Value Play or Value Trap? (Cash Bargain (almost!)) – Suashish Diamonds

I was about to write an overview on the Jewellery industry, but found that this link explained the industry in a much better way than I ever could. So, do go through the link to get a hang of where we are in terms of Gems and Jewellery industry. If you don’t have the patience to go through the article, bottomline says that we are going to have a 15% growth till 2015.

So, from an industry perspective, we are suddenly not going to have any major surprises.

And this blogpost is also in no way influenced by the way Gold prices have taken off in the last month or so (and my friend tells me that Diamond necklaces have tripled in price in the last 6 months). So, whoever owned diamonds and gold, you can feel richer and now can gloat in public 🙂

Anyway, back to the post and to the stock mentioned. Suashish Diamonds.

This one popped on my radar because the amount of cash is more 3 times that of the share price.

Cash per share – Rs. 448/-

Current share price – Rs. 125/-

Is this an immediate buy? Well, let’s investigate.

Suashish Diamonds has not yet put up their latest Annual report on their website (and their website is very impressive), but they have put up the unaudited results for March 2011 here. This will form the basis for our investigation.

For the sake of convenience, I will note important figures below:

Assets (in lakhs)
Cash and Bank Balances 93122.58
Inventories 8211.98
Sundry Debtors 7158.44
Other Current Assets 2606.17
Loans and Advances 11979.68
Investments 41597.75
Fixed Assets 2851.65
   
Liabilities  
Secured Loans 92791.19
Current Liabilities 4595.45
Provisions 4447.71

We’ll do this valuation in two ways. One, espoused by Graham in his seminal ‘Security Analysis’. And two, deeply pessimistic (so pessimistic that even Roubini would be put to shame!)

Graham (Security Analysis):

So, this stock has a P/E less than 10 (it’s 4.25), P/B is less than 1 (it’s 0.36) and D/E ratio is negligible. No dividends from 2009 though (previous to that, they had a decent dividend history). Anyway, it almost satisfies Graham criteria.

Assets (in lakhs) Weightage Value
Cash and Bank Balances 93122.58 1 93122.58
Inventories 8211.98 0.5 4105.99
Sundry Debtors 7158.44 0.8 5726.752
Other Current Assets 2606.17 0.5 1303.085
Loans and Advances 11979.68 1 11979.68
Investments 41597.75 1 41597.75
Fixed Assets 2851.65 0.5 1425.825
       
Liabilities      
Secured Loans 92791.19 1 92791.19
Current Liabilities 4595.45 1 4595.45
Provisions 4447.71 1 4447.71
       
Net Current Assets     57427.31
Net Current Assets per share     276.5809
Current Share price     124
Discount     55%

According to Graham’s analysis, the stock is quoting at a 55% discount to its value. Good buy?

Our Analysis:

Let’s be really pessimistic.

Assets (in lakhs) Weightage Value
Cash and Bank Balances 93122.58 100% 93122.58
Inventories 8211.98 0 0
Sundry Debtors 7158.44 0 0
Other Current Assets 2606.17 0 0
Loans and Advances 11979.68 0 0
Investments 41597.75 20% 8319.55
Fixed Assets 2851.65 0 0
       
Liabilities      
Secured Loans 92791.19 100% 92791.19
Current Liabilities 4595.45 100% 4595.45
Provisions 4447.71 0 0
       
Net Current Assets 4055.49

We are assuming that we would recover only 20% of our investments. Rest of the stuff is not even worth salvage value. And we have paid off all loans and liabilities (provisions will be zero since we have assumed the loans and advances to be nil, nada). Still, we end up with a positive net current assets value.

Clearly, with a market cap of 257 crore, but cash of 931 crore (and we have not considered any fixed asset, inventory etc.), this is a value buy.

So, why am I not rushing out and buying the stock? Why did I even hint at a value trap?

As with most things, the answer is I don’t know but here are my concerns.

a) I have not yet read the latest AR. The reason I want to read up on the latest AR is i) Where did they hoard this cash? (hopefully not in some obscure bank in Europe etc. which makes the cash fictional) ii) I am interested to look at interest income figure (this should closely match with 3-5% of the cash figure, indicating this cash is present and not a figure made up in the air).

b) Suashish promoter holding is 89.45%. In fact, it had come up with an open offer last year around this time, but it fell flat as the discovered price due to book building came to Rs. 320/- per share and the owner basically said ‘nope, am not paying a naya paisa more than Rs. 220/-‘ (although 220 was just the floor price). In essence, the promoter basically doesn’t care about the minority shareholder interest.

c) Volumes or the lack of it have never been a problem for me. But look at the volume chart for this stock over the last year or two. There are spikes (huge spikes) in volume from time to time, and hence maybe operator driven. Not sure when they’ll drive it up and when they’ll drive it down.

d) Lack of dividend for the past 3 years is definitely a concern. The question is why will this stock run up? I have no catalyst to offer you.

e) Their revenues are up and down a bit, but EPS and Cashflows have largely remained positive. However with increasing gold and diamond prices, I don’t know how fast their inventory (and hence profits) will move (classic price-quantity curve Economics 101).

Do let me know your thoughts.

 

P.S: Another stock I did want to write about, which is in a very similar position to Suashish Diamonds is Polyplex Corporation. However, the brilliant Kumaran has already written about it here. Please peruse his analysis.

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  1. #1 by value guy on August 12, 2011 - 1:16 AM

    Stop chasing such value traps. If you want some cash bargains i will suggest you have a look at gujarat intrux, it also generates good return on capital. Though this is a nano cap but i guess that makes it even more attractive…no analyst coverage 🙂

  2. #2 by Kiran on August 29, 2011 - 2:58 PM

    I am not too sure how Gujarat Intrux is a cash bargain? Can you elaborate? I had a look at the B/S and P&Ls, but couldn’t arrive at a cash bargain.

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