I always take the Private Buyer approach to stock investment.
Here is my simplest logic to purchase the Company at the Current Market Price of Rs. 72 per share.
1). The Company holds 33,72,50,001 shares of PTC India Financial Services Ltd. â a well-recognized, publically traded company (which for all intents and purposes we must forget is a “subsidiary” of the Company - just think of it as an listed, marketable equity investment held by the Company).
The stock of PTC India Financial Services currently trades at around Rs. 55 on the exchanges. Taking a huge Margin of Safety, I will assume an âAll Weather / Bear Marketâ price of around Rs. 30 for this stock â which incidentally is also approximately its Book Value for the year just ended.
This gives me and overall value Rs. 34 per share of PTC India.
2.If the Company just settled its accounts in the market (and there is no large âbadâ outstanding I know of right now â plus they have no inventories, it is all just cash) as of 1st October, 2014, it would receive Rs. 57 per share. You could also look at this as the Ben Graham style Liquidation Value of the Company - Net Current assets minus ALL liabilities. By the by, out of this, Rs. 19 per share is actually held in cash.
Once again, let us be clear, I am assuming a 50% discount on the CMP of the PTC Financial Stock that it holds plus my Net-Net figures are from their half yearly Balance Sheet more than 6 months ago.
There’s Margin of Safety and then there’s MARGIN OF SAFETY.
**This means a total Liquidation Value or Net CashEquivalents****of Rs. 91 per share. This is a discount of 26% to the current Market Price. **
This would be “inefficient” enough of the Market if the Company had a poor or dwindling business.
Not here. PTC India has a wonderful, wonderful ongoing business which should â on the whole â do better than OK with time. Its the largest power trading company in the country promoted by some of the biggest names in the Power Industry of India (it is quasi-PSU, by the way). A business that will continue to generate cash for me over a very long time.
This business, I am receiving free of cost. Actually I am being paid more Rs. 19 per share to own to this great business.
Now, why does the market value this Company like this. That is something we must always seek to understand.
There are 5 reasons for Market Inefficiency. Emotion, Neglect, Myopia, Misinterpretation and Short Term Demand-Supply issues.
In this case its primarily Short Term Demand-Supply issues. LIC of India and HDFC Standard dumped a huge amount of stock into the market over the past six months. Why? I don’t know. And considering that most “funds” underperform the markets - I don’t hold them in much regard. So I don’t care either.
Secondly, there’s misinterpretation. They had one optically bad set of numbers last quarter. I say optically because it was just a write off in their Teesta Urja project which will get written back. Let us not get into that.
Now if someone knows something that I am missing, I would love to hear from you.