Majestic Auto - An Undiscovered Real estate/Facility Mgmt Stock

Stock Opportunities Untested - but worth a good look
1

Hello everyone , hope you are fine and in good health
this is my first post in VP. Over the years i have learnt a lot from this forum as well another kinda predecessor forum (he now runs a famous pms ) and peter lynch .
Before i read these forums and peter lynch i actually knew nothing . i would watch tv and buy stocks based on what i saw on business channels , i was that kinda ignoramus :sweat_smile:

So finally decided to stop mooching off vp(just reading the stock posts ) and actually contribute
so here goes

There are safe no tension bluechip fmcg stocks, they are fast growing midcaps ,exciting smallcaps and then there are the ignored longshots. These undiscovered stocks generally have the right fundamentals in place but for some reason are ignored by the markets for extended periods of time (years and years )
The beauty of these longshots is that when they work out , the stock performance is often way higher than what we investors originally anticipated and will produce extremely pleasing results making us look like a genius. But the problem is we would have sold it off by then due to exhaustion

An example of such an opportunity for me was bombay burmah trading corp many years ago (i had accumulated a sizable position , got sick and tired of waiting and finally sold off at minor profit and then the stock went up more than 10 times :sweat_smile:

And so i have learnt to be more patient.

Company - Majestic Auto
MARKET CAP - 85 CRORES ( from moneycontrol) as on 14.6.20
CMP - RS 81.7 (listed only on bse )
Promoter holding - 75%
PLEDGING - NO Pledging
Consolidated BV - RS 385.64
Cons Price /book value - 0.21
Consolidated net debt - 171 crore (i have added up long term and short term debt and subtracted them from the current investments ,cash balances and other bank balances, i am ignoring things like other current assets)
Investments - 921000 shares of hero motocorp (as per 2019 annual report)
worth 221 crores as of today (hero motocorp price - rs 1401) on 14.6.20

Majestic auto is a part of Mahesh Munjal group (Family of Hero group)
The company which was originally an auto component co has discontinued its automotive components business in 2017-18 and has now transitioned into Leasing of office space and facility management of the office space it currently owns.

The business has 4 parts

a) Leasing business
the company has a subsidiary emirates technologies pvt ltd which owns office space of
6 lac odd(0.6 million) square feet in a building called Majestic knowledge boulvevard located at sector 62 in Noida city.
it has marquee clients like tech mahindra and ericcson (do correct me if i am wrong ).
has 93% occupancy as per the latest annual report (18-19).
this property/company was acquired for 73.2 crore in 2015… Majestic auto acquired 80 percent of emirates technologies pvt ltd while the rest of the 20% was acquired by Group company OK Hosiery Mills .(its a related party). mahesh munjal and renuka munjal are directors in ok hosiery mills private ltd.
we need to study this related party angle a bit more.Future growth can come from acquisition of new commercial properties.

if the link doesnt open search for cnbc majestic auto
in this January 2018 video where the promoter mentions annual rent of 32 crores plus some more income from the facility mgmt . Also mentions that they hold 10 lac(1 million shares) of hero motorcorp.

the news anchor is guessing the property could be worth around 500 to 600 crores .
its also a positive in my opinion that the promoter is not tom toming the company and in infact downplaying the assets that the company holds .

Rental revenue generated has been 29.89 crores until 9 months ended december 2019.
Rental Profit before tax generated has been 18.91 until 9 months ended december 2019(decreased by 65 lacs approx as compared to previous 9 months ).
Rental revenue has increased by 3 crores as compared to previous 9 months ended december 2018

b) Real estate mgmt/Facility Mgmt business
Majestic it services ltd is a subsidiary which is into managing the properties acquired by majestic auto. It manages the planning and mgmt of majestic knowledge boulevard as well as things like
catering, cleaning, , HR, accounting, hospitality.etc
future growth can come from the facility mgmt division taking up other clients besides its parent.

Revenure generated for 9 months ended is 26.76 crore . PBT for 9 months has been 10.96 crores
These figures have reduced by half from the preceding year. .Last year there was additional income from sale of land which is not present this year.
If any of the boarders find other reasons for the revenue drop other than land sale , do give your opinion.

c) Land
the company has shut down its manufacturing locations and is selling the land little by little.

from the annual report 2018- 2019.
“Accordingly Land and Building amounting to 6,414.61 lakhs which was earlier part of Fixed Assets has been re-classified as inventory held for sale. A disclosure in the quarterly results to BSE has also been made to such effect in the Financial statements filed for the quarter ended June 2018 (dated 10 August 2018). A part of such Land and Building valued at 1,407.68 lakhs which has
been re-classified as inventory was sold for ` 5,765.24 lakhs during
the year having a significant impact on revenue and profitability of
the Company”

from the above i understand a portion of the land was sold in financial year 2018 -19 for 57.65 crore
which was valued only at 14.07 crores in balance sheet.
so there is a chance that the rest of 50.06 crore worth of land (as per inventory) can be sold for a substantial sum in the future.But i am not using this aspect for my valuation.
I am yet to understand how much more land is actually available for sale.
and whether this spare land will be sold or used to develop newer real estate to rent out.
The land is at the two old manufacturing facilities which are in Ludhiana.and Greater Noida
9 months ended december 2019 there has been no land sale till now.

d) Investments
The company holds 921000 shares of hero motocorp(latest annual report ) worth 221 crores of today. i dont think any of these shares have been sold till 9 months ending december 2019.
In the above video link it was mentioned as a million shares (10 lac) . in 2017 annual report shares of hero moto corp are at 10.3 lacs which is now 9.21 lacs so the company is definitely not averse to sell the shares. During q1 2018 company sold hero shares woth 22.4 crores.
if i take into account the value of hero shares held then the company has zero debt and a cash surplus of 50 crores as of today.

MANAGEMENT
Mgmt compensation seems okay(vp boarders correct me if am wrong )
Both son and daughter of promoter are part of mgmt
Promoter has lent some money to the company and has received an interest of 3.73 lac. for 6 month ending september 2019
Promoter group company OK HOSIERY mills pvt ltd which holds 20% of emirates technologies which inturn owns the it park has been paid 31 lacs by the company as rent for 6 months ended 2019
source - bse disclosure

Future
i feel the cushion of hero motocorp shares might help the company raise more debt to buyout commercial real estate cheaper in the future (covid might change things a lot)

Alternatively company might sell hero motocorp shares as the market recovers and clear off all its debt and be a cash surplus company with a fixed income comprising of rental &others (slowly rising ) every year.

Pros

  1. a company with a promoter holding of 75% , no pledging , rental revenue of around 35 crores from a commercial asset worth (well help me out here ) having zero debt and
    effectively with a cash surplus of 50 crores considering hero motocorp shares
    is available is at a marketcap of 85 crore. Net Net we are getting this company for 35 crore market cap (almost equal to one year rental revenue) and a price to book of 0.21.

  2. Famous investors hold chunks of the public holding.
    ANIL Kumar Goel holds 2 lac shares (0.2 million) which is 1.92 % of the company as on march 31st 2020

Nishit parekh holds 1.44 % of the company
varsha parekh holds 1.16 % of the company

dipak kanyalal shah holds 1.49 % of the company

  1. other triggers like additional income from land sale and hero moto shares sale.

  2. company has been reducing consolidated borrowings
    reduced from 207 crore to 187 crore half year ended September 2019 as compared to previous half year.
    Consolidated borrowing was 341 crores in 2017 which has come down to 187 crore in september 2019 and has been coming down consistently over the past few years.

  3. ValuePickr - Chintan Baithak 2019 - #51 by Prdnt_investor

Abhishek basumalick presented this company at the 2019 chintan baithak. link shows his slide on majestic auto.

if a senior vp boarder is interested then its definitely a plus point :slight_smile:

Negatives

  1. stock is listed only on bse . its in the x group and you have to take compulsory delivery .

  2. As mentioned in the beginning its an undiscovered and ignored stock and when i say ignored i mean it literally.
    Liquidity is really really low . the whole market starts trading at 9 15 am everyday and this stock slowly wakes up with a yawn at around 11 am and then there will be a transaction of shares in single digit volumes
    The lack of liquidity would be actually be funny if i was not invested :grinning:
    Volumes are very low most days with less than 5k shares traded often.

  3. the problem with ignored stocks is that they wont move up for years but will crash a lot in a situation like covid. So such stocks can have a lot of price damage as i learnt recently in march 2020 just because nobody is bothered to buy.
    and when such crashes happen i often question myself as to why do i even bother to be a so called value hunter ,instead just go with the herd and buy fmcg stocks and chill in life. So these ignored stocks are definitely high risk and can be a scary roller coaster ride.

  4. there are related party transactions which i have to study and 20% of the material subsidiary is owned the by a group company.
    and we dont know how things will pan out in the future with respect to covid. Mgmt communication is very limited.

link for annual report

http://www.majesticauto.in/annual_reports.php

An icra 2018 report just for info
https://www.icra.in/Rationale/ShowRationaleReport/?Id=68445

Conclusion
This is my first post , so seniors do correct me if i am out of line somewhere.
i believe majestic auto is an highly undervalued stock and deserves to be re rated.atleast to the bare minimum of its book value.

Discosure : i am invested in it …

vp boarders do help us all in finding what i am missing . why is the company trading at such a low valuation.
Comments and especially criticisms are welcome . i would love to know the red flags that i have ignored.
Please take my opinions with a sackful of salt
cheers !!

Disclaimer : This is not investment advice and should in now way be construed as one . I am not a registered sebi investment advisor. Please do your due diligence before investing.

.

9 Likes
2

The stock has moved out of the short term asm(Advanced survelliance framework) as pert this link.

i am not able to edit my original post so posting in this reply

investors Anil kumar goel and dipak kanyalal shah are invested since atleast 2015 with minor changes in holding (havent checked the years before that).

In the above initial post i have mentioned hero moto price as rs 1401 on 14.6.20 ,thats incorrect
correct price is rs 2401

the best part about vp and the high standards it sets is i actually did more research for posting the topic on the forum than for investing in it :rofl:

4 Likes
3

Just wondering … why would they wait so long to sell HM shares to reduce debt ?
Should have done years ago

1 Like
4

hey nimish , i have myself thought about this question as to why has the company not sold its hero moto holding completely and cleared its debt.
the price of hero 3 years back on this day was rs 3783 , now its rs 2395.
In the last three years majestic auto has sold a little of its holding in hero.

so i checked the 2008 annual report which shows 16.25 lac shares of hero motors , as of today its down to 9.21 lac shares of hero.

In the past majestic auto had cross holdings in other group companies which got untangled in the last few years due to the hero group reorganization.

So lets see what happens in the future. one thing i am sure of is majestic auto is definitely not some kind of holding company of hero motocorp and will gradually reduce its holdings or raise debt and buyout commercial space. Either ways there would be growth.

Does anybody have any details about knowledge boulevard in noida, what could be the currrent market value of that building ?

ps: if all the hero moto shares are sold today and debt paid off , the net profit will double

In a few years MAYBE majestic auto could become a noida based Reit/Nesco type of stock .
If they execute well, market will definitely start taking more notice.

Disclaimer : i am invested ,my opinions might be biased

1 Like
5

HM is a compounded @ 18% including dividend between 2007-2017. Only past 2 yrs, it has underperformed both due to lesser growth and PE contraction. May be Majestic Auto was paying lesser interest rate for loans that HM’s CAGR.

1 Like
6

good point , i didnt think from the hero moto cagr growth angle.
you are right about majestic auto(majesco is a seperate company no connection)
paying lower interest than hero growth rate
they have taken term loans from hdfc bank by pledging hero moto shares. the rate of interest
ranges from 7.85 to 10.65 %

Disclaimer : i am invested ,my opinions might be biased

7

while googling came across another new corporate property called Majestic signia
This building was completed recently in 2019.
1.75 LAC square feet area
No mention of this in the last year’s annual
report.

I DON’T KNOW WHETHER THIS IS OWNED BY THE LISTED MAJESTIC AUTO OR IS A PROMOTER OWNED PROPERTY.

it’s in the same sector Noida sector 62 as knowledge boulevard .
link for info

Disclaimer : i am invested ,my opinions might be biased

8

It would be interesting to have a pure microcap portfolio of 20 stocks with the following characteristics

  1. Marketcap below 500 crore
  2. only 5 % allocation to a stock
  3. stocks with 70% and above promoter holding
  4. Net debt zero , no fccb either
  5. No Pledging
  6. 10 years listed history
  7. we may or may not add a dividend yield criteria
  8. paying taxes at more or less the prevalent rate.

I have been coming across some companies with characteristics like these . will post more after detailed research.
Even if a few stocks hit the jackpot it would be fantastic.

3 Likes
9

Results are gonna come on 29th this month.
if I have missed any filter in the above post do let me know.

two wheeler companies are expected to do well in the coming months because people will prefer them over public transport

there is a good chance the value of Majestic auto holding in hero motocorp will increase from the present 221 crores. (assuming no shares have been sold during the March quarter).

10

disclosure: have sold almost 8% of my holding in majestic auto and taken initial positions in muthoot finance.

disclaimer : I am invested in majestic auto, my opinions may be biased

11

results are out . they are not comparable directly with last year because of land sale component last year.

consolidated revenue for the year is 79.14 crore.
consolidated pbt for the year is 23.63 crores. but due to reasons beyond my current understanding income tax expense is 44.53 crore . which results in an annual loss of 20.9 crores.
in the other comprehensive income section there are some more items which show a bigger loss which i am yet to understand.(these items are classified as not part of pnl statement)

Net cash flow from operating activities is 40.1 crores

long term borrowings have reduced from 207 crores to 173 crores resulting in debt reduction of 34 crores. no sizable short term debt.

it seems company has not sold any hero motocorp shares.
the reduction in investment value to 147 crores from 235 crores is because as on march 31st hero moto price was 1596.
now price is 2504 which results in a holding value of 230 crores of hero moto shares which majestic auto has.

the results have various aspects like the tax thing which i dont understand , i will get greater clarity once the latest annual report is released.majestic auto.pdf (1.8 MB)

it would be swell if other boarders shed light on the results as well especially the tax and the other comprehensive income part.

1 Like
12

This property, Majestic knowledge boulvevard located at sector 62 in Noida city was acquired for 73.2 crore in 2015 but is generating a revenue of 40 Cr and PBT of 25 Cr.

Assuming 10% rental yield,
Asset Value = Revenue / rental yield = 40/0.1 = 400 Cr in 2019.
Why asset was sold for 73 Cr when real value was 250 Cr in 2015 adjusting for appreciation in asset price ?

Am i missing something ?

13

i havent been able to get any info about the terms and conditions of their purchase of emirates tech pvt ltd which owns knowledge boulvevard.
the purchase price does seem low.
old interview link

other unknowns

  1. the 43.2 crore tax expense year ended march 2020. no idea where this huge tax epense came from. there is no deferred tax liability in last years consolidated balance sheet.
    there is a deferrred tax asset os 21.3 crore and other non current tax assets of 7.16 crore this year
    here is a deferred tax liability of 30.2 crore this year which was nil last year
    the only good thing is the business is definitely legit because of all these taxes paid.

  2. in the other comprehensive income section , items not classsified to p&l statement is another -88.35 crores(negative 88.35 crores).
    its definitely connected with the closing down of the automotive division.

page 104 of previous year annual report shows unused tax losses and depreciation for which no deferred tax asset is recognised
this amount over the next decade is 210 crore
this year results

THE PDF IN MY PREVIOUS POST IS THE LATEST RESULT.

because of these unknowns we are getting the stock so cheap.
market cap of 90 crore with debt of around 170 crores which is consistently declining year by year having rental income of 35 crores approx but holding hero moto shares of rs 253 crore(its not a holding company),gets dividend too of a few crores from hero and commercial property (IT BUILDING ) worth conservatively atleast 300 crore.

DISCLOSURE i have sold 12.5 % of my majestic auto holding and shifted it to muthoot finance.

i am invested in majestic auto . my opinions may be biased. i am not a sebi registered investment advisor. this is not investment advice

14

2 wheelers stocks should do very well in the forseeable future due to need for social distancing which is virtually impossible in public transport.

there is a good chance of hero motocorp getting rerated which will benefit majestic auto .
In my opinion majestic auto mgmt will seek to ride this out and will definitely pare down down a significant portion of its debt by selling off some of hero moto holding (due to all the economic shocks witnessed )
. current value of its holding of hero moto cmp of 2663 is 245 crores.

What i am guessing is the massive income tax paid this year is to do with the land sale . i will post more details once the annual report is released.

Since they have Big IT clients(tech mahindra for eg ) in their rented out property , corona impact should be minimial .Moreover IT companies are doing great .

Disclosure :
i am invested in majestic auto . my opinions may be biased. i am not a sebi registered investment advisor. this is not investment advice .Please do your due diligence before investing

15

The valuation is as follows :

  1. Hero moto corp = 177 Cr (30% of asset weightage)
  2. Emirates Tech = 0.8*36.25 Cr / 12% rental yield = 242 Cr (41% of asset weightage)
  3. Land = 4.1 times book valued amount as per previous land sale deal
    = 4.1*50.07 Cr = 205 Cr
    = 164 Cr (20% discount) (29% of asset weightage)
  4. Liability = 253 Cr

NAV (Cr) =330 Cr
Value / share = Rs 317

I am not considering facility management business as its profit comes from the expense of Emirates Tech. Hence only Emirates is valued.

Do you agree with this valuation which requires further discount based on expected profit sharing by management with minority shareholders?

2 Likes
16

it will be great if you can provide an elaborate explanation for each point

for example how is the liability 253 crore

17

Good find! @centrist I am interested, but the points which I find troubling are:

  1. why does the company report losses and not pay dividend?
  2. company has some business of its own, which can face a downturn due to covid and WFH situation.
  3. though this thread has done a very good job of digging into this, some points remain unclear.
  4. i do not find hero motocorp a good or even decent growth share
  5. holding company discount is estimated to be 70% or more in India, this one has a 90% discount because of points such as these.

Most likely several of the 100s of vaccines are going to work fine and people will not like to buy a 2 -wheeler other than 2-3 quarters in future (consider in context of depressed incomes in this time-frame), also given Indian weather, fuel prices, and traffic.

Disc: not invested.

18

Majestic Auto valuation.xlsx (13.2 KB)

The attachment is a conservative valuation.

Good will of 40 Cr, loans, other financial assets of 9 Cr are not considered as assets.
All liabilities are considered.
Since parent company that runs facility management business derives its profit from subsidiary, Emirates, if we consider both valuation, it becomes double accounting. Hence only Emirates is valued based on rental yield method.

1 Like
19
  1. losses are due to a large income tax component this year which i think is connected to the land sale . i dont have clarity on the the income tax component yet
    consolidated pbt this year is 23.63 crores
    Net Cash Flow is 40.1 crores this year

the other losses which are not part of p&l statement are connected with closing down of auto component division
No dividends because company has been using cash to pare down debt.
Even though a small dividend will go a long way towards establishing credibility for the stock.

  1. yes the property rental business is just like nesco(on a smaller scale) but i feel should have minimial covid impact due to the presence of tech mahindra as its tenant.
    i dont think tech m will quit the building because of covid .
    https://bps.techmahindra.com/locator/asia-pacific/
    building info available in the link

  2. thanks :slightly_smiling_face:

  3. hero moto used to be a market darling a decade ago and might bounce bank in the future.

  4. i think this is the main reason the stock is so undervalued , mr/ms market thinks majestic auto is a holding company of hero moto

evidence points to the contrary
in 2015 majestic auto had 10.3 lac of hero moto shares
in 2016 majestic auto had 10 lac hero moto shares
in 2020 majestic auto has 9.21 lac hero moto shares.

Clearly majestic auto has been selling its holding in hero moto and theres a good chance based on past evidence that it will sell further once it gets a comfortable valuation for hero moto shares.

i think this holding company discount deserves to vanish because majestic auto is not a holding company of hero moto.

  1. two wheelers not rebounding is a possibility for sure.

Disclosure :
i am invested in majestic auto . my opinions may be biased. i am not a sebi registered investment advisor. this is not investment advice .Please do your due diligence before investing

20

i dont think market is considering it as a holding company as it forms only 30% of assets. Its main asset is land and buildings which form 70%.

There are 2 issues with the company

  1. Capital allocation- company to be made debt-free. There were lot of oppurtunities in 2015-2018(once Honda got isolated, Hero moto becomes mediocre) to sell Hero Motocorp shares and become totally debt-free but was not done.
  2. Even bigger issue is no dividend at all. This raises questions about management integrity.

Is there any observations about management ? Will they share the gains with minority shareholders ?

1 Like