Den Networks - Company selling for free?

1

This is the first time I am starting the thread, but I am diverging from the usual aspect of running the entire business story, since my investment thesis is based purely on balance sheet. Risks are highlighted with respect to my thesis, rather than that for business. I have started the thread because I couldn’t find other for this company. Also, seniors and moderators, I am not sure about the categorization since I am not betting on earnings growth of this stock. Sincere apologies for missing if such categorization exists :sweat_smile:

  1. Den Networks is majorly hold by Reliance (~67%), followed by ~7-8% by founder promoter Mr. Sameer Manchanda

  2. The business has generated good amount of cash from operations, with historical performance as follows -

Column 1 Column 2 Column 3 Column 4 E
TRENDS (INR Cr) 10 YEARS 7 YEARS 5 YEARS 3 YEARS
PAT -194 589 901 633
CFO 1335 1064 838 352
CFO/PAT -6.87 1.81 0.93 0.56

Its balance sheet currently is as follows -

Column 1 Column 2 Column 3 Column 4
Equity 3256
Non Current Liabilities 70
Lease obligations 26
Deferred revenue 32
Provisions 12
Current Liabilities 432
Lease obligations 2
Trade payables (Inc PPE payables on purchase) 277
Provisions 3
Employee dues 5
Deffered revenue 49
Statutory remittances 28
Indirect tax + others 69
Total Liabilities 3759
Non current Assets 888
PPE & CWIP 432
Goodwill & Other intangibles 159
Investments in operating subsidiaries 67
Other financial assets 3
Deferred & Non current tax assets (Net) 156
Other non-current assets 70
Current Assets 2870
Investments in quoted mutual funds & bonds 1359
Cash in FD 1140
Cash in Hand 16
Cash kept as margin 178
Trade receivables 87
Doubtful advances 13
Unbilled revenue 19
Other financial assets 5
Balance with govt authorities 47
Other current assets 6
Total Assets 3759

Its current Market Cap = ~2380 Cr

So, considering only net cash in hand and quoted investments amount to ~INR 2515 Cr, do we have a graham style bet? Where a business generating ~INR 200 Cr profit year on year is available for free? In my opinion, considering market won’t give much terminal value to cable network business, this should go for a PE of maybe 6-7? That itself- gives target market cap of ~3800-4000 Cr

Risks:

  1. Reliance holding - Not sure how and what they will do if they choose to take this private. I am not sure about their intentions for minority shareholders
  2. Wrong about terminal value assumptions - Maybe 6-7 PE for business is also too optimistic and it won’t be valued at that
  3. Lack of some insider info: It has been such a value bet over last 2-3 quarters at least, if we check its balance sheet and market cap. Somehow, it has escaped till now despite presence large number of quantitative formulae based screeners and investors

Request views from everyone. I am not invested yet since I am not sure why such a bet will exist for so long, and hence I think there is some point I am missing

Disclaimer: I am not invested in this yet, but have been tracking for some time now.

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2

Any idea why they are not giving dividends if they are so cash rich and generate so much of cash every year

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3

Reliance doesn’t need that money at all is my guess, although like I said that is the biggest risk. Management is not exactly minority shareholder friendly.

Further, to correct, Operating profit from business is ~150-200 Cr, but earnings are coming mostly from treasury gains since depreciation eats up all the operating profits. However, this is also the reason that operations are generating good cash, and hence earlier logic of valuing operating business over and above cash & investments should still hold true in my opinion.
What do you all think? Request your inputs

4

If dividend policy is decided by promoter needs then we have a problem.

That way most promoters who run companies get a fat paycheck and don’t need dividends.

Also, typically with Reliance ownership this may not be even on radar of Ambanis. Someone at general manager at best might be in-charge. Will never move needle for reliance.

5

I agree. Den Network’s Dividend distribution policy is pretty vague and general as expected. That’s the problem I guess. I am not sure when will this extra cash reflect as real gain to shareholders. But then again, this is certain that at some future point, this is bound to come to shareholders in one way or other, so why not factor it in valuation from now itself?

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