As a result of depressed market conditions, companies with significant cash balances have been ignored offering investors an opportunity to grab them at throwaway valuations.
Undoubtedly, there is a severe liquidity crunch across the world, and nearly all central bankers are working round-the-clock to ensure that their financial systems don’t go dry. The RBI is not an exception and among various measures has so far cut the CRR by 350 basis points to 5.5 per cent and reduced the
SLR by 100 basis points to 24 per cent to infuse liquidity into the domestic system and reduce cost of funds. In this scenario, the proverb ‘cash is king’ surely holds a lot of weight.
Companies that possess a lot of cash or cash equivalents are placed at a huge advantage vis-à-vis others and tend to outdo others during such tough times.
This is because, it helps them tide over tight credit conditions, provides them ammunition to acquire assets at cheap valuations or use this surplus cash in a shareholder friendly manner viz. to buy back shares or pay dividends.
With markets having fallen significantly in the recent past, The Smart Investor crunched numbers of all listed companies to find out how much cash (which could be result of accumulation of cash generated from the business, sale of assets or issue of equity in the past) each company is holding in relation to its enterprise value (market capitalisation plus debt). The result: a long list of companies with some well-known names.
Notably, in many cases, the combined value of cash and cash equivalents is so high that it works out to well over 50 per cent of the enterprise value, and in some cases, it is almost equal to or even more than 100 per cent. For our calculations, however, we excluded the investments in subsidiaries, joint ventures and group companies, which if included would make the figures more attractive.
What the numbers also suggest is that in the mayhem, either the market is not fully recognising the cash on the balance-sheet, or it is significantly underestimating the company’s business potential. A caveat: although a few companies may be relatively small in size or have unexciting track record, there are others with sound business models, healthy balance-sheet and reasonable growth prospects.
To arrive at the picks, companies with cash and cash equivalents, as a percentage of their enterprise value, of less than 50 per cent were excluded. Factors like business prospects, positive cash flows, promoter/management profile and value of the core business among others, were considered to arrive at the picks. The process also saw companies like LMW get excluded even as it holds over Rs 550 crore in cash; out of this cash, Rs 442 crore is the advances it has received from customers.
Tata Investment Corporation, a typical investment company which owns securities (equities, debt, etc), including worth Rs 730 crore in group companies (as on March 2008), was also excluded (after adjusting for discount typically given in case of holding companies). Apart from the companies covered here, there are some others like Bharat Electronics, India Infoline and Motilal Oswal Securities, which could also be considered for investing.
Apar Industries
A notional mark-to-market forex loss of about Rs 63 crore for the September quarter dented operating and net profit margins for specialty oils and conductors company, Apar Industries. Excluding exports, while revenues were up a healthy 52 per cent at Rs 637 crore, EBIDTA and net profit for the quarter were down 56 per cent and 54 per cent at Rs 12 and Rs 5 crore, respectively.
In addition to the forex losses, lower offtake in the specialty oil segment in expectation of a price cut (the company had built up an inventory) and higher input costs spoiled the operating and net margins, which the company believes should improve in the last quarter of the current year. In the conductor business, the company is sitting on a health order book of Rs 910 crore as on September 30 2008, to be executed over the next 18 months.
The company hopes to corner a part of the mega tenders for conductors to be floated by Powergrid Corporation and other transmission players before the fiscal runs out. Despite the poor performance for the September quarter, a point of comfort for the company though is the fact that it is sitting on a cash of around Rs 444 crore after deducting its investments in its subsidiaries.
| CASH KINGS | ||||||||
| Rs crore | Cash + CE | Ent Value | Cash + CE/ Ent Value (%) | Mkt Cap | Price (Rs) | P/E (x) | P/BV (x) | Dividend Yield (%) |
| Reliance Power | 13,440 | 23,074 | 58.2 | 22,626 | 94.40 | 209.8 | 1.7 |
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CE= Cash equivalents (investments minus those in group/associate companies); Mcap=Market capitalisation; Ent Value=Enterprise value (market cap + debt)
Source: Capitaline Plus
With the current enterprise value at Rs 360 crore (the Apar Industries' stock is down by 37 per cent in the last one month and is currently trading at Rs 84.05), the market is grossly undervaluing it as just the cash per share comes to Rs 193. With over 75 per cent of its revenues coming from the power sector, which is expected to grow at robust rates, there is an opportunity for the investor to buy in on a growth story at attractive prices.
Denso India Despite a 13 per cent increase in sales to Rs 131 crore, Denso India's operating and net profits were down by 29 per cent and 35 per cent y-o-y to Rs 8.31 crore and Rs 4.7, respectively for the September quarter. Though cost control measures undertaken by the electrical automotive component company, pricing pressures have dented operating margins.
Going ahead, the company believes that unlike the negative growth recorded in sales of two wheelers in the last fiscal, the sector could reverse the trend in the current fiscal. To take advantage of the upturn, the company is setting up its second unit at Haridwar, Uttarakhand at a cost of Rs 28 crore (in phases) over the next four years.
The unit will manufacture capacitor discharge ignition and magneto, an ignition system. This will not only aid in increasing its sales to the two-wheeler industry but also help get tax exemptions. While the company has negligible debt (Rs 3 crore) it is sitting on cash of Rs 95 crore. Though the auto industry outlook does not look too bright, the company's hefty cash position means that its cash is just a tad shy of the current market cap at Rs 116 crore.
An impressive parentage comprising Denso Corporation of Japan (48 per cent) and heavyweights Sumitomo Corporation of Japan and Maruti Suzuki (10.27 per cent each) is a source of comfort and would ensure a steady flow of orders. The high dividend yield also adds to the comfort.
Hindustan Oil Exploration
Oil and gas explorer, Hindustan Oil Exploration, raised about Rs 610 crore through a rights issue in November 2007. As a result of this, the company now has cash equivalent of about Rs 729 crore. The company is exploring various opportunities in the oil and exploration space and intends to deploy the cash into the existing and new exploration and development activities.
The company has already made investments in oil and gas blocks, including in partnership with ONGC. How soon these investments will materialise into revenues and profits will have a bearing on the stock’s valuation. So, while the near-term may see some blips, the company should be able to increase its production going forward. Although valuations are compelling and the company’s performance is likely to improve going ahead, investors need to be cautious considering its small size of operations and inconsistent revenues in the past.
Despite a 32 per cent fall in production, the company's consolidated revenues were lower by 20.8 per cent at Rs 96.8 crore, partly due to better realisation on account of high crude oil prices. The first half of the current year however, has seen the company report better numbers, wherein revenues grew by 13.1 per cent, while profit growth was higher at 38.3 per cent. To conclude, the company's revenue and earnings are strongly influenced by production levels and crude oil prices, which suggest that the near-term could see some pressure on core financials. This stock is for investors with patience as well as ability to take risks.
MTNL
The stock of Mahanagar Telephone Nigam (MTNL), the state-owned telecom operator, appears to be a steal going purely by the real assets and cash the company owns. Consider this; the company is debt-free with liquid investments and cash and bank balance of Rs 3,720 crore as on FY08, which is just 10 per cent less than its current market capitalisation of Rs 4,139 crore.
What this effectively means is that the market is valuing the company’s core business at just Rs 419 crore, which is certainly too less given the company’s assets including its subscriber base, telecom infrastructure and vast land bank among others. Even if one considers the book value, it is three times the company’s share price of Rs 65.70.
Part of this undervaluation is on account of the company’s lacklustre performance in the last three years, with revenues and profits declining. Among other issues that weigh on the company’s valuations is its huge workforce. The company spends a massive 34 per cent of its revenues towards employee costs, which is far more as compared to about 7 per cent for private players. Thus, any measures to curtail this will reflect positively on the bottomline.
Notably, the company is taking measures to shore up its business and has added new capacity (earlier a roadblock to growth) and subscribers in its mobile and broadband services. Going forward, the company’s ability to successfully gain from its foray in the 3G business (expected by early 2009 and will need to use a part of cash), where it has got a first mover advantage (thanks to preference given by the government), will be under test. Last, but not the least, any move towards merging MTNL with BSNL, should prove positive for the stock. Meanwhile, analysts have put a price target ranging Rs 100-115 over 12 months.
PTC India
PTC, which is a leading player in the power trading business, is sitting on cash and cash equivalents of about Rs 1,450 crore, which is significantly higher than its enterprise value of Rs 1,094 crore. Post correction in the market, the stock has come down from a high of Rs 202 to Rs 52.15 currently. The current market prices only reflects the value of cash on its books, while other aspects such as its growing business and better industry outlook do not seem to have been factored in.
The current cash and cash equivalent reflects the money which the company raised through the qualified institutional placement in January 2008 worth about $300 million. “We are planning to use these funds over the next two years, enhancing the capital adequacy, capitalisation of PTC Financial Services, investment in fuel intermediation, investments in entities in the energy sector along with meeting working capital requirements of a growing business,” says T N Thakur, chairman and managing director, PTC India. Once these funds are deployed in the business, they will start contributing to the core financials and hence, likely to be taken in a positive manner by the market.
| SMALL BUT RICH | ||||||||
| Rs crore | Cash + CE | Ent Value | Cash + CE/ Ent Value (%) | Mkt Cap | Price (Rs) | P/E (x) | P/BV (x) | Dividend Yield (%) |
| Tata Invest.Corp | 898 | 927 | 96.9 | 927 | 268.95 | 4.9 | 1.1 | 5.6 |
| Hind.Oil Explor | 729 | 981 | 74.4 | 833 | 63.85 | 26.5 | 0.8 | 1.6 |
| Ingersoll-Rand | 516 | 819 | 63.0 | 819 | 259.45 | 10.9 | 1.2 | 2.3 |
| Motilal Oswal | 787 | 961 | 82.0 | 815 | 57.40 | 20.5 | 2.0 | 1.4 |
| LMW | 671 | 727 | 92.4 | 727 | 587.40 | 3.0 | 1.0 | 7.7 |
| Punjab Tractors | 352 | 558 | 62.9 | 554 | 91.20 | 5.4 | 0.8 | 5.5 |
| Merck | 351 | 459 | 76.4 | 459 | 272.30 | 6.5 | 1.1 | 7.3 |
| Plethico Pharma | 455 | 828 | 54.9 | 446 | 130.80 | 3.4 | 0.8 | 1.5 |
| VST Inds | 228 | 289 | 78.8 | 289 | 187.20 | 5.7 | 1.3 | 10.7 |
| Apar Inds | 489 | 360 | 135.9 | 259 | 80.00 | 5.0 | 0.9 | 6.9 |
| Hinduja Ventures | 383 | 312 | 122.7 | 237 | 115.45 | 6.3 | 0.4 | 8.7 |
| Honda Siel Power | 108 | 158 | 68.5 | 158 | 155.60 | 6.2 | 0.9 | 2.6 |
| Pratibha Inds | 142 | 274 | 51.8 | 141 | 84.70 | 3.2 | 0.8 | 2.4 |
| Denso India | 95 | 125 | 75.9 | 122 | 43.60 | 4.5 | 0.7 | 4.6 |
| D-Link (India) | 109 | 119 | 91.7 | 118 | 39.45 | 4.5 | 0.6 | 5.1 |
| Market Price, Price/Book Value (P/BV), Price-to-earnings ratio (PE), Market Capitalisation and Dividend Yield as on October 28, 2008 CE= Cash equivalents (investments minus those in group/associate companies); Mcap=Market capitalisation; Ent Value=Enterprise value (market cap + debt) Source: Capitaline Plus | ||||||||
PTC, which was mainly into power trading, is now transforming itself and diversifying into various related segments like power generation, financing, fuel sourcing and power trading exchange. The company has already acquired stakes in a few power generation projects including 11 per cent in the Teesta Urja 1,200 MW project. This will not only mark PTC’s presence in the generation business, but also help increase its power trading revenues.
The company has already tied up about 11,940 MW of capacity under long-term PPA, which will drive its revenue growth and margins going forward. The stock is currently trading at 17 times its FY09 estimated earnings and 15 times FY10 earnings. While the long-term prospects look promising, the cash component provides substantial comfort.
Punjab Tractors
A year after being acquired by Mahindra & Mahindra (M&M holds 65 per cent stake), Punjab Tractors (PTL) has seen a significant improvement in operational numbers in the September quarter. On the back of a 41 per cent y-o-y increase in tractor volumes to 8,303 units (tractor segment grew about 6 per cent to 83,000 units) sales in the quarter were up 49 per cent to Rs 308 crore.
While EBIDTA was up 87 per cent to Rs 30 crore, net profit was up 175 per cent to Rs 27 crore, aided by Rs 6 crore of other income. The company believes that the higher sales numbers for the quarter and the first half (revenues up 64 per cent to Rs 622 crore with tractor sales of 17,257 units) are a result of the streamlining of the distribution system and promotion of the Swaraj brand (PTL markets its tractors under this name).
The improvement in retail credit brought about by the increased retail financing by Mahindra and Mahindra Financial Services has helped boost the performance. This has been a problem area for PTL as 95 per cent of tractor sales are effected through tractor loans.
Going ahead, the company will be able to enhance its output, which is currently at half its capacity of 60,000 units a year as M&M plans to manufacture a part of its own tractor requirement from PTL's two locations at Mohali. With these measures, the company will also try to enhance its presence in the segment with its market share already moving up to 10.7 per cent in the first half of the current fiscal as compared to about 7.3 per cent in the first half of last fiscal.
The balance sheet of the company also looks healthy with cash of about Rs 198 crore and investments (mostly in mutual funds) of about Rs 154 crore (total: Rs 352 crore) which works out to about Rs 69 a share. With no major expansion planned and negligible debt on its books, and benefits of having M&M in sourcing, manufacturing, product development and distribution, PTL is only likely to add to its cash kitty. While the stock has run up by about 21 per cent in the last one week and is currently trading Rs 115, investors can look at a 30 per cent return over the next fifteen months.
Sterlite Industries
On the business front, the outlook could still be weak for companies operating in the commodities space, but in terms of valuations a few significant players are trading at attractive levels. Sterlite Industries, for instance, is trading at historically low valuations, thereby offering good opportunity for long term investors. Analysts say that these are stressed valuations where most of the negatives (the dampened outlook consequent to the declining metal prices at LME and worries regarding the demand destruction due to global slowdown) are factored in the stock price.
As of March 2008, Sterlite had cash and cash equivalent of Rs 14,074 crore. Add to this, the Rs 2,760 crore of cash profit it reported during H1FY09, the cash equivalents work out to 78.4 per cent of its consolidated enterprise value. The company had earlier maintained that the cash would be used for funding its inorganic initiatives such as acquiring mines and companies. According to analysts, this also includes funding for the acquisition of America's copper major Asarco for $2.6 billion.
However, considering that the deal is being renegotiated at lower valuations, the company would still (post acquisition) end up holding substantial cash surplus, while Asarco’s financials will add up to the consolidated entity. “But, even if the acquisition does not go through, this cash hoard could fetch handsome returns in a bank FD,” says an analyst.
For now, analysts are not positive on the commodity space. “In the near term, the company should continue to be impacted by lower operating margins on the back of falling base metal prices,” says Vipul Shah, research analyst, K R Choksey Shares and Securities. But, they also believe that once the overall scenario improves for commodities, companies will again outperform and could reward shareholders handsomely.
Sterlite Industries, which is a leading player in non-ferrous metals such as aluminium, copper, zinc and other metals, should however continue generating cash profits, given that it is a low cost producer with highly integrated operations. Meanwhile, there will be substantial benefits accruing from its ongoing power generation projects.
The company is expected to commission about 2,400 mw of power by end-2009 and hence, the full benefits will start reflecting from FY11 onwards. That apart, as the company uses its cash towards expanding capacities in future, it should be better placed whenever the commodity cycle looks up. Patient investors may consider this stock.
