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.