A
company with market cap of only Rs680mn, having lost more than 60% in last 3 months, perceived to be driven by operators
and in a sector which nobody wants to own, ARSS Infra has all the
elements for being a perfect short candidate for many and certainly in “Not Interested” list for fund managers. I
know it could be tremendous risk for my blog to start writing on a company
which is down and out with no possible investors. I might be classified by some of you as a
speculator or by some other as inexperienced, untalented and high risk seeker
analyst who is interested in making quick money like Rakhi Sawant or India TV.
But
then investments is not always about buying the best companies but it is also
about buying not so bad companies at a value which is dead cheap. Ofcourse some
will argue, bad companies have zero value and will be delisted but then how to
classify them is a difficult task. Therefore, let me take you into this company
some 2 years back.
Company
had raised Rs1030mn through IPO in Feb 2010 with a price band of Rs410-450 per
share. At time of listing, nine month financial details for FY10 were all
upbeat –Revenue of Rs6100mn ,EPS of Rs 40, book value of Rs 158, RoE at 29% and
order book of over Rs25000mn (4x FY09 sales), resulted in huge investor
appetite and the issue got oversubscribed by whopping 48 times. With listing
gains of Rs300 and then trading firmly to make a high of Rs1250 over next 4
months, ARSS looked poised to be next big infra bet for many with market cap of
Rs18000mn. But that is history now, as
financials have deteriorated and so has stock price.
Reported
FY12 nos showed contraction in topline, ballooning interest cost, colossal jump
in receivables and loss at PAT level. As if it was not enough, inability to
meet margin calls by promoters has led to massive selling by financial
institutions. As on March 2012, promoters owned 54.5% of equity (80.7 lakh
shares) about two-thirds of which was in the pledged form. In June alone, IFCI sold
nearly 43 lakh shares, which account for a 29% of ARSS Infra’s equity capital
and the stock slipped 26% to Rs 40, which is over 90% lower than the price at
which the company had made public issue in early 2010. What surprises me is if
IFCI sold 43lac shares even at avg price of Rs 60, it would not have
recovered more than Rs250mn, that is too
less for a client who has more than Rs2800mn of long term debt & another
7000mn of ST borrowings. I wonder how institutions operate when they sell
shares. But that’s not the agenda in this post, maybe another blog someday on
such cases.
Unlike
a regular analyst, I don’t want to start believing outright that things will
improve immediately & then with an estimated EPS of blah blah and multiple
of x, stock should easily trade at Rs100. For companies which are outright in
distress with zero visibility in business should in my opinion be valued at
liquidation value- (a value that can be recovered by selling physical assets
and paying off its debts). Markets are unlikely to give them any premium or
multiple as they are enclosed by uncertainty.
Benjamin Graham, a legendary value investor
in early 1930’s suggested an easy formula for liquidation. Value of Company
> (Total Cash & Equivalents + 0.75 *Receivables+ 0.5*Inventory – Liabilities) I tried running this criteria over Indian
companies but couldn’t find reasonable sized company trading at deep discount
to liquidation value. The next simple and logical step is Book value (Value of
Assets- Value of Liabilities). Stock trading at discount to book value
indicates that market is expecting company to erode value through increased
losses which will wear down previous years retained earnings i.e in accounting
terms- RoE will be less than required rate of return. For my friends from
non-finance background, I know it is difficult to comprehend and is similar to
how I see Alpha, Gamma and sin teta, but you can chose to ignore if you want to.
The next obvious question in my mind is what
discount to book value is great entry point for value investors? I picked up
few construction companies, where sustainability of businesses were in doubt
either due to regulatory, political, balance sheet or governance issues to
check out what lowest price to book multiple they traded during last 1 year. Since
estimation is poor indicator for distressed companies, I relied on reported
book value at that point of time.
Exhibit 1: Large construction companies under stress
Exhibit 2: Pure road construction players at their lowest valuation
 |
Exhibit 3: Similar size peers at their lowest Price to book valuation
The exhibit says it all.. Stress is never permanent as you see how swiftly prices have moved for larger companies whose survival was in question just few months back. I find it difficult to believe, that company with Rs12000mn revenue and B/S size of Rs20000mn to trade at lowest multiple which was not seen for any company in last 1 year.
Even valuing
ARSS at lowest multiple of 0.2x, will take stock price higher by 20% and
going by avg of its immediate peers it should double the stock price. Therefore, I would like to take a small
exposure of 3-4% in a portfolio. I believe stocks like ARSS Infra have
potential to turn multi-bagger but are surely for high risk seeker investors. If
sentiments improve, then we could see going concern value in addition to
liquidation value & that could re-rate the stock from current levels. No
doubt, we could also see sharp downside cut in the stock as events unfold but I
guess it’s worth a risk.
Key Risk
My underlying assumption behind this thesis is ofcourse,
reported numbers are genuine and not manipulated as we see in increasing infrastructure
and real estate companies and that remains key risk to investment. Next 2 quarters results will determine the destiny of this company and shall be subject to high risk events.
