Thursday, January 30, 2014

Madhav Marbles - Value buy or Value Trap

“Ninety to 95% of all my investing meets the Graham tests. The times I strayed from a rigorous application of this philosophy I got myself into trouble.”

“We do liquidation analysis and liquidation analysis only.”

“One of the dangers about net-net investing is that if you buy a net-net that begins to lose money your net-net goes down and your capacity to be able to make a profit becomes less secure. So the trick is not necessarily to predict what the earnings are going to be but to have a clear conviction that the company isn’t going bust and that your margin of safety will remain intact over time.”

These were some of the extracts from the wonderful book by Christopher Risso-Gill on legendary superinvestor Peter Cundill, “There’s Always Something to Do”. 

Peter was a fan of Graham’s net-net approach and he used it extensively with tweaks of his own to build a portfolio of international deep value stocks which generated 15%+ returns for its investors for well above 30 years!

Today we will try to use Peter's approach of using liquidation analysis to find an investment opportunity in Indian equity space.

I want readers to take a look at the balance sheet snapshot of Madhav Marbles & Granites Ltd. which is in the business of manufacturing and processing Granite tiles and slabs, wind power generation and realty. The company reported a net revenue of Rs.653 million, EBIT of Rs.50 million and net profit of Rs.31 million in FY13. The company had operating cash flow of Rs. 44 million and has been cash flow positive for last five years (maybe longer).

One look at the balance sheet, and you can easily make out that all the liquidity ratios are pretty high: current ratio is 6.6 and quick ratio is 6.2. Actually, you'll see that company’s cash position covers more than 70% of all of its current liabilities. In the event of company needing some urgent funds, it can do so very easily. Even in a distress scenario of 50% marked down on total assets position, the firm can easily meet all its liabilities.

Now the best part of this post. The current market capitalization of Madhav Marbles is Rs. 17 crores. Its liquidation value, after marking down the entire assets by 50% and adjusting for contingent liabilities is around Rs. 32 crores. The liquidation value is double of current market value of this company. See the table below for illustration.

To re-emphasize one can buy the entire company for Rs. 168 millions, sell all the assets at 50% discount, pay off all the liabilities and will still be left with some cash to spare.

I am not sure whether this is a classical deep value investment or a value trap. The company is priced for bankruptcy when its cash position is sufficient to take care of most of its current liabilities.The stock has been largely ignored by the general market with last one year average volume of few hundred stocks on NSE.  I searched for any fraud, scam or cheating case against the company and found nothing.

Let me know what readers think about this investment and if there is some major development or issue with the company I am missing.

Disclaimer: Invest at your own risk, you can lose money on a misprint :)


  1. Reason for low liquidity is simple please simply dont want to participate in this stock as so far no visornary investor is ready to park his big money in this stock and do so the people. If rakesh junjunwala is crazy about this stock then people do replicate.

  2. Hi Kapil Chauhan.
    You pointed out right, looking at books and fundamentals, its surely a BUY. And for me, its still a BUY.
    As I am a long term investor thin volumes doesn't matter to me as volumes can pick up at any time.
    e.g. when I invested in NBCC, Asian Granito, etc; volumes in those stock would be less than 1000. RUBY Mills which I recommend at the moment is still having thin volumes but when looked at performance, its one of the best BUY in the market.
    All I know is my investment is safe and sound. Thin volumes is a problem only for traders who doesnt look to a stock over a long period and who wants to exit shortly.So they wont look at the stock which has volumes below 1 lakh.
    Thanks for the blog. Made my vision more clear and strong about my rightful investment.

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