JM Financial is an Indian financial services company, founded by the well known Indian banker, Nimesh Kampani. The company operates in four segments: Investment banking and securities, fund based activities, alternative asset management and asset management.
Opportunity: Before we understand this special situation better, we should take a look at the following details:
Sales: FY12: 874cr, FY11: 896cr
PAT: FY12: 121.2, FY11: 174.6cr
Dil EPS: FY12: 1.61, FY11: 2.33
Networth: FY12: 1954cr, FY11: 1979cr
Cash: FY12: 1370cr, FY11: 1057cr
Working Capital: FY12: 1283cr, FY11: 943cr
- CMP: 12.16, Market Cap: 911cr (the stock is at 52w low, down from 52w hi of 26.4 inJun-11)
I guess now the opportunity should be clearer. The company is trading at a discount of 33.5% to cash and ~29% to working capital. What we need to understand is if this is a mispriced bet, factors offering protection/comfort and associated downside risks.
Factors offering protection/comfort:
Dividend of 0.6 per share, i.e., a yield of ~5% and payout of ~37%
Promoters have been increasing their stake: 67.18% by Mar-12 vs. 66.86% by Mar-11
Nimesh Kampani and his son, Vishal Kampani seem to be trying to do the right things in one of the most difficult times in the industry and their careers.
Strong headwinds driven by macroeconomic concerns, global pressure and low investor sentiment;
Take a note of the following (Note 3 on page 5 of the latest results release):
“Consequent upon the completion of assessment for FY09, the company had received a notice of demand from the IT dept amounting to 315.74cr (Quantum Appeal). The dept had also demanded a penalty of 169.29cr, levied on the enhancement of income, relating to FY09. Upon the appeal filed by the company, the IT Appellate Tribunal, Mumbai held that the Quantum Appeal be restored back to the assessing officer to decide the issues ss per the direction. Accordingly, the penalty levied has also been set aside. As a result of this, no amount is payable by the company as on date pending the completion of fresh adjudication by the assessing officer.”
Seems like the company had a cumulative penalty of 485.03cr by IT dept, which as of today has been set aside, and the company is awaiting further assessment/result.
- The long term debt of the company has increased from 26cr in FY11 to 271cr in FY12 (possibly because of consolidation, but anyway, need to understand this better)
Conclusion: Lets say the company has to pay 485cr to the IT dept and also pays 271cr to take the LT debt to zero. This will reduce the cash to 614cr. Net of that cash from 911cr market cap, i.e., for 297cr., I will get:
1). A profitable business doing 874cr sales and 121cr profit;
2). Brand JM Financial that includes the Kampani family and the team;
3). Opportunity to partner with the person who is the reason why Morgan Stanley was able to start their operations in India and subsequent growth of IB in India;
4). Networth of 1469cr;
5). Dividend of 0.6 per share, however, at an implied yield of 15%
If the company doesn’t have to pay anything to the IT dept, then I can buy all of the stuff mentioned above, pay the LT debt of 271cr and the market cap of 911cr, and will still have 188cr. cash!
This opportunity might materialise on its own as soon as the market participants realise it and start buying, and/or when there is clarity regarding payment due to the IT dept if any, and/or things turn brighter for the business. Bears time risk associated with opportunity cost, but looks good considering minimal downside and significantly higher potential upside.
A classic heads I win a lot, tails I don’t lose much.