The Liquid Oxygen Stocks
There is a famous Ajit joke – “Dump this man in liquid oxygen. The liquid won’t let him survive, and the oxygen won’t let him die !!”
There are quite a few of these stocks in the Indian Markets today – which have high amount of net cash on the balance sheet, in comparison to the Market Cap of the company. The presence of cash acts both as a support for stock valuation as well as gravity to stock price increase, atleast till the time the cash is converted into a profitable business of some significance. In all these companies, the cash was gained by sale of substantial part of the business, at great valuation to MNCs in non distress business condition. We have taken 5 examples below, where the management seems credible, and have used the cash in a productive manner. The list is in order of current Market Cap:
Piramal Healthcare/ Piramal Enterprises
CMP: Rs. 490
Market Cap: Rs. 8500 cr
FY 2013 continuing business: Sales and PAT: Diversified Businesses
Likely Dividend Yield: 3.5-4%
Stock Return since deal (2.5 years): Flat
The largest cash bargain ever in the Indian Stock Market! Prof Bakshi has already put a detailed and wonderful analysis of the same.
The company sold its domestic formulations business to Abbott Labs for Rs. 17,140 cr and diagnostic business to Super Religare for Rs. 600 in mid 2010. The company paid taxes of Rs. 3700 cr, utilized Rs. 2500 in stock buyback and repaid debt of Rs. 793 cr.
The company is strengthening present business lines, entering into new business lines, and parking excess cash in likely profitable investments in the interim.
J B Chemicals & Pharmaceuticals
CMP: Rs. 73
Market Cap: Rs. 620 cr
Net Cash on Books: Rs. 450 cr
FY 2013 continuing business: Sales of Rs. 800 cr, PAT: 12%
Likely Dividend Yield: 3-4%
Stock Return since deal (1.5 years): Flat (adjusted for Rs. 40 dividend)
The company sold its Russian-CIS OTC product business to Johnson and Johnson for around Rs. 1200 cr in May 2011. The company has given Rs. 394 cr as a special dividend.
The company had also announced a deal with Dr. Reddy for sale of prescription product business in Russia – CIS countries, and later the deal was terminated.
Recently, there was also announcement about some dispute with Johnson and Johnson with the balance deal money in escrow account, which needs to be monitored.
The company plans to aggressively growing its domestic formulations and Rest of the World (ROW) business.
CMP: Rs. 470
Market Cap: Rs. 620 cr
Net Cash on Books: Rs. 400 cr
FY 2013 continuing business: Sales of Rs. 2400 cr, PAT: 2-3%
Likely Dividend Yield: 1-2%
Stock Return since deal (8 months): Flat
The company sold its shareholding in JV in Man Force Trucks for gain of Rs. 960 cr in Mar 2012. The company paid tax of Rs. 200 cr, repaid debt of Rs. 165 cr, and paid additional dividend of Rs. 6.5 cr, and capex of Rs. 140 cr, and reduced trade credit by Rs. 80 cr.
The company has announced targeting high revenue growth with high investment and new product launches.
Smartlink Network System
CMP: Rs. 50
Market Cap: Rs. 150 cr
Net Cash on Books: Rs. 350 cr
FY 2013 continuing business: Sales of Rs. 125 cr, PAT: Marginally Negative
Likely Dividend Yield: 4-5%
Stock Return since deal (1.5 years): 30% (adjusted for Rs. 30 special dividend)
The company sold DIGILINK brand product business to Schneider Electric in May 2011 for profit of Rs. 470 cr. The company paid around Rs. 95 cr as Tax and Rs. 90 cr as special dividend.
The company is now focused on building size in – DIGISOL for Active networking product lines, DIGILITE for Motherboards & peripherals and DIGICARE for Support services.
Numeric Power/ Swelect Energy System
CMP: Rs. 140
Market Cap: Rs. 144 cr
Net Cash on Books: Rs. 240 cr
FY 2013 continuing business: Sales and PAT: difficult to estimate
Likely Dividend Yield: 2%
Stock Return since deal (10 months): 30-40% (adjusted for Rs. 120 special dividend)
The company sold its UPS division to Legrand Group for Rs. 837 cr and a profit of Rs. 615 cr in Feb 2012. The company paid Rs. 132 cr as tax on this gain and declared additional dividend of Rs. 121 cr.
The company plans to aggressively get into generation of Solar/ Wind energy, manufacture of LED products, etc besides up scaling Foundry business.
Our view on these companies: At this point of the time, these companies look okay for investors who like to buy stocks at deep discount, and are willing to wait for medium -long period of time for potential returns. But these are worth tracking for most value investors, and evaluate when the business starts getting some traction.
Disclosure: No Investment as on date
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