Questionable Capital Allocation of late. Co’ has become a Fund Manager.
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For Example : Co’ bought shares of HAL recently. It’s a small amount but, what’s their thought process here, it’s a little odd
The co. has 1,788 Cr in investments, mostly in equities which they bought in the last few months. Full year revenue was 1729Cr. with a OPM of 7%. The margins are closer to the lowest margins the company has witnessed in last 10 years. They have switched on the furnace at Impex, which was turned off due to unviable operations. I guess the cycle must be turning, very low margins+starting the furnace. If I remove the investments from the m.cap (3300cr)…then the business which is debt free, is available at 1500 cr, thats P/S of 0.87 and could be a good investment idea.
What I dont like is the mgmt’s unwillingness to distribute the cash to the shareholders. They have made massive equity investments which they should not have done, unwise capital allocation.
Disc: very small allocation, not an advise
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The biggest investment they have made is in NSE 425crs. They have got 13,25,000 shares at the Rs. 3,207 a share. I think unlisted share price of nse is more than rs 5000 a share, which means the company has already made unrealized gain of 50%+ on this investment. If the management can deliver returns in excess of 15-20% on the cash they hold on balance sheet, I think investors still benefit because ultimately book value keeps on expanding. Yes, I agree to an extent doing investments at peak margins and peak valuation is quite risky, especially in current scenario where PSUs are overowned. So, a negative.
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NSE shares are 4000/share right on the unlisted segment.
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From what I have read, NSE prices are anywhere between 4500-5500 depending on the lot size at the moment. So definitely a big plus once NSE gets listed.
Mostly when a company starts investing in other companies through equity, and in turn increases its book value, markets tend to value them at a lower PB ratio. Look at all the holding companies, or companies which have substantial percentage of their cash in stocks, and you will find similar trend everywhere. The takeaway point in such cases is that company thinks of generating more returns through investment in equity in non related business rather than growing inorganically.
A better metric for such companies is Market capitalization to Sales ratio, which for Maithan has only increased over time.
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Even if you assume 15% LTCG/STCG, the equity portfolio is about 2000Cr. I wont be surprised if the 450 Cr odd NSE portfolio will become 1000 Cr in a few years…
Plus in the next few years, there should be a few years where they can produce FCF of 400-500 Cr annually. Could get very interesting… if that happens,assuming the equity portion remains the same, the rest of the company could be going for a potenital MCap/FCF of 3 as of today. Should be an easy double from here, if that happens.
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I was very positive on the company and used to think it is a great value buy…may be it still is…but what I didnt like was promoter’s intent to not return money to shareholders and instead invest money in equities. This was the biggest trigger for me to exit…I had a very small allocation but not any more.
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Hi Gaurav,
Did you get any feedback from them on their equity investements and why they think its a better capital allocation strategy?
Because, I am not comfortable with them adding more PSU’s. Not sure, what is their plans and fall back strategy.
Will they plan to carry these investements for longer period ?
Disclosure: Invested.
Hi Santhavel
I am still awaiting their response. I had sent multiple reminders to their IR team but no one cared to reply or connect to the relevant person. I first invested post covid, exited around the peak in 2021-22
I entered again recently with a small position. But after this episode, I exited my position completely
In their past annual reports 5-6 years back, they mentioned conserving cash for future growth opportunities. It made sense as they were quite a small company but somehow I feel they have completely missed the bus, while other alloy companies expanded and are now reaping the fruits, they have not been able to acquire something big nor grow organically.
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Some of the tailwinds boosting exchange stocks are expected to slow down as the government/SEBI explores ways to reduce the volume of FnO trades. This factor certainly contributed to the meteoric rise of BSE and, rub-off on NSE.
So only time will tell if this was most prudent decision on mgmt part or not.
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