So while researching the textile sector in general, i came across Vardhman Textiles and then its spinoff company which has just started trading (May 17th, 2012) called Vardhman Special Steels. And whenever i hear of a demerger/ spinoff, I stop and pay attention, especially after I read the book - You can be a stock market genius by Joel Greenblatt.
In this situation, i really have not looked at the business outlook of VSS in detail. The valuation is that attractive. And there are other factors too:
1). The stock is trading below its liquidating value as defined by Graham. The calculations are given below:
Figures in INR Cr.
Current assets
Current Investments 18 100% 18
Inventories 95 66% 62.7
Trade receivables 105 80% 84
Cash 87 100% 87
Loans & advances 16 80% 12.8
Fixed assets
Tangible assets 43 15% 6.45
CWIP 8.6 15% 1.3
Long term investments 81 100% 80
(debt mutual funds)
Loans and advances 12 15% 1.8
**
**
Total 353
Total current liabilities 188 100% 188
Total non current liabilities 93 100% 93
Liquidating value 72
Liquidating value per share 38.7
2). The promoters are the biggest shareholders holding approx 75% of the shares of VSS. So their interest are aligned with the shareholders.
3). If that is not enough to convince you of the intent of the promoters, here’s more good news. The promoters have lent the company INR 66 cr through their companies. From the latest balance sheet:
Short term borrowings
From related parties
)- Vardhman textiles limited 29.8 cr.
)- Vardhman acrylics limites 35.9 cr
So, the promoters do have a lot to lose if the company goes down. And the share price does suggest that it is going down.
4). Currently, around 11% of the shares are held by MFs. As generally happens, the institutional shareholders will exit the demerged company after the demerger. If that happens, as i assume it will in this case, the share price will go even lower.
5). If you insist, i will tell you a little about the earnings of the company. First it is not loss making. That should be enough. Maximum i will do is look at the ROE and cash flows.
Net profit margin: 4.9%
Net asset turnover: 1.87
Leverage: 1.48
ROE : 13.6%
Last year, on a net profit of 26 cr
CFO: 5 cr.
Operating cash flow was much below net profit, because of an increase in receivables and increase in “other current assets/ loans and advances.”
)- Increase in tradereceivablesis concern and one to look out for.
)- Other CA/ Loans and advances consists of advance to suppliers mostly (13 cr. out of 16 cr.) So no problems there.
6). Currently, the stock is trading around 34. I will wait till it does down further and then start buying.
Any feedback will be much appreciated.
Thanks.