Madhav Marbles - Part II

"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime." - Jim Rogers in Street Smart

There is no doubt that Jim Rogers is one of the best minds on investing we know as of today. He has authored several books sharing his investment philosophy with millions of readers worldwide. He is there on top of my people-whose-advice-I-follow list, right on top with Warren Buffet and Seth Klarman.

What Jim Rogers is essentially saying is what Warren calls "waiting for a sweet pitch" or time "when you can buy a dollar for forty cents". Seth has elaborated on this concept in his book Margin of Safety. He advices his readers to be patient and wait when Mr. Market throws you a deal too hard to resist. And when it does, you go all in.

"The greater the undervaluation, the greater the margin of safety to investors" - Seth Klarman

I intended to write just an update to my earlier blog post on Madhav Marbles. I attribute this pick (too early?) to Peter Cundill's successful strategy of balance sheet investing and ideas and teachings of legendary investors mentioned above.

Mr. Market in its all glory and excitement sometimes throws up a company which is trading way below its liquidation value. You can easily buy the company, sell off the assets at a discount, pay off all the liabilities in full and still have lot of cash to spare.

Madhav Marbles is one such stock in my view. A stock that is so clearly undervalued in the current market - it is neat money just lying there in the corner to be picked up.

I am attaching the updated tables for FY14 results for my readers to see. It is obvious that the stock - though has gained 50% in last four months, is still trading below its liquidation value.

You can read the first part of the post here: Madhav Marbles - Value Buy or Value Trap

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

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 :)