Dear Moderator,
This is the first time i am posting on this website. In future i will mention both risks & holdings.
On disclosure: I hold both and AK Capital in much larger quantity than First leasing. I bought both of them in the last 2 months (June & July 2013). AK Capital i had earlier bought it in 2012 at 150 levels and sold at 270. Now back again. First leasing this is the first time i bought it.
Disclosure:
Source of news on First leasing: One Mr. Girish Gulati (Very smart HNI small cap investor) whom some of you may know. He used to recommend stocks in www.valuenotes.com 7-8 years back very actively. He got a mandate to find a buyer for First leasing few months back. The max buyer he could find was 120 Rs. and the management feels it is not fair to sell below book value. So they are scouting for buyers at higher prices.
Risks in First leasing: They keep searching and never find a buyer and keep making 15 Rs. EPS and paying around 1.8 Rs. dividend. Chances of dividend or EPS falling to me by a significant margin is low. This is because the company only lends to high quality borrowers and has a history of low NPA and their earnings has been fairly consistent with very little volatility. With higher book value EPS should only grow assuming that ROE is maintained. In terms of leverage they are taking much lower leverage than the 8.33 times they are allowed and they are taking only 5 times and maintaining a Tier I capital ratio of close to 20%. Key risk is the management team is old and they do nothing and the stock keeps languishing at current levels. So risk is more of a oppurtunity loss. I am not able to see much downside risk at 30 Rs. (net of dividend). If somebody throw more light on possible downside risk it would be helpful.
Risk in AK Capital:
1). They have a very large bond portfolio worth around 500 crores. So if interest rates go up and stay high for quite sometime they will get into trouble as they also have borrowings. They are betting that interest rates will drop from here and they have very successful making such bets making huge EPS in the last downturn in 2008 & 2009 when most small caps had a huge drop in EPS. I am speaking about an environment of high interest rates and low GDP growth. They can survive and prosper in both low rates & low growth or high rates and high growth. But not low growth and high rates. I assume that we can’t have such an environment for a long time as with low GDP there will be more and more pressure to reduce rates and inflation will also ease. But this can’t be ruled out.
2). There is always a quality of management issue. Last time when i bought in 2012 also this fear was there. But the good part about the management is they keeps the books clean, pay dividends & income tax. Also they never sold a single share and bought heavily in 2009 when the foreign PE investor had to exit due to legal issues (They wanted to start banking operations inIndiaand had some restrictions in terms of holding). Further the management did not sell a single share when the price went to Rs. 1000 which is 8+ times current price and they did not sell a single share. Also they are holding 64.3% including 5+% held by am care which is part of management group and holding this quantity for the last 10 years. Also AK Mittal is seen as a visionary and has huge experience in bond market. But as an investor if you try to contact them they hardly respond. So for management quality i will give them 5 out of 10 as this is the biggest risk in this stock.
downsides/RISKS.The verysophisticatedinvestors.