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 :)

Weekly Market Commentary - Jan 20, 2014 - Jan 24, 2014

Investors were a cheerful lot for most of this week. So far, result season has been good, has been largely without any negative surprises. Dollar earning sectors seems to have picked up steam on hope of strengthening US recovery. Falling inflation levels have also brought back the rate cut clamour. Everything was good and normal until two important events happened. One, Urijit Patel tabled a report on strengthening monetary framework, which among other things recommended changing the inflation targeting benchmark to CPI from WPI. If this happens, it may lead to higher interest rates in near to medium term and may put a dampener on India’s growth plans (for short term). Two, RBI governor made statements to the effect of inflation fighting would be the main focus of RBI, which dashed hopes of rate cut in RBI review meeting on Jan 28.

Sensex and Nifty ended this week with small gains of 0.3% and 0.1% respectively while CNX Midcap fell 0.9%.

Monday – Sensex up by 0.7%, Nifty up by 0.7%, Midcap up by 1.0%
Market’s mood was cheerful as index heavyweights Reliance Industries and Wipro managed to beat consensus and post healthy results. Reliance fared better than street forecasts as its refinery earned $7.6 per barrel of crude refined, significantly better than Singapore GRMs (Gross Refining Margin) of $4.3. Shares went up initially but lost all its gains in the latter half of the day. Wipro ended the day up as its results showed that business continued to improve as signs of turnaround and margin expansions are growing.

Tuesday - Sensex up by 0.2%, Nifty up by 0.2%, Midcap up by 0.2%
Market continued its uptrend amid some profit booking seen on the bourses. Govt decision to sell stake in Hindustan Zinc to cover some of its fiscal deficit also helped to improve the sentiment.

Wednesday – Sensex up by 0.4%, Nifty up by 0.4%, Midcap up by 0.1%
Indices spurted to all time highs in latter half of the day as investors flocked to buy pharma, metal and banking stocks on expectations of strong corporate earnings and rate cut by the Reserve Bank.

Thursday – Sensex up by 0.2%, Nifty up by 0.1%, Midcap down by 0.4%
Markets continued their rally and closed at another record high as industry bellwether, L&T, which is widely considered the barometer of Indian economy, rose as much as 4% after reporting a 22% jump in standalone net profit for 3Q.

Friday – Sensex down by 1.1%, Nifty down by 1.2%, Midcap down by 1.8%
Indices snapped on last day of the week as RBI governor Raghuram Rajan calling inflation a “destructive disease” dashed hopes of investors expecting a rate cut in the review meeting. These comments bring RBI’s priorities to tackle inflation first before focusing on growth to the fore again. In another event, Ranbaxy’s stocks crashed 20% after US FSA banned the firm from shipping drugs from its Toansa plant. Weak global trend following poor economic data in the US and China dampened the market sentiment.

Weekly Market Commentary - Jan 13, 2014 - Jan 17, 2014

Low inflation numbers came as a respite to both Indian consumers and investors alike. In hindsight, the decision of RBI governor to not raise interest rates in last review meeting proved to be sound. He rightly pointed out in that meeting that RBI should avoid taking long term measures for tackling the short term problems or issues. If inflation continues to get leveled the chances of a rate cut becomes strong to revive Indian growth story. Let’s see how everything rolls out in coming days.

Sensex and Nifty gained 1.5% while CNX Midcap was down by 1.1% this week.

Monday – Sensex up by 1.8%, Nifty up by 1.6%, Midcap down by 0.2%
After a muted trading activity last week, markets saw a surge in interest in technology, energy and financial stocks. Infosys’ good results, improved dollar revenue guidance and expected positive news from other IT stocks also has raised hopes of the market. Govt’s move to notify the gas Rangarajan’s gas price formula led to improvement in energy stocks levels. In addition, weak US job data also eased the tapering concerns of investors around the globe that added to the buying momentum in the Indian markets.

Tuesday - Sensex down by 0.5%, Nifty down by 0.5%, Midcap flat
Markets pared gains it made previous day mostly because of profit booking. Lower retail inflation numbers released by the govt. on Monday evening failed to cheer up the markets as the decline was already factored in the market prices.

Wednesday – Sensex up by 1.2%, Nifty up by 1.3%, Midcap up by 0.6%
Although the retail inflation numbers were low but the fall in wholesale prices took the market by surprise. WPI increased by 6.16% far below the street estimates of 6.99%. This decline has finally set aside the speculation on rate hikes in RBI review meeting at the end of this month. Sensex touched its five-week high on the back of rise in interest rate sensitive sectors such as auto, banks and financials.

Thursday – Sensex and Nifty flat, Midcap down by 0.4%
Markets continue to trade range bound as increased hopes of no rates hikes in RBI meeting was countered by profit booking. The news that Reliance Jio is planning to bid for spectrum licenses also led to huge selling across the telecom sector stocks as re-entry of RIL may bring back the price wars and cut into profitability of the sector.

Friday – Sensex down by 0.9%, Nifty down by 0.9%, Midcap down by 1.1%
Markets slide as TCS posted lower margins and guided to no recovery until the general elections are over in the country and things stabilizes a bit. Profit booking also led to selling across all counters.

Weekly Market Commentary - Jan 6, 2014 - Jan 10, 2014

Trading activity remained muted for most of the week only to be picked up at the end of the week with starting of 3Q earnings season. Apart from ongoing earnings season, markets will also see release of CPI and WPI data next week, on which RBI’s interest rate policy hinges. Govt is also expected to come up with stake sales of IOC and Engineers India this month and BHEL, HAL in next to meet its disinvestment target of Rs 40K crores.

Sensex fell by 0.4%, Nifty lost 0.6% while CNX Midcap was down by 1.9% this week.

Monday – Sensex down by 0.3%, Nifty down by 0.3%, Midcap up by 0.3%
Market activity remains muted in absence of any catalysts. Most Asian stocks traded lower, as an index of China's services industry declined last month, and did not rise even after Fed reiterated its stand of accommodative monetary policy.

Tuesday - Sensex down by 0.5%, Nifty down by 0.5%, Midcap down by 0.9%
Investors seems to sit out on sidelines as they wait for minutes of Fed meeting and starting of earnings season on Friday which street expects to be weak.

Wednesday – Sensex up by 0.2%, Nifty up by 0.2%, Midcap up by 0.5%
Indian markets recorded their first gain of 2014 as most Asian stocks traded higher after the IMF said it would raise its estimate for global economic growth. Also, the recovery seen in US as their trade deficit narrows augurs well for Indian export stories.

Thursday – Sensex down by 0.1%, Nifty down by 0.1%, Midcap down by 0.8%
Markets closed lower on a day ahead of 3Q earnings season commencement. Street expects results to be weak though slightly better than previous quarter.

Friday – Sensex up by 0.2%, Nifty up by 0.1%, Midcap down by 1.0%
Markets cheered Infosys’ better than expected results and set the IT stocks zooming. The company also raised its FY14 dollar revenue guidance as it sees improvement in US business environment and confidence.

Weekly Market Commentary - Dec 30, 2013 - Jan 3, 2014

First week of 2014 was, to say the least, unexciting. Many investors decided to stay on the sidelines as market lacked any fresh triggers. A speech from our PM promising that his govt. would continue to push reforms, create a favourable FDI climate and will work to generate more employment left most people yawning.

Sensex and Nifty lost 1.6% each while CNX Midcap was down by 0.9% this week.

Monday – Sensex down by 0.2%, Nifty down by 0.4%, Midcap down by 0.3%
The markets were lackluster as investors stayed away because of ongoing holiday season.

Tuesday - Sensex up by 0.1%, Nifty up by 0.2%, Midcap up by 0.8%
Small gains seen in the index level as cement and oil and gas stocks registered positive movement owing to the bets on turnaround in Indian economy in 2014.

Wednesday – Sensex down by 0.1%, Nifty flat, Midcap up by 0.5%
Sensex recorded a drop on first trading day of 2014. Investors were cautious as govt. data released yesterday showed India's fiscal deficit is now 94% of the annual target. Also, lower growth of 1.7% in index of eight core industries vs. 5.8% previous year added to the bearish sentiment.

Thursday – Sensex down by 1.2%, Nifty down by 1.3%, Midcap down by 2.1%
Strong opening during the early day was hit by bout of profit booking in the second half of the trading day. Weak manufacturing data from China also kept the global sentiment low.

Friday – Sensex down by 0.2%, Nifty down by 0.2%, Midcap up by 0.3%
Markets continued their cautious stance on Friday as low activity in the market with some value buying and rise in tech stocks countering the profit booking and keeping the index range-bound.

The Walking Dead

How did equities as an investment look now after being pronounced dead about 5 years ago? Remember 2008, when everybody and his uncle was shit scared and trying to save his ass from getting fired in latest downsizing. I don’t want to remember that either. Everyday you lose friends, colleagues, batchmates to credit crisis. That was when I started giving blogging a serious thought. You can read my 2008 posts here. I wrote only three.

Lot of people denounced equities back then. Lot of my friends changed career lines. Not me. I stayed. To write this post. Not that I have become a portfolio manager of some big stud firm or have decided to retire from this business after making my millions during this crisis. Nope. My objectives are still far from being achieved. Though, I did made some money. But I stayed to present you with this graphic (all NSE data) which speaks volumes about the performance of equity markets since 2007 with special mention to 5 years CAGR performance.

Let me know what are your thoughts on equities as an investment.