A.K. Capital Services - Value buy or a trap?


Have been following this stock since 280 - 300 levels and recently took a plunge into it.

A.K. Capital Services Ltd. is a SEBI registered Category I Merchant Banker. The company has been providing merchant banking services for over twenty years and is a leading player in the corporate debt market segment through management of private placements as well as public issues.
The merchant banking activities conducted by AKCSL involves raising corporate debt through private placement of bonds and debentures and initial public issue of bonds and debentures. The company has placed approximately Rs.1,04,584 crore of debt issues in FY16, decline of 10.1% as compared to total debt placement of Rs.1,16,336 crore in FY15. In FY16 AK Capital managed 175 assignments of private placement of debt for all types of issuers corresponding to a market share of 22%.
(Source: Care Ratings Database).
It is currently operating through a branch network of 10 offices in 9 cities.
AKCSL is also involved in dealings of bonds and debentures (g-sec, corporate bonds and PSU bonds) and generates investment income and interest income taking proprietary positions in various marketable securities to be retailed out to institutions like provident funds, banks, insurance companies, mutual funds, corporates , family offices, FII’s and FPI’s AKCSL has 5 subsidiaries namely A.K. Capital Finance Pvt. Ltd. (Non-Deposit taking NBFC), A.K. Stockmart Pvt. Ltd. (engaged in broking and IPO distribution), A.K. Capital Corporation Pvt. Ltd. (Investment company), A. K. Wealth Management Pvt Ltd.(provides portfolio management services) and A.K.Capital (Singapore) PTE Ltd.(engaged in distribution of financial products globally).
Mr Subhash Chandra Bhargava is the Chairman and Mr A K Mittal is the Managing Director & CEO
i. Long and established presence as a merchant banker in the debt market segment, experienced management team, strong institutional client base and low gearing level.
ii. Low interest rates.
i. Income volatility due to dependence on debt capital markets
ii. Concentration in the corporate loan segment and
iii. Competitive merchant banking industry scenario.
iv. Concentration and asset quality of loan book
v. Interest rates going up

A brief about the financials of the company-

Marketcap: Rs 273.7 Crores
Stock P.E.: 6.57
ROCE: 23.04%
ROCE 3 year avg.: 23.38%
ROE: 10.36%
Dividend payout is nearly 10%
Promoter Holding: 66.31% (in last 1 year promoter bought nearly 4% from open market, in the past also the promoters have bought shares from open market)
P/B value: 0.65
The company has been paying tax also @ 30% approximately.
The company has posted a record profit of 57 crores for the financial year 2017 on a consolidated basis and EPS of Rs 87. a growth of 40% over last FY.

The company is doing so well but still market is discounting it. What is it that I’m ignoring?
Views invited.

Disclosure: invested


They seem to have racked up a tremendous amount of debt in the last two fiscals without commensurate returns, what do you think is the reason for this?

The reason for the same could be to invest in the bond markets as the interest rates are coming down.
IMHO over the next 1-2 years the interest rates should fall by 50bps which is going to give good returns to AKCSL.
Moreover, the last year has been very good for the company with profit growing by 40%.

My view is that the stock is yet to be fully discovered by the market, hence we might need to show more patience.I believe it is thinly held as of now, based on the shareholding pattern as of 31st March,2017. It might be a slow and steady mover over a period of time. With a good management and good book value and its current P/B ratio , it is a matter of time before its move up. One more constrain , is that consolidated results are published annually and not quarterly. Company is a leader in its field with a good reputation in the market , hence with good growth expected in future in corporate debt raising , it should have a reasonable growth in the future. Around Rs 440/- is a big hurdle in the chart , which it needs to cross with a volume break out to go to the next level.

Disclosure : Invested

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The company’s Mkt Cap is presently at ~ Rs. 270 Crores

The Investment in Quoted Securites (Consolidated Basis) is approximately Rs. 2500 Cr.
The Loans & Liability net of Cash stands at ~ Rs. 1800 Crores.

Moreover, the company has a property at Nariman Point which generates Rental Income.

No change in position in 5 years - still at discount.