Our kite-flying exercise for the model portfolios ends with this instalment, after which we shall brave the storms and buy small quantities for both Safe Wealth and Wealth Zoom. So here is my final list of basement bargains that my research team has fished out from the turbulent seas of investing. Most of these are candidates for Wealth Zoom.
Banks are natural proxies for economic growth and pain, so it is no surprise to see a number of PSU banks being hammered. But some of these are at price points that represent good bargains, especially in conjunction with their recent performance and steady position among peers. As the second largest PSU bank, the Punjab National Bank is not getting the respect it deserves after posting an inspiring third quarter result. Its net interest income rose 38% and the fee income (that bug bear of PSU banks) grew 40% YoY. The net profit was up 40%, while the bank earned a superlative 3.85% net interest margin. With a loan book of Rs 1,41,000 crore, PNB is growing faster than its peers, and at Rs 343, it’s available at a 22% discount to adjusted book value (the criterion used universally to value banks). Should we include this large and under-rated gem in Safe Wealth instead?
The Corporation Bank and the Oriental Bank of Commerce (OBC) are among the smaller PSU banks sadly unnoticed by serious investors. OBC is growing furiously (advances are up 28% YoY) and continues to post recoveries from the acquired asset book of the Global Trust Bank. The bad news is that they have low CASA ratios (percentage of low-cost deposits) and operate in the sub-3% NIM bracket. But, I think, it’s adjusted in the price. OBC is available for over 55% discount to its adjusted book value for the 2008-9 estimate. The Corporation Bank has a very low operating cost structure, low net NPAs (0.33%) and a strong loan growth (30% up YoY in December 2008), while its negatives are low CASA and small size. Perhaps that’s why it’s available for bravehearts like me for Rs 168 when its expected book value should hit Rs 340 by March 2009.
A unique company in the technology space that keeps coming up in readers’ suggestions is Bartronics. Originally a player in bar-coding systems, Bartronics has rapidly evolved into a complete solution provider in the Automatic Identification and Data Capture (AIDC) space. It has set up India’s first and only chip-based smart card manufacturing unit, and has acquired AIDC companies in the US and Singapore. Bartronics should cross Rs 550 crore in revenues and Rs 75 crore in net profit in 2008-9. Given the visibility it garnered from the Delhi government’s e-governance project, ESIC’s orders and a strong bid pipeline, growth should not be a problem for Bartronics. If it keeps the working capital monster at bay, this niche player can grow at 50-60% YoY for the next three-four years. Its current market cap: Rs 220 crore, translating into a rock bottom PE of 2.2 on estimated 2009 10 earnings.
It’s a little strange to see midcap companies from two branches of the Birla tree in our list, but such is the battering that these stocks have received that bottom fishing is called for. Especially when you consider that the core capabilities of our two mini-gems, Orient Paper and Kesoram, are intact and flourishing. B.K. Birla’s Kesoram (CMP: Rs 115) has aggressively added capacities in cement and tyres over the past two years and will now have to contend with sagging demand. The tyre division’s segment profits took a nosedive in the December quarter, while a national cement glut seems to be in the making.
This should not deter the astute, long-term buyer today. My sum of the parts (SOTP) for this diversified company is: assign a distress case enterprise value (EV) of $50 a tonne (against replacement cost of at least $100 a tonne) to its expanded 6.2 million TPA cement capacity to get Rs 1,550 crore. Add at least Rs 300 crore for the tyre business (Kesoram has recently invested more than Rs 650 crore in new tyre capacities) to get Rs 1,850 crore of the total EV. Subtract the estimated net debt of Rs 1,050 crore as on April 2009 to get a fair market cap of Rs 800 crore. This makes Kesoram’s current market cap of Rs 514 crore look like it’s hiding a 55% upside.
Like Kesoram, the G.P./C.K. Birla-promoted Orient Paper has expanded its cement capacity from 2.4 MTPA to 5 MTPA, along with a 50-MW captive power, by June 2009. The total spend: Rs 600 crore against a benchmark cost of Rs 900 crore, at least. This is the key value driver at a time when the cement industry is afflicted by falling margins and potential oversupply. Another Rs 120 crore is being spent on a tissue paper plant addition (15k TPA) to the paper mill at Amlai and a small expansion in the fans unit.
Orient’s cement division is among the most cost-efficient in India and has delivered a PBIT of Rs 1,100 a tonne in the third quarter, well above the industry averages. I would still value Orient’s 5-MTPA cement capacity at a discount to industry peers at a distress-like EV of $40 a tonne (against $90 replacement cost), translating into Rs 1,000 crore. Add Rs 200 crore for the rest of the business (paper, fans) to get Rs 1,200-crore fair EV. Subtract Rs 400 crore of estimated debt as on March 2010, and you will get a fair market cap of over Rs 800 crore versus today’s Rs 380 crore, suggesting more than a 100% upside. Orient Paper completed a 3:10 rights issue at Rs 36 a share about a year ago. An entry at Rs 19 allows for almost a 50% discount to the rights price.