A little bit about the Company
• The Company is promoted by Punjab National Bank – which owns 74.07% of the Company.
• The business of the Company is as a “Primary Dealer” for Government Securities. There are not many of these around (one has to be licensed for this) and it is the only publically listed one.
• The Company is not your typical Non-Banking Financial Institution. It lends to nobody, borrows from nobody. If you check its balance sheet, it has zero long-term liabilities. So there is obviously no question of NPAs etc.
• The entire Business is available for a total consideration of Rs. 432 Crores in the Open Market as of this moment. That is at Rs. 24 per share of the Company.
• The “Liquidation Value” of the Company (that is Current Assets less ALL liabilities) is a little above Rs. 726 Crores – that is Rs. 40.34 per share. Out of this Rs. 23 per share is held is Cash and Rs. 17 per share in the form of Government Securities. Once again, this is after deducting ALL liabilities – that is, assuming that all of the short term borrowings are “settled”.
That is 68% above the Market Capitalization of the Company.
• The shareholder’s equity in the Company is Rs. 742.55 Crores. That is a Book Value of Rs. 41.25 per share.
So here is the play.
• The Company makes short term borrowings – way in excess of their Equity – to purchase Government Securities to “underwrite” (to sell as a wholesaler) and also trades them on their own account.
In any case, they have a Capital Adequacy Ratio of 65% - so they have tons of space to if need ever be.
• As per the Balance Sheet, the Company held about Rs. 3,508 Crores in these Government Securities on their “Current Investments”. This I am assuming is their Inventory for underwriting and trading.
• So the simple point that needs to be analyzed is whether there is a possibility (or analyze the subjective probability) of the company losing Rs. 306 Crores (that is Rs. 17 per share to get to the CMP) on their Inventory of Government Securites. That is a humungous 10% loss on their holdings of Long Term GOI Bonds. It is really not that simple to lose that kind of money on Government Debt.
Because that is the only way that the market price of their shares can be justified. We must begin with the presumption that Markets are “efficient”.
• Just for the record, the Company – in atleast the last 15 years – has only made a loss once. A net loss of Rs. 68 Crores.
• Everything else is ‘noise’.
Their earnings per share is usually between Rs. 2 and Rs. 4 over the last 10 years. I doubt if any projections can be made to this end – since a lot of it is “trading” (read, “speculative”) income. That is not what is important or even relevant in this particular investment. In any case, I am pretty confident that the Indian Debt Market will only get exponentially bigger in years to come. That should be good for business.
They do have a long track record of paying pretty healthy Dividend too. At Rs. 1.50 last year – that yields a fantastic 6.25% at this price. Even assuming an average dividend of Re. 1 per share (considering the income last year was mush higher thanaverage) gives a yield in excess of 4%. That never hurts while you wait.
Plus they have grown at about 8% per year over the last decade (CAGR) and have a decent ROE of 12.42%. It is a decent business.
• End of the day their income – though once again, that is not what is important in this case – is a proxy on the interest rates. And on the whole, there is a widespread expectation of interest rates being cut in the near future. That should augur very well for the Company.
Let me know if I am missing something. If there is a ‘hole’ in my thesis.