ValuePickr Forum

Rajapalayam mills ltd - value unlocking possible?

Hello Everyone,

This is my first post here. Regret getting to know about this platform late.
I am a novice investor.
This is the first stock I picked up and have done a bit of research.
It would be great if all of you can share your inputs (criticism is much appreciated).

Introduction:

Rajapalaym Mills is the mother company of the Ramco group. The company makes quality yarn; counts from 4’s to 300’s and it has always incremented capacity to produce value added yarns like Compact, Elitwist, Slub, Gazzed yarn in singles and doubles among others.

Company’s performance:

During the last 5 years, the company has reported modest growth of 5.3% in operating revenues deriving 25-30% of its revenues from exports.
The company posted its best ratios in last 5 years in H1 FY 17 with RoE of 14.9%, RoCE of 13% and RoIC of 10.4%.

The company’s has been consistent in repayment of long term loans evident from Rs. 404 Cr in 2011 & 277 Cr.in 2016 and is poised to be free of long term debt by 2021.

Goes with the Management:

Competency - The Management has decades of experience and has established a brand name in the spinning industry.
Debt repayment - It has been paying off long term loans as per the repayment schedule . Infact, they have been paying off more amount as required in the schedule. This shows the serious attitude to run the business unlike many other companies.
Loan from Directors - The loan taken from the Chairman/MD are at average interest rates of 7.1/8.3% (last 5 years) which is in line/cheaper than loans taken from any financial institutions.

Goes against the Management:

Managing Director’s Remuneration - The remuneration paid to the MD as a % of Net profit for the last 5 years is ranging from 2.2% - 11.2%which is quite wide. A reputed peer listed company pays in range of 2.5-3.5%.
Promoter’s share holding - The promoter’s have pledged 28.05% of their holding which is not a good sign. The intent needs to be checked and the time frame for the release will also need to be assessed.
Related party transactions - There are a number of such transactions - the intent and the requirement needs to be assessed.

Interesting insights:

  1. Capital Allocation - Business segments:
    Surprisingly the company’s capital allocation is an area of concern. It allocates on average 80% of its capital in the textile business butthe windmill business has been generating higher return on capital - 15-20% and also contributing 50-60% of the company’s PBIT. Also contributing to this is the fact that there has been a growth in Income per lakh KwH generated has gone up by 9.3% CAGR over the last 5 years showing an uptrend in tariff rates. The company’s future allocations will be on the radar to see if it has any strategies in place for further growth justifying the deploy of capital.

  2. Stake in Ramco cements worth Rs. 3000 per share:
    It has a 13.8% stake in Ramco cements with a market value of around Rs. 1750 Cr. along with stakes in other group companies implying a discount of around 80% to the company’s current market price.

  3. Statistics
    The correlation between share prices of Ramco cements and Rajapalayam Mills in the last 5.5 years has been 0.65 and in the last 3.2 years has been a strong 0.91.

I do not understand what justifies the 80% discount to the market value of the investments.

Also I request the experts to please share your views on how can I improve my analysing skills based on the above analysis. @hitesh2710 Please share your views.

Disc: Invested a nominal quantity.

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No doubt… lot of shares and value…

but how do you see value unlocking?

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Since all these companies are well known and the individual companies have their own boards as well, there is a very small chance of value unlocking. Though the value of each share means a very big sum of money, the ownership pattern itself doesn’t warrant a gratification of that sum at some point of time.

I feel if this parent is dissolved and the value realized by selling the holding shares at open market levels to public, then the money can be made, if not a huge dividend payout by selling stock can also be another option, but since all of the group companies are listed, I find no justification as such

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The basic question rush158/Rushabh has asked is whether value unlocking is possible, and short answer may be - its difficult. There are quite a few such examples in Indian market, where holding companies are trading at huge discount (50%+) as its very very difficult to unlock value by realizing gains of market prices of their holdings. Few examples that comes to mind are - Tata Investment Corp and Bombay Burmah.
However, in this particular case of Rajapalayam Mills, two things are notable: One- the holding company has its own business and two- theoretical value of its holding is almost five times of the market cap ( 400Crs mkt cap vs 2000Crs market value of holding).
Thus, the question boils down to this - what is the intrinsic value of the yarn business and what is the value of the “holding company”. One way to look at current situation is that market has given a zero value to the yarn business and holding company is trading at 80% discount. If one thinks that Yarn business has a certain value, and/or holding company discount will reduce (perfectly possible- recent re-rating of Bombay Burmah) then there’s some value in this script.

4 Likes

I appreciate all your insights.
I had the same query if there was a possibility of a value unlocking here, if anybody had any update for this company. But even leaving the investment in ramco cement, the company has a Brand name in the fine count yarn market.
The current textile scenario should see many mills in the south close down and it could benefit from lower cotton prices in the coming years and aid margins.
Expecting sops for this sector in the Budget.

And sorry for asking a basic question what’s the reason market discounts so much for holding companies ? Only because the value is not unlocked or is there anything else ?
Perhaps anyone could give insights on its valuation - whether it is under/fair/overvalued currently?
@paresh.sarjani1 @suns @ketand

Now for Rajapalayam mills all the numbers have changed …
Consolidated EPS:-RS.196
Cons. Book value:-Rs.2000
Value of investment:-Rs.3500 cr
Current Mcap:-Rs.900 cr

Big Question is Does the minority share holders gets Justice??

Hi,

Now in the current market correction this stock has fallen quite a lot and the current market cap is around 420 crores.there are various factors contributing to it like the primary business is suffering also the underlying share values have decreased due to market correction.Seems like a good value buy at these levels.when overall business improves,the share should increase.Anyone monitoring the stock or invested kindly provide guidance.

Thanks,
Deb

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