Indian Stock Market – Cash Bargains

Alright – even in this market (with Nifty P/E above 20, well above its historical average of 17.5), there are some cash bargains. What are cash bargains? Prof. Sanjay Bakshi defines them as “A cash bargain arises when the market value of a company goes below the amount of cash and other liquid assets in its possession, net of all current liabilities and debt.”

I found some companies satisfying this criteria and I have listed them below.

Company Cash per                   Share Debt per             Share Cash-Debt Current                  Price Discount
Aftek 28 9.73 18.27 13.11 39.36%
Amrapali Industries 19.81 0 19.81 6.9 187.10%
Eldeco Housing 187.97 31.75 156.22 138 13.20%
MPIL Corp 93 5 88 63.5 38.58%
Rajesh Exports 250 78 172 131.8 30.50%
Teesta Agro 63.37 3.58 59.79 10.75 456.19%

I have excluded companies which are burning cash. For example, ‘Punjab Communications’ was one such stock which was on my radar for a cash bargain, but I realised that they were having negative Operating cash flows (and Operating margins) for the past 5 years. Any cash on the balance sheet would soon be burnt. Hence, I have excluded such companies.

I have also excluded companies like MTNL which satisfied Cash Bargains criteria, but is a value trap (as Neeraj puts it very elegantly here and here).

I have also excluded companies with very high debt like JVL Agro (in this rising interest rate environment, its very dangerous to bet on any company with high debt!)

All the 6 companies in the list have low margins, low operating profit and may not have any competitive advantages at all (there are some reasons why these companies have been beaten down by the market). But they have been beaten down so much so that they are quoting below cash

I have not researched extensively on any of these companies except for the fact that each of these company financials are in decent order (i.e., they are not burning cash, and have most of the time generating positive operating cash flow). (I doubt though, that something is seriously wrong with ‘Teesta Agro’ and/or ‘Amrapali Industries’ (mgmt problems?), else why would they be quoting as such a tremendous cash discount?). (Aftek, I think is one of K-10 stocks, and hence quoting at a discount?)

Do any of you have any idea why these companies are quoting at cash discounts? Do you have a position in any of these companies?

As usual, the disclaimer applies. Please do your due diligence before you invest.

Disclosure: I have starter positions in Eldeco Housing and Rajesh Exports.

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  1. #1 by Excel_Monkey on February 14, 2011 - 12:42 AM

    with regards to Aftek
    why would a company keep most of its net worth in an unscrupulous European bank where the deposit rates are almost zero.
    sounds fraud

    Regards,
    Excel

  2. #2 by moneysights.com on February 14, 2011 - 1:22 PM

    Rajesh Exports has a cash & equivalents of Rs. 6,600 Crore (appx) with market cap around Rs. 4,000 crore. it looks like a steal! 33% of market cap as cash!

  3. #3 by Kiran on February 14, 2011 - 8:30 PM

    @Excel_Monkey – I read an article on Sanjay Bakshi (pasted below) only today (pointed out to me by Siddharth Shukla), and he has highlighted the same aspect that you stated. Thanks for that.

    @moneysights – I had my hypothesis wrong about Rajesh exports. Please refer this article by Sanjay Bakshi where he talks about Aftek and Rajesh Exports among other companies. In summary, they are fraud.

    http://www.sanjaybakshi.net/Sanjay_Bakshi/Articles_files/Show_me_the_money.pdf

    I got out of Rajesh Exports today, and luckily at a small profit due to the rally. My hypothesis was wrong, and I had to get out. I had no doubts.

  4. #5 by Ayush Mittal on February 21, 2011 - 10:14 AM

    Hi Kiran,

    Amongst the above list – Eldeco, Teesta and Amrapali seem to be the clear ones. Others are sort of value traps.

    I have tracked Eldeco & Teesta. Eldeco is a reputed real estate player having very good presence in UP region. The only negative being – the group has some other listed cos also…hence the true value of the group doesn’t gets portrayed in the listed co. They haven’t posted much growth in the listed co. Otherwise the co is good and has strong fundamentals.

    Teesta – The picture of cash/share is looking extra-ordinarily attractive due to surge in cash balance at year end of last year. The same should get rectified this year. Otherwise…seems something is going on this co…as the promoters are taking pref allotment at premiums to price in stock market.

    Regards,

  5. #6 by Mandy on March 1, 2011 - 5:04 PM

    Kiran, How do I get in touch with you? I know something about Rajesh Exports. Basically, your analysis – a computer can do. You have to look at if the cash is due to Net Working Capital or PAT accumulation over the years.

    You have to understand his business model. Go to his retail stores on foot, and see if there are customers. Also, you can look at the companies track record from the time it went for an IPO.

    Don’t blindly follow Sanjay Bakshi.

  6. #7 by Kiran on March 3, 2011 - 11:15 AM

    Hey Mandy,

    Thanks for visiting my blog. You can get in touch with me on kdaaku@gmail.com.

    The computer throws up a lot more companies than just Rajesh Exports, as I mentioned in my blog. These looked good rather than say Punjab communications or MTNL. As I communicated in one of the comments, I got out of Rajesh Exports due to the quality of cash (forget quality, is it there at all?) from a Sanjay Bakshi article.

    I think I’ll be better off following Sanjay Bakshi’s principles than following my own model of thinking for now 🙂 I am sure I’ll evolve to eventually find my own niche.

    I agree with ‘where is the cash coming from’ argument, but we also need to understand that there is a certain reason why markets don’t value few companies even at cash. If everything looks good (increasing PAT, increasing ROCE, great fundamentals etc.), you will never find a company below cash except in ‘Depression’ conditions. I think one needs to be comfortable with the reason why a company is quoting below cash while investing in its stock – whether it be due to restructuring or spinoffs or sale of a unit etc (reasons why large amounts of cash suddenly sit on a B/S).

    What do you think?

  7. #8 by Mandy on March 14, 2011 - 4:52 PM

    Kiran: You did not get my point. The cash on their balance sheet is not their cash.

    The market is not valuing the company at below its “legitimate cash.”

    They sell Gold. They collect hoards of cash from their customers first – this is showing up on their balance sheet at the given point in time, and supply the cash to their suppliers later.

    They could be another Satyam – I don’t know. If you look at their history and do the ground work – visiting their shops, and talk to their suppliers, etc – you might come to a different conclusion. Sure, you could have done the same “ground work” with Satyam and never found out about Ramalinga Raju.

    But your whole cash argument doesn’t make any sense here. From what I recollect – if my memory is right, they have about 1200 Cr of their “own” cash on their books now.
    If you add up their Retained Earnings (minus the capex over the years) and the FCCB’s – it should add up to about the same.

  8. #9 by vikskukreja on April 23, 2011 - 6:25 PM

    Hi kiran,
    Their are other cos which have cash near their market cap and are profitable with positive cash flows. Also their cash are with indian banks as declared in ARs. One such company is Divyashakti granites listed on BSE mainly into exports of granites to europe (mainly italy). Their market cap is around 26 crs and cash in hand is around 22 crs selling at 3.5x to their last year EPS. The negative thing is that their sales have decreased in last 5 years continuously but they have maintained steady earnings by improving margins i guess. Not much of the research has been done yet.

    Disclaimer: I have starter position in the above mentioned stock.

    Regards
    Vikas

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