Divyashakti Granite - Graham Cigar Butt?

Dear All,

Im going to be keep this short. I came across this company on my screener.

Market Cap - 53 crores

Cash in Hand - 31 crores

Inventory - 12.5 cores

Debtors - 30 crores

Creditors and Current Liabilities - (9) crores

Provisions - (2.25) crores

Deferred Tax Liability (0.75) crores

Nil Debt

Company is not growing and there is no significant investment in growing productive assets of the company but there is cash generation of approx. 6-10 crores per year.

Assuming actual liquidation value of inventory and debtors is only 50% of actual that works out to 0.5*42.5 = 21.25 crores + 31 crores cash = 52.5 crores which equals to market cap of the company.

I did a basic check on related party transactions and didn’t find anything extraordinarily out of place. No promoter pledging

In essence what Mr. Market is saying that the future earnings of the company are worth nothing.

I dont usually go for cigar butts but perhaps this is worth a try? Invite views?

Disclosure: No holdings.

Yeah I too bought a small amount a couple of days back,

But a very small amount. With the fall in property prices in all metros it might turn out that the market is right after all and the company might end up posting losses.

Also capital allocation is the key. It’s a different matter that they have cash, and it’s a different matter what they’ll do with it.

disc: small investment

Most of the company’s sales are exports (>90%), so the Indian market hardly affects the prospect of this company.

Yeah I too bought a small amount a couple of days back,

But a very small amount. With the fall in property prices in all metros it might turn out that the market is right after all and the company might end up posting losses.

Also capital allocation is the key. It’s a different matter that they have cash, and it’s a different matter what they’ll do with it.

disc: small investment

hi,

Was looking it & saw that the cash is in EEFC account. Never heard of it. As you mentioned the revenue comes from exports this EEFC account helps you make transaction in Foreign Currency. If it is an necessary thing then do we count it as an liquid cash?
Dis : I am learning :wink:


Hi Sunny,

Yes - EEFC account is like a current account in foreign currency which earns no interest. So for example, if you get $10 as revenue, you do not convert it and transfer it into your current account; instead - you keep it in the EEFC account. Reasons could be - maybe waiting to make a payment for one of your imports or simply waiting for a better rate.

However, the money in the EEFC account in a particular month has to be converted in the next calender month.

Most of the company’s sales are exports (>90%), so the Indian market hardly affects the prospect of this company.

** With losses. ** ;))

Hi Karan,

So the company is not gaining something from the cash instead the value of the cash is deteriorating. I think one should wait for the next annual report for a clear view.

The positive side I liked about the company was if I pay all the liabilities from the cash, deduct the reaming cash & other liquid assets from its market cap & now I apply debt capacity bargain theme based on the cash flows, it appears a bargain.

The problem investing in these net nets is that we need to diversify a lot in this theme, & these days such situations don’t arise that frequently.

If anyone knows 5-7 such companies should consider this true value theme.

Yeah I too bought a small amount a couple of days back,

But a very small amount. With the fall in property prices in all metros it might turn out that the market is right after all and the company might end up posting losses.

Also capital allocation is the key. It’s a different matter that they have cash, and it’s a different matter what they’ll do with it.

disc: small investment

hi,

Was looking it & saw that the cash is in EEFC account. Never heard of it. As you mentioned the revenue comes from exports this EEFC account helps you make transaction in Foreign Currency. If it is an necessary thing then do we count it as an liquid cash?
Dis : I am learning ;))

You cannot hold the cash in an EEFC account for more than a couple of months, so how does the value deteriorate? Rather, if the company has imports, it is prudent to hold that cash in the EEFC account to avoid any exchange rate fluctuations.

As for your point about net nets, its true. Graham is an advocate of diversification of such companies and they are certainly hard to find.

Hi Sunny,

Yes - EEFC account is like a current account in foreign currency which earns no interest. So for example, if you get $10 as revenue, you do not convert it and transfer it into your current account; instead - you keep it in the EEFC account. Reasons could be - maybe waiting to make a payment for one of your imports or simply waiting for a better rate.

However, the money in the EEFC account in a particular month has to be converted in the next calender month.

Most of the company’s sales are exports (>90%), so the Indian market hardly affects the prospect of this company.

** With losses. ** ;))

Guys, nice discussion but just from a usability point of view, could you not include previous replies when you do your next reply? Makes for better reading.

Thanks.

Seems to have no net free cash flow at the end. Too hard for me to take a pill like that

I checked the Cash flows for the past 4 yrs (FY11 to FY14). OCF = 17.46 cr; CAPEX = 1.52 cr; Free Cash Flow = 15.94 cr. I guess Company has made good free cash flow in FY15 too because Cash increased to 42.73 crores in FY15 Balance sheet. With Market Cap less than 50 cr, it certainly looks like a value bet but I am not comfortable with company hoarding cash and doing nothing about it i.e., No expansion plans.

I am confused whether to allocate some 3-5% of my Investment in DSG. The “Cash” part is very tempting. Any help is appreciated.

Company is getting into power generation. See this from March 15.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Divyashakti_Granites_Ltd_050315.pdf

I recall speaking with the management years back. I had bought this between Rs.18-20 in those days. The management seemed very conservative, especially about taking loans because of bad experience with banks. This may fit the criteria of being a Graham cigar butt stock but you may go years without seeing any appreciation. Take a look at its movement over the last ten years. It has underperformed even in the current bull run. Some good use of the cash whether by reinvesting in the business or increasing the dividend sharply can result in the market re-rating it.

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Hi nice discussion.
I would like to point out that if we consider the topline growth over last 10 years company has just managed to double its sales which turns out to 6% CAGR over last 10 years.Similarly on the EBIDTAM side there has been no consistency from peak of 32% its already down to 18% in a period when rupee depreciation should have acted as a tailwind for him( based on earlier discussion of him being a export player).
Secondly although his sales growth has been tepid his working capital has grown 20x over the last 10 years which i presume is consuming most of the cash flow generation.
Rather why not look at a comparative player Inani Marbles & Industries which has done better on both PnL and Balance Sheet sides?
Moreover can this be a large industry with significant scope for players to scale up their topline and bottomline?
Regards

Inani Marbles dint declare results for Dec’14 and Mar’15 quarters. Not even available in their websites.

Hi,
I Checked with the Company Secretary today there was some problem and their website is not updated.Have asked them to mail the results.Will post them as soon as i get.

Divyashakti has been continuously on upper circuit for the last 5-6 trading days…scrip has touched 97 today…Q1 numbers were decent nothing spectacular…any views?

Q1FY16 numbers
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/F5ECE1F4_6EF4_44DC_AAF5_ED13306D37D7_122751.pdf

My views were published earlier too, now I kind of regret on this. I should have bought it on 44. I recommended it to my friend for a target of Rs 60 but Rs 97 was unexpected. Similar case happened with smart link.

Well it was incredibly cheap, copious free cash flow producing company giving generous dividends. No wonder people are buying like there is no tomorrow.

Also apparently influential investors like porinju are loading up on granite stocks like pokarna and this might be a spillover effect.

Disc: long

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Divyashakti Granites has reported good results. Sales are up , no debt, Net Profit up. I dont think this qualifies as a Cigar Butt. I thought Cigar Butt companies are those who are better dead than alive. I cant see any such patterns with Divyashakti. It has a good future in my opinion & I would peg the FV of the stock at least at 200 bucks a share. Holding on to it.

DivyaShakti Grantires - strong results
Q1 Net Profit Up 71.9%
Total Income Up 45.3%
EBITDA Up 40%

Guess that takes care of the Cigar Butt thesis. Haha. Company has had excellent fundamentals, good cash flows, next to no debt, great ratios, etc. for a while and been undervalued for very long.

I think there might be a few important lessons in this story. Wonder why the market just refused to take notice of this stock for so long?

Disc.: Invested since two years.