Pudumjee Pulp & Paper Mills Ltd - Value unlocking post spin off

Pudumjee Pulp (CMP - Rs 18.2/share, Rs Mkt Cap Rs 75cr)

Pudumjee Pulp which was earlier into Paper manufacturing, Real Estate and Power/Investments, is now a pure Real Estate play (with small wind power capacity) post demerger scheme effective from 1 Feb 2016. With transfer of Paper division, new entity will be almost debt free.

Rationale for Demerger (As stated in demerger document)

  1. Shifting operations from Pune (land belongs to Pudumjee Pulp) to Mahad. This will free land (measuring 29acres) for real estate development. (As per page 52-53 of demerger document, Pune land measuring 29acres and Fort office will belong to Pudumjee Pulp)
  2. Respective segments namely paper and real estate can better focus on their activities post demerger.
    Pudumjee Pulp carries out real estate activity in JV with G-Corp (60:40). JV started booking numbers from FY12 onwards.

Pudumjee Pulp’s Real Estate Financials

Pudumjee Pulp’s Financials
<img src="/uploads/default/original/2X/9/963884973ee5d6eb962cfe8e9f91bb3919d138af.png" width="497"height=“322”>
As we can see Real Estate contributed significantly to company’s numbers before demerger. Paper business consumed large capital, while had very little to show in terms of numbers.

Time Line in terms of Real Estate Development

Annual Report FY10
The Real Estate business being carried out by the Company in Partnership involving construction and sale of over 650 mid size luxurious flats aggregating about 9,30,000 sq.ft. in 3 phases at Thergaon, Pune is in progress. This project has received a good response as from its first phase which has just launched, 115 out of 176 apartments have already been booked. All 3 phases of this project are expected to be completed during the next 5 years.

Annual Report FY11
The Real Estate project of the Company at Pune in Partnership viz ; Pudumjee:G-Corp Developers’ having aggregate saleable area of 9.3 lac sq.fts. comprised in about 650 mid sized luxurious flats to be constructed in 3 phases is progressing satisfactorily. The possession of 188 flats is expected to be handed over in the current year when the revenue is expected to be recognized by the firm and consequently by the Company.

The Real Estate project for construction of about 650 mid sized luxurious flats in Pune in Partnership is satisfactorily progressing. Encouraged by the success of the project the Company has initiated another Real Estate project at its surplus land having about 2.5 lacs sq.ft. of saleable area. (This shows company has land bank beyond what is known in public domain)

Annual Report FY12
Your Directors are happy to inform that the accompanying accounts of the Company includes a profit of ` 691 lacs being its share from the Partnership firm “Pudumjee G:Corp Developers” from Real Estate activity, consequent upon completion of first building having 94 mid-sized luxurious flats. Another two buildings having about 188 flats are expected to be completed in the current year when revenue from which is expected to be recognized by the firm and consequently by the Company. The remaining four buildings are expected to be completed progressively.

The Real Estate project for construction of about 650 mid sized luxurious flats in Pune in Partnership is satisfactorily progressing. The possession of flats to the customers, in its first building has been handed over by the firm in March, 2012. Possession of flats in the next two buildings is expected to be handed over in the current year.

Annual Report FY13
The Company received a tax free profit of `16.60 crores being its share from the Partnership Firm carrying the Real Estate activity at Pune consequent upon this years’ completion of 188 mid-sized luxurious flats comprising two buildings. The project is progressing satisfactorily and so far out of 658 flats which are to be completed in a phased manner, 282 flats have been fully constructed.

Annual Report FY14
The Real Estate Business of the firm in which the Company is a Partner, has been satisfactorily progressing despite the business in the industry facing some recessionary pressure elsewhere. The accounts include Company’s share of profit of ` 1143 lacs in respect of a building completed during the year and stock of few flats sold by the firm as against a profit of Rs1660 lacs in the last year in respect of two buildings then completed.

The Company has commenced development of land for constructing residential / commercial complex having saleable area of about 1,50,000 sq.ft for which purpose the land has been treated as stock-in-trade at a fair market value of ` 1441 lacs, by crediting the difference over cost, to Capital Reserve of the Company.

The Company so far has been carrying on the Real Estate business through a Partnership firm where this year a building of 94 mid-sized luxury flats has been completed, taking the total of such buildings to 4. The Company has now commenced a project named ‘Greenville’ on a land of about 9000 Sq.Mtr where residential / commercial complex would be constructed. The Company’s accounts include a tax free profit of ` 11.43 Crores being its share from the Partnership firm in respect of the aforesaid building completed and stocks of few flats sold by the firm.

Annual Report FY15
The demerger process when complete will enable the Company to focus on Real Estate business.
The Real Estate Business of the firm in which the Company is a Partner is satisfactorily progressing. One more building of 94 flats has been completed and the accounts include Company’s share of profit of ` 13.53 crores in this respect. One more residential building for construction has been taken up during the year and despite recessionary pressure elsewhere the firm has been able to book all but few flats.

The construction of residential cum commercial complex taken up by the Company on its own, is awaiting certain statutory clearances.

The Company’s Real Estate business through a Partnership firm has been successfully operating, having completed its 5th building comprising of 94 flats in the “GREENS” complex. The 6th building has been started as an ambitious project of 16 stories comprising of 124 flats adding to the tall status of this complex.
The ‘Greenville’ project comprising of residential cum commercial complex taken up by the Company on its land of about 9000 Sq. Mtr. is awaiting statutory clearances.

Summary of timeline
Company started Real Estate development with of 650 flats (comprising of 6 buildings) in JV with G-Corp in Thergoan, Pune having total area of 9.3 lac sqft. This project was to be developed in 3 phases.

FY12 – Completed 94 flats (Building 1). Possession handed in March 2012.

FY13- 188 flats completed and handed over (taking total to 282 flats till date). Total 3 buildings done.

FY14 – Another 94 flats completed in fourth building (taking total to 376 flats). Total 4 buildings done.

FY15 – One more 94 flats completed in 5th building (taking total to 470 out of 650). Company has commenced work on 6th Building having 124 flats (16 stories)

*9M FY16…FY16 nos of flats are from FY15AR…PAT will be much higher once numbers are recognized for 124 flats.

Investment Risks

  1. Pre-Demerger, Pudumjee pulp had large ICDs to Pudumjee Industries which has been increasing since FY12. With streamlining of paper business, continued increase in ICDs will be negative.

Investment Rationale

  1. Company’s cumulative profit of Greens project (total 6 buildings) is Rs 53.3cr (partly includes 6th building…which will be complete by FY17)

  2. Another project GreenVille with saleable area of 2.5lac sqft (land 9000 sqmt) is awaiting regulatory clearance.

  3. Asset light model wherein property is developed in JV. Pudumjee provides land.

  4. As per the demerger document, company will be shifting paper plant from Thergoan (Pune) to Mahad (Raigadh) and use factory land to develop real estate. Pudumjee Pulp owns 29 acres land. Assuming FSI of 2, this provides developable area of 2.5mn sqft. This provides enough raw material to company which can be developed over many years. As per note 25.11.a (notes to account) in AR FY15, land measuring 96111.84 sqft (costing Rs 0.14lac) used in relation to operation of factory, has been revalued and converted to stock in trade on 25.10.2013 at an amount of Rs 1441.67 lacs. The same is being used for development of real estate development. This gives approximately land value of Rs 1500/sqft. Considering Company has around 1.26mn sqft land (29 acres * 43560), land value is around 190cr.

  5. With market cap of Rs 75cr, risk reward is favorable given asset light model, large available (known land bank) and PAT run rate of Rs 11-13cr.

Disc - Invested

Views Invited.

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Just to understand the risk part of it:
PAT can be earned only if the project development by JV goes through and then sales occur for the revenue to be recognized. Considering the current glut in real estate, how can we be certain on this part - how long can our invested money be tied up vs how much returns can be expected in what time frame.

I am not particularly interested in this investment but it was an interesting read, so just trying to clear out my thoughts on it.

Thanks

Parvin,
Risk is the first thing that should be looked at. I am just going with 5 years of track record in terms of generating PAT…I have no idea about real estate market in Pune. My sense is concern would have been same couple of years back. Margin of safety comes from these factors

  1. Almost debt free balance sheet

  2. Large chunk of historical land bank available which company can be developed at ease since balance sheet is clean. Land value (based on AR land revaluation…pls refer point 4 of investment rationale) is close to Rs 190cr + 5 years of profit + another parcel of land (2.5 lac sqft) awaiting environmental clearance + Fort office…these factors provide downside comfort. In most cases leverage takes away margin of safety if assumptions turn sour…which isn’ the case here.

  3. JV provides asset light model in terms of execution.

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Nirav8,
Nice write up on Pudumjee Pulp and indeed demergers are very interesting. I tried looking on their web pages for demerger document but could not find it. Could you please guide me as to where I can find this information?

In addition to the above, I have few questions for you.

  • In regards to the ICD’s do we know at to what interest is being paid to Pudumjee Pulp and what collateral is held by Pudumjee Pulp?

  • Is the company run like a professional company and each demerged business kept at arm’s length in their transactions?

  • JV is no doubt an asset light model wherein the developer provides the capital and the asset holder gets paid in various stages. However, there are associated risks of the developer being passed to the asset holder such as,
    * Litigation against developer
    * Bankruptcy of the developer
    * Developer not being able to sell properties in the given location
    What factors are considered by the management to mitigate these JV risks?

  • Is the management astute enough to ensure there is a decent return on capital? How can individual small investors judge the integrity of the management?

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I’m from Pune and just to give some info on the Pudumjee Gcorp project - its one of the better ones in terms of quality. One hears very few complaints about this project on the real estate boards. Hence the developers have a decent reputation as well. I think they are/were also able to charge a bit of a premium as compared to other projects in the vicinity. The factory land in discussion - its also very close to to the current project.

disc: not invested

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Thanks Ravjan,
I tried uploading demerger document, but it was exceeding data limit. Pls share your email id, I will mail across.

  1. No I am not aware of ICD interest rate and collateral being held by Pudumjee Pulp.

  2. One can hope it will be run like professional company :-). Lot more clarity will come post Annual result and with new balance sheet (FY16).

  3. Based on my understanding and info, JV partner is quite strong (G-Corp run by Ghanshyam Sheth). JV has executed one big project measuring 9.5 lac sqft reasonably well over past 5 years. Also project was executed timely. If you read management interview in 2010, they have delivered what was said then. (Timely delivery is rarity in Real Estate). Pls refer to below link for that old interview
    http://www.moneycontrol.com/news/business/real-estate-biz-to-add-rs-350cr-to-topline-pudumjee-pulp_457743.html

  4. I have no idea as of now if management is astute enough to ensure decent return on capital. I am trying to meet them but haven’t been able to. My call is based on publicly available information which provides good margin of safety at this price. The same is based on following…

a) Past PAT run rate of JV with timely execution.
b) large captive land bank and same being intended for real estate development (one of the rationale of demerger). Value of the same itself provides good margin of safety.
c) additional 2.5 lac sqft waiting for environmental clearance.

One should try and meet the management to get sense on what company holds over and above known in public and how will they go about developing factory land.

Thanks.

Nirav8 & HG_6470,

Thanks for the valuable info it is much appreciated. Definitely, there are positives in this stock that outweigh concerns. Having said that, one has to be a devil’s advocate when it comes to stock picking.

Positives Being

  • Debt free balance sheet
  • Holds large parcel of Land
  • Management so far have delivered what they have said.

Concerns Being

  • ICD’s to Pudumjee Industries as Nirav has pointed out. What basis they are lending and why are they lending?
  • Stock price of all three enterprises, that is Pudumjee Industries, Pudumjee Paper Products and PPPM is less than book value. Is there something that professional investors are aware of and probably not being picked up by an unco like me.
  • Currently, hard to evaluate if management acts in the best interest of its shareholders.

Just a point on Margin of Safety: It is a very thin line between Margin of Safety and a Value trap. For example, a stock like McDowell Holdings looks like it has a huge margin of safety. Nevertheless, due to promoter pledging and cross holdings it has become very hard even for professionals to differentiate between uncertainty and risk. This is no doubt reflected in the stock price.

Normally, with demergers only the spinoff company suffers price reduction due to uncertainty. Stock price of all three companies being less than book value tells that either market knows something or the true book value will be revealed in the next Annual results.

On the flip side, when demergers happen investors get nervous as they do not understand the objectives of demerger and hence sell off. This gives rise to uncertainty which is what an astute investor will look for. If one understands the difference between uncertainty and risk then it becomes easier to invest.

I am sure other members have done enough due diligence and have shared their views. Thanks for all the contributions.

disc: currently not invested, will definitely investigate further before investing.

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Nirav –

What a fantastic work! Thanks for sharing it with us.

My e-mail is myprasanna@gmail.com – it would be great if you can mail the demerger docs. I want to validate the three claims central to the thesis: (a) Debt free. (b) 190 Cr worth of land bank present in the balance sheet. © The co is available at 75 Cr market cap.

Re © – It’s all a bit confusing (I’m sure that’s where the opportunity is). For eg: Why is Pulp & Paper Mills releasing press-release of Paper Products Limited?

Thanks Prasanna,
Sending you demerger document.

a) Debt over years (if you go through AR) is largely attributable to paper business. Segmental results shows EBIT for real estate is as good as PBT. Interest cost of Rs 6.7mn for 9MFY16 could be largely attributable to Wind business.

b) I have explained rationale for Rs 190cr worth of land bank in Investment Rationale (Point 4)

c) Number of shares stands at 4.1cr shares (FV 2)…there is no change in share capital post demerger. This gives mkt cap at Rs 73.8cr.

As you rightly pointed out if there is confusion, that is where opportunity is :slight_smile:. If we can try to understand materiality of known risk, risk reward seems much better at this price. Market rarely pays for certainty :slight_smile:

Just to add…
Pudumjee Pulp & Paper released Paper products ltd’s announcement because paper got listed on 30th March 2016, while announcement was made on 24 Feb 2016.

Hi Nirav

I request you to forward the demerger documents along with the
comprehensive analysis you have done to my email ravip@aapt.net.au. Since
you are a shareholder, can you please get clarifications from management
regarding ICDs and their business risk mitigation plan?

Management play a big role in running the company and in ensuring return to
shareholders. Would appreciate if you could pen your thoughts regarding
management once you have a discussion with them.

Definitely the stock looks interesting and am keen to invest after a few
checks.

Thanks

Ravi

Thanks a lot Nirav for sharing the doc. Two issues:

  1. [Page 53 of demerger doc 3.8.2] The 29 acres is licensed to the Paper Products Limited for a period of 5 years to carry on the paper business and might even be extended.

Basically for 5+ years the 190Cr worth of land bank is not usable. Am I missing something?

  1. There is no clarity on where the ICD’s went. Demerger docs don’t state this. Any idea?

Nirav - Excellent work and nice write-up.

Some points as below.

The company does not appear to be debt free. Article 5.2 (Transfer of Liabilities) in the Scheme document states that all those liabilities pertaining to the Demerged Entity are being transferred. It is likely that some part of the debt gets left behind in the Real Estate company. This is corroborated by the 9-month result for the Real Estate Company which shows some amount under Interest expenses (although it is quite small compared to the earlier periods which included the Paper business)

Forward calculations:

  1. I tried to project some revenues (please bear with my assumptions). As per Nirav’s note, cumulative PAT earned by the Real Estate business from 2012 to 2015 is 485 mn. PAT per flat is showing an increasing trend. The max PAT per flat is 1.43 mn in FY15. Assume PAT in FY16 for 124 flats is 1.5mn per flat. Therefore total PAT in FY 16 from 124 flats is 186mn. Cumulative PAT for 2012-16 is 671mn. This has been generated from 9.3lakh sq ft of land that has been developed.

    Company has 29 acres of land ie 12.6 lakh sq ft. Assuming same proportion as above, expected PAT from this land can be 909mn, lets round that off to 1000 mn (ie Rs 100 cr). This can come over next 2-3 years, assuming company will develop this land much faster that it developed the earlier parcel. Compared to this current market cap of 74 cr looks quite less.

  • I also looked at it another way. With FSI of 2 as assumed by Nirav, the developable area for 29 acre land is 25.2 lakh sq ft. Assuming current going rate of Rs 3000 per sq ft prevalent in outskirts of Pune (conservative assumption), the total sales possible from the project is 7560 mn. The company has averaged about 30% PAT margin in the Real Estate business. Assuming 25% net profit margin, the PAT works out to 1890mn. 60% belongs to Pudumjee (assuming they go in with same JV format), which is 1134 mn – quite close to the above calculation.

Risks mentioned in above posts need clarification i.e.:

  • Status of the ICD’s
  • 29 acres land is given on lease to the Paper Business as per the Scheme for 5 years

Some links:
http://www.pudumjee.com/scheme-of-arrangement-and-reconstruction/

http://www.pudumjee.com/wp-content/uploads/2016/02/PPPL-Authenticate-Order-of-High-Court-Order-.pdf

http://www.greenspune.com/apartments-floorplans.html#

In passing (not an important point at all) - generally asset light model is referred to a situation where our prospective company does not own the asset and only provides value addition. Godrej Properties is asset light as it does not own the landbank (mostly) and only provides design, construction, advertising, marketing etc. Same goes for Arvind Infrastructure. Pudumjee cannot be called an asset light business (IMHO).

2 Likes

Sammy11, Thanks for the input.

Points regarding risk are valuable

  • If ICD’s are stripped then 75 crore market cap + 61 core of ICD’s takes out margin of safety.

  • Does anyone know as to when the annual report will be released?

  • Can any of our members throw some light regarding management?

Regarding ICD’s, the intentions of management will become very clear if you read this article.


Here, Vijay Malik has analyzed the case of Gujarat Automotive.

Avneesh

Thanks for posting the article. ICD risk is a known issue. Companies don’t have to lend to one another if the balance sheet is healthy. A Company with a healthy balance sheet can raise debt in the market and financial institutions would love to fund it. More so, the management has to keep different entities at arm’s length in their transactions.

We as shareholders will be exposed to huge risk as explained in the article.

As per update posted on BSE today, below info has been shared on future developments in the real estate business.

Updates 28 May 2016 15:36
Pudumjee Pulp & Paper Mills Ltd has informed BSE that the Company has entered in to a Memorandum of Understanding with Messrs. G:Corp Properties Pvt. Ltd. For the development of the Company’s land admeasuring about 13 acres located at Thergaon, Pune 411 033 through an LLP to be formed for the purpose offering a potential development of about 9,00,000 square feet of residential apartments subject to the requisite approvals.

The aforesaid development is in addition to Company’s land of about 12 acres at Thergaon, Pune already under development under Partnership arrangement with G:Corp Properties Pvt. Ltd. which is currently being developed as residential complex named “GREENS”. This development provides for a potential of about 10,20,000 Sq.ft of saleable area out of which over 7,93,000 Sq.ft. have already been sold / booked so far including about 6,65,000 Sq.ft. already built. Another project as GREENVILLE on a land of about 2 acres at Thergaon, Pune being developed by the Company is awaiting statutory clearances.
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=f8fe4e0f-698a-480c-84e4-ec31b36980fa

Company’s Q4 financials were nothing to speak of. Excluding the demerged paper business, the sales for FY16 was 33.7 cr, comprising 25.6cr from real estate, 5 cr from power and 3 cr from investments. PAT was 7.13 cr. Long term loans and advances (presumably ICDs) have reduced from 64.7cr as on 31.03.15 to 25.3cr as on 31.03.16 as per consolidated balance sheet. This figure is higher in the standalone balancesheet at 36.9 cr (PY 74.7cr). Networth is 87cr, against which there is total debt of 12cr and other liabilities of 25 cr, resulting in D/E ratio of 0.14 and total liabilities to networth of 0.29.

From Segment results:
Real estate generated sales of 25.6cr with EBIT of 10.6 cr and employed capital of 11.6cr
Power - sales 5cr, EBIT 2.5cr, Capital employed 17.7cr
Investments - Sales 3cr, EBIT negative 1.9cr, capital employed 28.2cr.
While sales of the power and Investment divisions are relatively small compared to real estate, they have a major share in the capital employed.

Discl - still tracking. not invested. not enough info is available to give comfort.

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Pudumjee Pulp’s results were out on Friday (29/07/2016). Quarterly results are difficult to judge due to nature of business, since booking of revenues tend to get bunched (project completion method). However, one interesting announcement was done. Company has entered into MoU with G-Corp (Pudumjee Pulp’s JV partner) to develop 9 acres (potential saleable area of 1.2mn sqft) at Village Ranjoli, District Thane. Since, G-Corp is marketing partner (one which constructs and markets the project), this land could be with Pudumjee. This comes as a pleasant surprise. Though would like to sought further clarity here. Whatever be the case, it provides strength to risk reward of investing in the company.

Disc - Invested
Pudumjee Pulp MoU Thane.pdf (17.8 KB)

Hi @Nirav8, what gives you the idea that the land could be with Pudumjee? I could not find any such indication.

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Did some digging.
Looks like there is some typo in announcement. Village is Ranjnoli not Rajnoli as mentioned in announcement. Its Village Ranjnoli, Bhiwandi (Thane). Now MoU is between Pudumjee Pulp & G-Corp for the development of the said land. Following are the possibilities

  1. Land owned by promoter and given to JV for development
  2. Land could be with Pulp or Paper products and given to JV.
    As far info which is available, (Annual Reports and De-Merger Document), Pudumjee Pulp owns lands in Pune and has registered office in Mumbai (Fort, Kalaghoda) in its name. No other info is available of any other land parcel. So I was surprised when this announcement came. Given the nature of JV, Pudumjee Pulp provides land to G-Corp (which constructs and markets), I thought land could be with Pudumjee Pulp. But on second thought, land could be with promoter or paper products (de-merged company). Either ways, it looks like positive for Pudumjee pulp, because I never factored into anything besides what has been mentioned at the initiation of the thread under Pulp. @sachit, I would need further clarity here to determine owner of the land (will try to ask at AGM)

Disc - Invested.