Terrorism is the new uncertainty on the block: Global terror fatalities have increased from 2,508 between 2001 and 2006 to 28,708 between 2014 and 2015.
The number of companies that have disappeared from the Fortune 500 list since 2000 is estimated at more than half. The gross non-performing assets (NPAs) at Indian banks have risen from Rs 1.76 lakh crore in 2013 to Rs 5.50 lakh crore in 2016.
Gross NPAs increased from 3.4 per cent of total gross advances in 2013 to 8 per cent of total gross advances in 2016.
The gross bad loan ratio of scheduled commercial banks was 9.6 per cent in March 2017 and likely to increase to 14.2 per cent by March 2018 (Source: CARE Ratings).
India finished second lowest in a list of 18 emerging markets, its Earnings before interest, taxes, depreciation and amortisation (Ebitda) to interest ratio declining from 6.68 to 3.69 between 2010 and 2016 (Source: IMF). Corporate debt worth Rs 6.7 lakh crore faces the risk of default as nearly half of the top 500 corporate borrowers in India may be unable to refinance their debt that matures across the foreseeable future; of this, about Rs 4.6 lakh crore could already be delinquent (Source: India Ratings and Research).
The one listed company that appears to be an excellent play on these realities is Prime Securities. In the last couple of years, Prime Securities restructured itself: From fund-based equity broking to a singular focus on corporate restructuring. The market for corporate restructuring is large; if Black Swans become a regular feature, the market for corporates to adapt and get into shape will keep growing.
Which brings me to what I like about Prime Securities.
One, the company’s business is completely fee-based, which means that it makes virtually no use of its balance sheet.
Two, the company is debt-free with negligible depreciation; after overheads have been paid, Ebitda virtually translates into pre-tax profit.
Three, there has been growing business traction: quarter-on-quarter revenues increased from Rs 3.18 crore to Rs 3.16 crore to Rs 3.32 crore to Rs 7.30 crore to Rs 7.90 crore (first quarter, current financial year).
Four, the company has an employee base of about a dozen professionals, which translates into an average revenue per professional of more than Rs 2.50 crore at the going run rate, fairly attractive for a service-driven company.
Five, the company reported an Ebitda margin of 76 per cent in the first quarter of the current financial year; this translated into a pre-tax profit of Rs 5.97 crore for the first quarter. Now let me put on my speculative glasses. Assuming that Prime sustains this run rate with a nominal improvement across the next three-quarters, it would not be unreasonable to assume a Rs 10 earnings per share (EPS) for the current financial year (which means it is available at a forward discounting of less than 4.0 based on last Friday’s closing price).
Going ahead, I would also presume that Prime will generate more cash than it can consume (recruitment, overheads and tax) so the most obvious thing is for Prime to be buying some of its own stock and enhance shareholder value.
If the world is indeed going to the canines, then Prime Securities might be a good equity hedge. Because, in this case, the worse it gets, the better it becomes.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
