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Rajasthan Cylinder and Containers Limited- An excellent case of valuation anomaly? (An 8 crore Mkt. Cap company with investments in fast growing associate company worth many times its market cap !)

Rajasthan Cylinders and Containers Limited (RCCL) - Here is a relatively nondescript company of market cap 8 crore, turnover of 50+crore with some nominal profits. Its a a 40 year old company into manufacturing of LPG gas cylinder, valves , regulators and having a gas filling unit. This company was earlier listed in Calcutta and Jaipur Stock Exchange and only in last October’14 they got it listed on BSE. Before listing, in July, Promoters brought an Offer for Sales for 14% of equity to comply with 75% promoter holding requirement ( this was mostly subscribed by relatives and family members, so practically promoter group still holds above 90% in the company)

Most likely any investor is going to ignore this company on the first look because there is nothing “Exciting” in summarized financials or business/industry. But there is a lot more hidden in details if you notice the most eye catching part in “Investments” section of Balance Sheet which is its investment of 49% stake in a group company called AGRIBIOTECH Industries Limited (ABIL).

Now, this investment is where the real fun is : This associate company , ABIL is a closely held unlisted group company (Bajoria Group) which is into spirits & Alcohol business with a 65000 KL per day licensed capacity of producing Alcohol. This company has grown its turnover from 70 crore in 2010 to 165 crore in 2015E with approximate profits of 4 crore, The brief financials of this company for the year 2010 to 2014 can be found from CARE ratings website. This company is doing bottling for one of the most successful brand of Allied distillery, Officer’s choice. Their bottling capacity is around 7000 cases per day, and distilling capacity of 65KLPD. They are one of the large producers of ENA (Natural Alcohol) and supply to all major alcohol companies like UB, Radico, Allied Distillery, Tilaknagar etc. Many brands like Jolly Rogers, Old Monk, officer’s choice bottling is done by ABIL currently. Apart from that they are largest suppliers to Country liquor in Rajasthan. Distillery ( Bulk Alcohol) being 60% of total income, 20% country liquor and rest comes from bottling.

The value of this investment can be gauged from the comparable listed companies like Associated Alcohol, Globus spirits etc. which are purely spirits companies with no significant brands of their own . Also based on some past deals in distillery industry ( Allied distillery buying a Bengal based distillery for 20 crore which had capacity of one fourth of ABIL ,also Allied bought a distillery in Andhra in same year for 300 crore which had roughly 3 times capacity of ABIL). Thus, on a most conservative estimate, going by the capacity of ABIL, and taking into account its rapid growth in sales & turnover, the full associate company is at least valued at 60 crore which means around 30 crore for a 49% stake.

This means RCCL currently with its own market cap of 8 crore is holding 49% in this company which is doing a turnover of 165 crore and a profit of 4 crore and is worth of at least 50-60 crore market value. (Even though this investment is recorded in Balance-Sheet at face value since its not a listed/quoted investment) . Also, not to forget , RCCL in itself is a 40 year old company with some mega asset like land itself of market value approx. 40 crore.

Now Look at the future developments which will bring this investment in ABIL in limelight and unlock the value for RCCL

  • Agribiotech Industries limited (ABIL) is working on a greenfield project to set-up a new plant with a capacity of 120000 KL per day at a different location ( because as per management , no new capacity addition on existing site will be allowed because this place is in a Dark Zone and water availability will be an issue). There is a huge revenue growth potential since there is a capacity constraint in the market for bottling . Needless to say about the changing lifestyles, increasing income , Cultural changes in no more looking Alcohol as a sin, addition of females consumers and all these triggers, Alcohol industry is on the verge of a vertical growth. And given the high entry barriers to this industry , existing players are set to reap the benefit of Industry growth. Even though this project is at a very initial level , once successfully completed, it will multiply the capacity by 3 times from 65KL to 185KL per day, and accordingly revenue & profits too will go up exponentially too. The size of the company itself will grow up to be too big to ignore. And certainly with that , RCCL and its 49% stake in this company will also be noticed.

  • New companies act will require consolidating the accounting results of investments in associate companies. Imagine , by next year the company will have to report the proportional profits of 49% stake of its associates ABIL which is currently doing a profit of close to 4 crore. This will bring the company and its investment into limelight as investors will take notice of the company with mcap of 9 crore and investment worth over 40 crores.

  • Allied distillery (Kishore Chabaria owned, the makers of Officer’s Choice Whisky – world’s largest selling Whisky) is on a buying spree to acquire bottling plants and distilleries, especially the units which do bottling for it. ( this is because there is a bottling capacity constraint in industry ) . They have acquired almost 4 distillery and bottling units of various capacities and bottling units for sums ranging 20 crores to 300 crores. If Allied distillery becomes interested in acquiring stake in ABIL too, the value of this investment will boost the RCCL valuation to 3-4 times.

- Agribiotech has its own Listing plan in next 2 years ( most likely to finance the new project for capacity addition) , if this happens, RCCL will most likely dilute its stake partially or fully and even if no stake dilution happens , the value of this investment in ABIL will be unlocked. Also going for a listing will give a lot of confidence about promoter group & corporate governance practices (as these days getting a good response in IPOs isn’t easy unless promoter image is clean )

The math looks pretty straight forward and simple. This is a huge value mismatch situation and current price ( Rs. 28) offers a very high margin of safety as even if the price rises by 3 times, company will still be undervalued based on intrinsic value. Current investor might have to wait slightly longer but they will be the early investors before the value of this investment unlocks and will stand to benefit the most.

Note: I own some shares in this company. Most of the futuristic statements are based on discussion with Company Management.

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Thanks for a wonderful writeup, this seems perfect way to invest in alchol business, I do have a simple question and i appreciate your response? how can we verify their investment, i dont see any annual reports on bse site, if you can share those it will be great.
thanks
Mukul

@abhisheksikaria, Are all companies required to report consolidated numbers on quarterly basis (or only annual basis) from FY16 as you mentioned or is there a size criteria? It will help if anyone can point which act/rule/regulation specify this.

Kmukul, you can verify the Investment by looking in their Balance-Sheet , “Investment section”. Since they got listed only in 2014 'October you may not see the Balancesheet of 2014 in BSE filings or at any public site. Its available at their website ; www.bajoriagroup.in

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@Ishank, Its as per the new Companies Act and mandatory adoption of New Accounting Standards ( in compliant with IFRS ). I am not aware of any size criteria but as far as I remember, its applicable to Listed Companies and since their management only told about this, Its safe to assume that it applies to them. Will research more nevertheless and reply you with the exact clause/provision which mandates this requirement!!!

Another Interesting Finding :

Current holding pattern is:
Promoter - Approx 74%(Would not be interested in selling given the huge growth plans of associate company)
Promoter relatives- Arpx. 14% ( Same as above)
Directors - Apprx 2% ( Same as above )
Large Investors- Apprx 2% (Would not be interested in selling - as most likely are expected to be tracking the Company & its growth plans closely )
Unknown Unfound non responding retail investors - Approx 5% ( if you notice in shareholding pattern of retail investors, huge difference in total retail holding and retail holding in Demat form will make this point clear, this is because its is a 40 year old listed company in Calcutta stock exchange - there are many old shareholders who are not traceable/dead/changed address/holding in physical certificates which are lost/or their following generations don’t know that they own shares in the company). This takes out another 5% floating stock.

This leaves only 3% shares in the market with some odd 500 retail shareholders … hardly 1 lac shares floating in the market - Which means there is no risk of any operator/insider dumping the stock at higher levels since there are no stock available with anyone to dump :blush: :blush:

I am relatively new to this form and will invite counter views/suggestions/opinions/queries of other members on the above research. my email ID is affluentstockinvestor at gmail if anyone wants to contact me for sharing their research/ideas !!

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Sub Section (3) of Section 129 of the Companies Act, 2013 mandates every company to prepare a consolidated financial statement for all the Companies having one or more subsidiaries.

Subsidiary means a parent company shall own not less than 51% of the share capital. Here Parent owns only 49% hence as per companies act, parent is not liable report consolidated financial statements.

Applicability of Consolidated Financial Statement (CFS):
Private Limited Company
Public Unlisted Company and
Listed Company

So RCCL will not be liable for consolicated financial reports.

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As per IFRS if a company substantial hold the power to decide the use of resourced of subsidiary company its accounts has to be consolidated.

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(post withdrawn by author, will be automatically deleted in 24 hours unless flagged)

‘How’ did you contacted the management ?
What was their reaction/behavior/attitude ?
Are they hostile for further inquiry or welcoming ?
Did you asked for previous annual reports ?
Did they replied via phone or email ?

What are the entry barriers ?
What stops me from starting one factory of my own (other then that that Dark Jone bit )?
Would you tell us how you come to have that opinion ?

Hello Dadhich - Interesting quesions !!
I can only say overall attitude was positive , not cold/hostile and not very welcoming - ( suggesting that they are indifferent to what is happening to their share prices and are not too interested in sharing detailed information to any “outsider”- you know the family owned management still consider their shareholder as outsiders :blush: ) , they were cautious in sharing more details about futuristic statement and shared only high level info. for eg. on listing plan of ABL - they only said they have plans for IPO , no further details like how big, who will dilute stake, have they appointed someone already etc. they didn’t say anything !! )
Previous Annual reports are available on their website - so I didn’t ask for it.
I had a couple of phone calls and a visit to their office in Jaipur, no email correspondence. They were welcoming enough to say that feel free to communicate in future as well.

Note: 1) Management doesn’t mean necessarily the promoters.
2) I am cautious about sharing too much on a public forum, you have to contact me separately on my id affluentstockinvestor at gmail. if you want to know more !!

On your second question on Entry Barrier:

Try applying for a Distillery License and you will know why this first step itself is a huge Entry barrier.
Second- now only bottling license is not provided, only bottling cum distillery license can be applied. That’s the reason there is some bottling capacity constraint in market given the highly increasing demand. And major players like Allied distillery are buying bottling plants left and right.
Third, running the distillery plant itself is very challenging given huge taxes, huge state controls on quality/quantity /cumbersome regulations/inspections-interference/‘Management’ of state officials and multiple state agencies/and marketing controls etc. and highly fluctuating input costs.Basically its not a straightforward business!!

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Some people who raised their concern for Unknown Management(with less track record) -
My view is I only know as much as you all know about management - except some research on publicly available information that I did. However I can observe some leads like - (a) The company is in existence for 40 years with listing in Calcutta exchange. From the days of 80s , when there was virtually no regulation and fly by night companies were very common - it would be very easy for them to siphon off everything and run away with shareholder’s money, or could dumped their stake to innocent shareholders at higher price, but they are still in business, and still holding 90% (b) They almost hold 90% in this company - and don’t have any plans to dilute stake, still they got the company listed on BSE once the trading on Calcutta exchange is negligent - only as a friendly gesture to shareholders. © If they wanted, before listing the share in BSE, they could have bypassed this investment to any of their closely held companies at a cheap price once ABIL became successful , but they carrying it in their BS and this investment belongs to all the shareholders.(d) They have plans to bring IPO of ABIL in future - without a clean management, getting successful IPO is a very difficult task , so I am sure there is no probability of any foul play of any kind by management.

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I take responsibility if readers have found any comment as over statement. Have deleted any statements suggesting of any motivated agenda, Please ignore as this was my first post of Valuepickr so was not fully experienced with house rules. Will be careful next time.

Not a single share available to buy :stuck_out_tongue:

Readers - Kindly take note.
This kind of definitive opinions expressed in public forum are highly irresponsible The series of posts certainly appears motivated and violates ValuePickr Community guidelines. Readers be warned - the Member has been privately warned by Moderators and has chosen to ignore warnings. Member hasn’t responded, and continues to post irrelevant misleading definitive opinions.

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Agreed , may be I am just carried away … didn’t mean anything !! have removed this statement !! I am new to this forum , so not fully aware of the boundaries of subjective statements ,will take care for future posts.!!

As Donald has so aptly put it, bull markets are a fertile ground for fly by night operators.

Its better to miss these kind of stories in hope of mega returns mainly because

firstly u wont get too many shares at attractive prices as most of them are cornered by the promoters and their relatives as mentioned in initial write up. So even if u get some shares which amount to 1-2% of your portfolio, the stock going up 3-5 times also wont materially impact the PF returns.

And second more important point is that even if part of the information is partly correct or if the management doesnt behave as investors believe they will then there is risk of investors holding the baby which they might not have wanted in the first place.

One always has to think about the risk of permanent capital loss while investing.

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Wonderfully put Hitesh. I have a learning which might be helpful. In the last bull run(2008/9), in the hope of high returns one of my bets(thats right, bet and not an investment) was into Kaashyap Technologies - a chennai based s/w company - a penny stock.

I had entered at 50paise/stock, hoping that even if it reaches 1 rs/share, I will be able to double my investment. In the months that ensued, the stock went up(to 80p) and came down to 25p and one fine day trading was suspended for whatever reason.

  • A case of permenant capital loss for me. So one has to be extra cautious with these micro-cap companies.

These were always good lessons, which have moulded me into a much better investor now. Happy that I made them early in my career.

Thanks,
Ravi S

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I was invesing into stocks for past 37 years , since the year 1978 - initially into public issues of Convertable Debentures and Equity Normally and later into secondary markets . In addition to analytical skills while assessing stocks - which I find in abundence in the present generation of stock pickers - commonsense is also found to be quite useful while taking decisions in stock markets .
In the instant case of the stock in discussion I find

  • that the fiancials for past 4 available years are not attractive
  • that not much information is available to evaluate quality or transparency of management
  • that my past experience indicated that there is a good amount of risk in investing in this company reminding me one famous quote of Mr Warren Buffet to the effect that " Only when the tide goes out do you discover who’s been swimming naked "