Case In A Value Investors Perspective

Published Date: 02 Nov 2017

Rakesh Jhunjhunwala

Understanding the RJ’s Case in a Value Investor’s perspective

Pranay Veer

Jaspreet Singh

PGDM 2011-13

NMIMS Hyderabad

2013

Table of Contents

Rakesh Jhunjhunwala

Understanding the RJ’s Case in a Value Investor’s perspective

Introduction to Value Investing:

Benjamin Graham has invented the concept of ‘value investing’ in early days 1934. It’s based on the premise or an assumption that there are two values attached to all the companies.

Market price: Value of the company on the stock exchange

Business value or the Intrinsic value of the company

Every company at the has an intrinsic value or business value, which is based on the company’s ‘real time’ value at the time of a merger with a competitor or takeover situation. In an alternative method of valuation, the business can be valued by arriving at an amount that could be attained by breaking up the company and selling of all its assets.

In the long term horizon, stock prices will reflect the intrinsic value or business value, but in a short to medium term, the market prices are often far different from that value. It may be above or below that value. Value investing seeks to identify such opportunities and make profits out of this disparity.

Graham coined the term margin of safety (mos.). At the time of buying, buy with sufficient margin of safety, i.e. a part of capital of a co. whose market price per share is below the company's "intrinsic value". When it’s selling, sell the company’s stock when the market price per share reaches its intrinsic value or "real value" of the company.

According to Graham, one should make an investment when the market price of the company is far lower than the business value, i.e. a lower by atleast 40% - 50%. This difference between the market value per share and the intrinsic value or the business value is called the ‘margin of safety’. [1] 

The premise behind the margin of safety is that the stock is so cheap that even at the time business downturn, the investor can earn return from his investment. This is because the margin. For this calculation, the liquidation costs are excluded. Investor can be happy that he is not paying anything neither for the fixed assets of the company nor for the potential earnings the company could make. [2] 

According to Graham, The investor must identify a company stock that sells for less than the its net working capital alone, after excluding all of its obligations. This means that the buyer would not pay anything at all for the company’s fixed assets - machinery, buildings, etc., not even for the good-will that might exist. He also said that there will be very few companies whose value would be less than the working capital alone.2

Concept of Net Net Working Capital (NNWC) or Net Current Asset Value Per Share (NCAVPS):

Benjamin Graham introduced this concept in mid 20th century to determine whether the company share price was trading at a fair market price. In the value investing domain, this concept is one of the initial methods followed for stock valuation. 

Graham suggested that one should make an investment when the Market price is equal to NCAV per share. This concept helps us in identifying the undervalued stocks.  This strategy is also known as  "liquidation value investing strategy".

Formulas:

NCAVPS: [3] 

 (Current Assets- Total Liabilities)

         # Shares Outstanding

NNWC = Cash + Short Term Marketable Investments + Accounts Receivable * 75% + Inventory * 50% – Total Liabilities [4] 

NNWC =(Current Assets – Total Liabilities (Current Liabilities + LT Liabilities)) * 67%

NCAV = Market Capitalization / (Current Assets - Total Liabilities)

NCTAV = Market Capitalization / (Tangible Assets - Total Liabilities)

For the purpose of this study, Formula 3 is used. As according to Benjamin Graham, investors will greatly benefit if they invest in a stock when its price is not more than 67% of its NCAV per share. 

Understanding the other concepts of Value investing:

A person who invests in Equity is buying a business; therefore it’s essential for him to understand the business model and the earnings stream of the company. In value investing, when one buys a stock, the price at which the investor buys the stock is important. Thus, a value investor is a one who buys the business (Equity) at a much lower value than the fundamentals justify.

Value investing is more of a philosophy of buying what is out of favour and thus, difficult for many investors to pursue value strategies. Adhering to value principles is a difficult task as it requires lots of patience. Value stocks take longer time to work out than investors who are seeking immediate and abnormal returns. Though it takes longer time, it gives almost a good return of more than 100 to 200%.

Valuation Heuristics used in value investing:

Price/Earnings Heuristic: PE ratio is the most commonly used valuation metric. Many investors take note of it either on trailing performance or historic performance. One of the misconceptions when it comes to PE ratio is, a low PE stock is a cheap stock and a high PE stock is an expensive one. However, along with that one has to look at other important factors such as ROE and future growth expectations. The perception gap also plays an important role in valuation of companies.

Price/Book Value Heuristic: A ratio used to compare a stock’s market value to its book value. Another common misconception is that Low P/BV represents cheap stock. However it is important to look at other variables rather than follow this blindly.

Price/Sales Heuristic: Price/ Sales ratios are used to compare investment opportunities within the same industry.

The role of PE Expansion and Contraction in Equity returns:

Stock prices reflect expectations and the key to generate superior returns is to successfully anticipate expectation revisions. The return on stocks depends not on the earnings growth but solely on whether this earnings growth is more than what the investors expected and also whether this growth expectations are reflected in the PE ratio.

The long term return on a stock depends not only in the actual growth in earnings but also on how those earnings compare to what investors expect. Thus, over here sentiments of the investor come into picture. When the sentiments are bullish, the expectations are high and when the sentiments are bearish the expectations run low. Understanding these expectations and assessing their impact on the price is the key to good stock pricing and thus creating more value to a Value Investor.

Understanding the Equity Returns based on different scenarios created with respect to Growth in Earnings:

It is very clear that the returns from equities are dependent on two sources, namely Fundamental and Speculative. The fundamental concerns the earnings behind the company along with the dividend paid out during the holding period (Dividend Payout ratio). The speculative element concerns the changes in the appraisal of the current performance and prospective profitability by the market participants, as a group, having a bearing on PE expansion or contraction, thereby increasing or decreasing the total share holder’s returns. This speculative element is the product of the earnings and change in PE ratio divided by the price paid, expressed as a percentage.

Hypothetical study - Growth in earnings

Let us assume that there is a company which has EPS of Rs.10 and quoting at a PE ratio of 20. We also assume that Earnings growth rate is 20%. Now we will be creating different scenarios to explain the impact of earnings growth rate and the sentiments prevailing in the market on the stock price

Scenario1-Stable PE ratio: With a 20% increase in earnings, the new earnings would be Rs.12 and with a stable PE ratio of 20 the stock price would now be quoting at (12*20) i.e. Rs. 240.

Scenario 1

Initial EPS

10

Earnings growth

0.2

Earnings

12

PE multiple

20

Share price

240

Scenario 2 – PE ratio expansion: Now let us assume that the PE ratio expands to a multiple of 25. This increase in high speculative interest could be due to various reasons such as, a change in the sentiments, expected better fortunes of the sector or the company. This results in the overall expansion of market valuations with a small change in PE multiple. Thus, keeping the EPS at Rs 12, the stock price would now be quoting at (25*12) i.e. Rs 300.

Scenario 2

Initial EPS

10

Earnings growth

0.2

Earnings

12

PE multiple

25

Share price

300

Scenario 3- PE ratio contraction: Now let us assume that the PE ratio comes down to a multiple of 15. This decrease in speculative interest could be due to various negative sentiments such as global liquidity and so on. Thus, the market price now would be quoting at (15*12) i.e. Rs 180. Here what we observe is though earnings growth rate was 20%, due to a decrease in speculative component net return is negative and comes down to -10%

Scenario 3

Initial EPS

10

Earnings growth

0.2

Earnings

12

PE multiple

15

Share price

180

Rakesh Jhunjhunwala Investment Philosophy:

If EPS is peaking or if the market recognises the future eps which is going to peak

 

If run out of capital

Crisil: India’s financial markets

US financial services contributes 14 to 16% to the US gdp whereas in india it contributes only 4 to 5%. Thus, the opportunity of crisil is linked to the Indian financial markets. As the size of the bond market increases in india, Crisil’s opportunities also increases. It is the business in which new entrants cannot find its way easily in the industry. It’s one of the reputed rating agency companies and thus has a competitive advantage. Its excellent business profile and healthy cash flows was one of the reasons why rakesh invested in this stock.

90% of his portfolio is on his call on India macro  

Opportunity

Top down

Opportunities to buy a stock

Indian country has too much of potential so he does not invest in foreign countries

Potential sectors

Rakesh Jhunjhunwalla’s portfolio:

The total value of Rakesh Jhunjhunwala’s portfolio as on 11th January, 2013 is Rs. 5119 crores. [5] It is observed that only 5 stocks make up 83% or Rs. 4229 crores of his Rs. 5119 crore portfolio.

Name of Stock

No. of shares held

Value as of 11.01.2013

Titan Ind

91550220

2470,94,04,378

CRISIL

5400000

548,18,10,000

Lupin

8678405

510,02,98,619

Karur Vysya

5629224

299,50,28,629

Rallis India

17607820

263,50,10,263

Geometric

12251250

137,21,40,000

Total Value Of Rakesh Jhunjhunwala Core Holding As On 11.01.2013

4229,36,91,889

Note: RJ’s complete portfolio is in Appendix-1 ( - Complete Portfolio of Rakesh Jhunjhunwala)

The core strategy behind the holding of Titan, Lupin, and Crisil which comprises 55% of his portfolio is that these stocks are focused on the Indian domestic consumption story and act like defensives at tough times. He also mentioned that though they are were expensive, they were worth their price.

Rakesh Jhunjhunwala has mentioned in an interview that since he entered the stock market in 1985, he had always had "not less than 110 percent" (sarcasm) of his wealth in Indian equity. He would hold a stock for a considerable period of time, irrespective of corrections, rises and falls.

Compucom Software Limited (CSL)

About the Company: It is one of the leading software and education company from Rajasthan. It customers are spread across all the 6 major continents. It is rapidly expanding its revenue streams and customer base. Its contributions was honored with many awards by Rajasthan State Govt. and Central Govt. It has come up with an IPO in 1999, and was listed on BSE.

Rakesh Jhunjunwala acquired 5 lakh shares of Compucom Software (Computers - Software – Training) on Dec 17, 2012at a MPS of Rs.25 on an average. The total deal is worth of Rs 1.25 crore. [6] (Economic Times, 2012)

Date of Acquisition

17-Dec-12

No. of Shares

5 lakhs

Acquisition Price (avg.)

Rs. 25

Deal Size

Rs. 1.25 crores

All time High

Rs. 34.20

All time low

Rs. 10.20 

CMP (20th Feb, 2013)

Rs.11.02

Table : Compucom Financials - Valuation using "Margin of Safety" method of Value investing:

 

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

Net Current Assets

79.86

74.36

51.30

31.59

13.66

Total Debt

21.55

48.92

42.22

40.02

0.00

NNWC

58.31

25.44

9.08

-8.43

13.66

Conservative NNWC @67%

39.07

17.04

6.08

-5.65

9.15

Shares in issue (lakhs)

791.25

791.25

502.50

502.50

251.25

NNWC per share

4.94

2.15

1.21

-1.12

3.64

 

 

 

 

 

 

MPS**

25.05

12.93

19.55

11.29

5.80

Earnings Per Share (Rs)

1.40

1.52

1.85

1.70

1.93

P/E

17.89

8.51

10.57

6.64

3.01

 

 

 

 

 

 

Book Value (Rs)

12.79

11.62

14.55

12.97

22.96

P/BV

1.96

1.11

1.34

0.87

0.25

Source: Money Control (Financials of 2008-12)

** MPS is as on 31st Dec for all the years

Book Value (2012) = Rs. 12.79

Acquisition price is about 2 times the Book Value. (12.79*2 = Rs. 25.58), 53 paise more than the purchase price of Rs. 25.05. RJ purchased the shares when the P/BV was at peak compared over the years. It entered at a high cost per share.

P/E Multiple: Even the P/E multiple was at peak at 17.89 times the EPS.

Implications:

This investment by RJ is of a very small, 0.65% stake in the Rs. 87 crore company. Unlike his other investments like Viceroy Hotels, A-Z Maintenance; where he holds more than 10% stake in the company.

Rakesh Jhunjhunwala (RJ) purchased this stock just 2 months back (Dec, 2012) at a price of Rs. 25. This price is about 25-30% discount to its all time high price of Rs. 34.20 which the stock hit on 19th Dec, 2012. This was just 2 days before RJ purchased the shares of this company. Post this in February, this stock plunged to almost to its all time low of Rs. 10.20 (which was hit on 4th Sep, 2012) and now trading at Rs. 11.02 (20th Feb, 2013). Hence, this is a very volatile stock.

This investment is not a Value investing as the P/E, P/BV was unattractive at the time of entry in Dec, 2012. Even the MPS at the time of purchase was 5 times the NNWC value per share of Rs. 4.94. Hence, this investment can be attributed to some other factors.

PROVOGUE Ltd.

About the Company:

Provogue Ltd was incorporated on 17th November 1997. It converted from private company to a public limited company. Its name was changed from Acme Clothing Ltd to the Provogue (India) Limited on 14th March, 2005.

In early 2005, Rakesh Jhunjhunwala has acquired a 5% stake in the Provogue India for an undisclosed amount and joined the board of the company. [7] As on 12th Jan, 2013, RJ owns 2010000 shares whose value on the same date was Rs. 3.03 crores. It is currently worth Rs. 2.54 crores (21st February, 2013; CMP Rs. 12.65).

Rakesh Jhunjhunwala was one of the Top 10 shareholders in the company even before the Draft Red-herring Prospectus of Provogue was filed in in 27th March, 2005. He owned 600000 shares [8] of the company as on that date. Provogue was listed in BSE on 7th July, 2005 [9] .

OFFER DETAILS

Issue Open Date

10-06-05

Issue Close Date

16-06-05

Listing Date

07-07-05

Face Value (Rs).

10

Offer Price/Range (Rs).

130.00-150.00

Issued at (Value)

Premium(140.00)

Issue Size(Retail)

[email protected]/share

Hence, he acquired a stake even before it was listed in BSE.

% Stake in Provogue as on 27th March, 2005:

RJ – 600000 shares

Total Outstanding shares: 9332864

Stake = 600000/9332864 = 6.4%

LISTING DAY DATA

(INR)

Open

250

High

299

Close

246

Low

225

Source: Company Report (As on 7th July, 2005)

Assuming that RJ has acquired the shares of Provogue at Rs. 130 (least in the Price band) in early 2005, he would have made a return of over 100% in just 6 months.

Insider Trading:

RJ was penalized by SEBI for Rs. 15000 regarding acquisition of more than 5% stake without informing the regulator nor the company. He admitted that this acquisition was a pure investment.

Company

Provogue (India) Ltd.

Name of Acquirer / Seller

Rakesh Jhunjhunwala

Transaction Date

26-06-08

Quantity

39625

Mode of Buy /Sale

Sale

No. of Shares Transacted

100000

Holding after Transaction (Quantity)

500000

Source: BSE India (Insider Trading Disclosures)

Stock Split & Demerger of Prozone Capital: http://www.bseindia.com/bseplus/charts/chrtPerf532647.png

There was also a stock split on 8th October, 2008 where the Rs. 10 FV share was split into Rs. 1 share.

In Sept. 2012, Prozone Capital Shopping Centre demerged with Provogue reduced its capital from face value of Rs 2 to Re 1. (that is, in the ratio of 1:1) [10] . Post the deal, the shares of Provogue Ltd of FV of Re. 1/- per share instead of face value of Rs. 2/- per share.

Return Calculation (Assumption):

IPO Pricing in 2005: Rs.130 to 150

Share Price as on 26th June, 2008 – Rs. 202.50

Assuming that he purchased at Rs.100 in 2005  HPR is approximately 100% or an Annual return is 33%

Table : Provogue Financials – Valuation using "Margin of Safety" and other Multiples

 

2004 (Lakhs)

2005 (Lakhs)

2006 (Lakhs)

2008 (Crs.)

2012

(Crs.)

Net Current Assets

2182.63

6108.70

11557.47

274.72

636.11

Total Debt

2023.19

3346.27

5429.82

145.54

280.9

NNWC

159.44

2762.43

6127.65

129.18

355.21

Conservative NNWC @67%

106.82

1850.83

4105.53

86.55

237.99

Shares in issue (lakhs)

24.9886

161.98

161.98

1.62

1,143.57

Share Price based on NNWC

4.27

11.43

25.35

53.43

20.81

Networth

1070.74

4373.41

10888.18

320.16

 

Net Profit

440.3

721.54

1194.00

25.97

 

Earnings Per Share (Rs)

3.45

4.45

7.37

16.03

2.19

Book Value (Rs)

42.84

27.00

67.22

197.66

48.05

MPS*

-

40.72

70.7

216.25

13.19

P/E

-

9.14

9.59

13.49

6.02

P/BV

 

1.51

1.05

1.09

0.27

Source: Annual Reports, Money Control

*MPS of 2005, 2006, 2008 is as on Mar 31st and 2012 is as on Feb 20th

Implications:

RJ exited 100000 shares of his investment at Rs. 202.50 (close price as on 26th June, 2008). This was just 3 months before the Stock Split corporate action announced by Provogue. This exit was a very shrewd one by RJ.

It is the insider information which prompted RJ to sell the shares before the stock split in Sep, 2008.

This exit by RJ can be considered as Value Investing exit, where he divested a part of his stake when the Market Price of the company, Rs.202.50 reached its intrinsic value of Rs.197.50.

Share Price Fluctuations:

C:\Users\Pranay Veer\Desktop\AIM - RJ\Provogue.png

Even the EPS during that period also was high at Rs. 16.03 per share, compared to Rs. 4.45 and Rs.7.37 in 2005 and 2006. Also the share price as calculated using the NNWC method was the highest since 2004 in 2008 at Rs. 53.43 per share.

Hence, RJ followed top down approach at the time of entry, which is based on the domestic consumption pattern and potential of Retail sector in India. But he exited using Value Investment strategy, i.e. when the P/E multiple went to its peak in 2008, Book value was almost equal to the MPS in 2008.

Geometric Ltd:

About the company:

Geometric limited operates in the Engineering Technology and software services. Geometric began as a research and development division of Godrej & Boyce who is a major promoter and continues to be one of the largest shareholders in the company. Headquartered in Mumbai, Geometric was incorporated in 1994 and is listed on both BSE and NSE. Geometrics’ product offering includes product life cycle management services and solutions, Industrial and production engineering, global engineering services and offshore product development solutions and technologies. They are expecting at least 15% growth year on year on an average from their top 10 clients (excluding 3DPLM). As Geometric operates in niche segments (PLM) with high exposure to manufacturing segment, it has faced tough times in the years 2009-10 due to global recession. However, things are looking brighter than before and this can be reflected in the stock price, which has appreciated significantly since 2010 and 2011.

Business Review: The consolidated revenues for FY12 increased to $167.51mn from $136mn, thus seeing a growth of 22.7% in revenues. It operates in four major regions namely USA, Europe, Asia Pacific and India. USA’S share has moved from 67% to 71.3% in FY12. Europe’s and APAC’S share has decreased to 18.4% and 4.2% respectively. When we see the India’s share it has increased to 6.1%. If we consider the business segmentation based on the product offerings, services contributes almost 94.51% of the total sales. The automotive Industry, an important market for Geometric showed a good progress ahead of strategic initiatives taken such as selling its specific brands and thus presenting a lean balance sheet

Key Ratios:

Year

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Debt-Equity Ratio

0.01

0.03

0.05

0.07

0.09

Long Term Debt-Equity Ratio

0.01

0.02

0.05

0.07

0.09

Current Ratio

2.36

4.02

3.9

3.26

3.14

Interpretation: Some of the leverage ratios clearly suggest that company is becoming leaner and reducing its exposure to high debt levels

Fixed Assets

4.06

3.1

2.91

2.49

1.48

Interest Cover Ratio

71.38

39.21

23.97

2.51

18.79

PBIDTM (%)

13.61

13.58

10.94

5.35

21.76

PBITM (%)

10.32

10.18

7.18

1.15

16.35

PBDTM (%)

13.47

13.32

10.64

4.89

20.89

ROCE (%)

12.1

10.52

7.24

1.24

12.6

RONW (%)

11.12

10.09

6.76

0.78

10.44

Interpretation: Interest coverage ratio is very good, thus giving an impression that it is able to service debt. This also indicates that it is showing a steady growth in its EBIT. When we look at ROCE it has recovered from 1.24% in 2009 to 12.1% in 2012.

RJ’s perspective on GEOMETRIC Ltd:

Rakesh Jhunjhunwala has been a long term investor in Geometric Ltd. Since 2003 and continues to be so. He and his wife Rekha Jhunjhunwala currently holds 19% stake in the company. He started off by buying 39.65 lakh shares at a price of Rs.45 (adjusted for stock split and bonus issue). As on today stock is quoting at Rs.105, thus giving him an aggregate return of 133%. The bulk of the gains have come in the last 3 to 4 years when geometric spurted almost 70% from Rs. 66 to 116. The main reason why Rakesh Jhunjhunwala is holding on to this stock is its low valuation when compared to other companies in the IT sector. Its P/E is at around 10.55 whereas, the industry P/E is at 18.01. The other reason why Rakesh Jhunjhunwala is bullish on Geometric is the PLM (Product lifecycle management) space in which Geometric was engaged "The biggest element of enterprise software". Thus, he anticipates that Geometric is going to give healthy return over the next 7-8 years.

Year

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Price Earning (P/E)

10.55

17.92

31.1

2.12

15.6

P/BV

2.01

1.69

1.83

0.48

1.51

Price/Cash EPS (P/CEPS)

8.62

13.04

19.08

1.72

10.73

EV/EBIDTA

6.26

12.01

16.98

1.19

8.77

Market Cap/Sales

1.55

1.62

1.85

0.39

1.86

Benjamin Graham, who is considered to be the father of value investing, believed in Margin of safety. He would use the concept of Net -net working capital to value the company and also to know whether the target company is a good value investing proposition or not. Thus, based on the Benjamin Graham’s thumb rule we got the Geometrics’ value investing price to be at RS. 38.75.

Table : Geometric Financials - Valuation usingC:\Users\Jaspreet Singh\Pictures\chrtIND532312.png

"Margin of Safety"

Geometric Ltd

All figures in INR

Net current assets

322329155

Total debt

30088509

NNWC

292240646

No. Of shares

5279389

Value per share

38.748509

Implications:

Thus, taking this value into consideration we can say that Rakesh Jhunjhunwala has bought the shares at decent low valuations. Over the years he has been accumulating the stock. Recently, in the month of September 2012 he acquired 4.5% of Geometric Ltd from Credit Suisse at Rs.106 per share. But, when we compare this stock with titan, we can be sure that geometric has not performed well. Titan gave a whopping 4125% return and Geometric managed to give only 133% return. Nonetheless Rakesh Jhunjhunwala finds value in the stock and has an optimistic opinion on its future free cash flows.

Sterling Holiday Resorts (India) limited:

About The Company:

Sterling Holidays was established in 1986 in Chennai. It’s into holiday business where it provides holiday packages to its customers. The company opened its first resort Lake view, in Tamil nadu (Kodaikannal).Since, then company has been expanding its resort base quiet drastically. Recently in 2011 Mr Ramesh Ramanathan was appointed as the Managing Director of Sterling Holidays. Its vision is to deliver great holiday experiences to Indian families.

Business Review: In 2010-11 the company went in for a new brand identity. The brand name changed from Sterling resorts to Sterling Holidays. During the year it went for a renovation programme of its resorts. It has built quiet a good resort base in India. It currently owns 10 resorts and has 4 other resorts on lease basis. Thus, in future an investor can expect a good return on his investment as it has already created a good resort base.

Rakesh Jhunjhunwala’s Perspective: He has been bullish on this stock considering that tourism industry is yet to grow in India and Sterling holiday resorts will benefit from it. He believes that there is a vast potential in its domestic tourism sector and thus was keen to invest in this company. Rakesh Jhunjhunwala got an equity stake in the company by converting the warrants which he had subscribed in the year 2011. It was not only him but other investors such as Radhakrishna Damani and the private equity firm, Bay capital who got equity stake by converting the warrants. The value of conversion is estimated to be around Rs17.1crores

He has been allotted 1250000 shares at a price of Rs75 in 2012.

Rakesh Jhunjhunwala’s five reasons to buy Sterling holiday resorts:

High Entry Barriers and low competition: He believes that for any other player to have a resort base of 14 in the top notch holiday destinations would be difficult as the real estate prices have gone up drastically. He is also banking on the fact that, the company has a good network of suppliers and it would be very difficult for any other competitor to imitate Sterling holidays.

New management: Mr Ramesh Ramanathan who had earlier worked in Mahindra holidays was now appointed as a managing director of Sterling Holidays. His rich experience would surely contribute to the success of the company, thus Rakesh Jhunjhunwala feels that sterling holidays will provide good returns in the future.

Zero debt: He believes that the company which had high levels of debt and levered balance sheet in 2008-09 has now repaid virtually all of its debt and is close to a debt free company. This would have a positive impact on its credit rating and would add on to its credit worthiness

High growth opportunities: He believes that there is a vast potential for growth as he expects at least 1crore couples in India to be the potential customers of Sterling holiday resorts. He also believes that as the income of this segment of people increases there will be an increase in the expenditure on holidays and thus, sterling holidays will be surely benefited.

Reasonable valuations: Mahindra holidays and India hotels are two companies which are highly valued in this industry. Sterling holiday resorts in the past has not come with good earnings and thus does not quote a P/E multiple. Being a niche player and having a market cap of only Rs.508 crs it can be considered as a dark horse in the tourism industry.

Table : Sterling Financials – Valuation using "Margin of Safety"http://beta.bseindia.com/bseplus/charts/chrtIND523363.png

Sterling Holidays

All figures in INR

Net Current Assets

45,73,06,990

Total debt

24939842

NNWC

432367148

No. Of shares

47454729.22

Value per share

6.37780488

Implications:

If we consider Benjamin Graham’s margin of safety principle we would be getting a value of Rs.6.3 per share. Here we used the most conservative estimate of Sterling holidays intrinsic value. But Rakesh Jhunjhunwala had bought these shares at a price of Rs.70 to 75, which is highly valued. Thus, we can’t conclude that he has gone for a value investing approach. Though the company had reduced its debt levels from the balance sheet, it has not been able to produce positive earnings. Thus, what we can say is Rakesh Jhunjhunwala believes in the macro picture and thus consider it to be a good stock. It would be a good stock only because his time frame of investment is very high.

Lupin

About the company: Lupin is a Mumbai based Pharmaceutical company and considered to be the world’s largest manufacturer of Anti-TB segments. It has been incorporated with a vision to be an innovation led transnational company. Over the last ten years EBITDA has grown at a CAGR of 21%. Over the last 10 years Lupin enjoyed a safe journey with high growth coming from its foreign markets. It had acquired Kyown in Japan in 2008 and various biotech facilities were set up. In 2010 it became the 5th largest generics player in US and in 2012 US business crosses half a billion dollars. Thus, all in all it is one of the best pharmaceutical company in India where it is expecting a growth of >20% in emerging markets.

Business overview: Lupin has most of its revenues coming from developed countries like US and Europe. Lupin’s core strength lies in its India growth story, which is almost 20% YOY and other internal factors such as it is vertically integrated and also good acquisitions such as Kyowa+L’rom in Japan. With recent Rupee devaluation against US dollar, its revenues in INR terms should a good increase on YOY basis. For the FY12 US business grew by 22%, India region by 24%, Japan by 38% and South Africa by 40%. The bottom line of the company has been growing consistently at a CAGR of 25% for the last 5 years. Its market capitalization has grown 11 times in 7 years. Lupin has been successful in maintaining a sustainable growth mainly because of its R&D investment. R&D investment has been at around 7.5% of the net sales

Key ratios

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Debt-Equity Ratio

0.3

0.33

0.47

0.71

0.83

Long Term Debt-Equity Ratio

0.05

0.07

0.15

0.29

0.42

Current Ratio

1.36

1.38

1.26

1.24

1.53

Interpretation: The debt to equity ratio has come significantly from .83 to .3, thus showing a leaner balance sheet. It has been able to reduce its debt levels.

 

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Interest Cover Ratio

36.03

31.6

25.97

12.35

13.99

PBIDTM (%)

21.47

21.53

22.33

19.69

20.59

PBITM (%)

19.04

19.23

20.1

17.43

18.44

PBDTM (%)

20.95

20.93

21.56

18.28

19.27

CPM (%)

17.25

20.18

19.93

16.43

15.68

APATM (%)

14.82

17.88

17.7

14.17

13.53

ROCE (%)

22.72

22.82

25.6

22.29

23.85

RONW

23.36

28.5

33.23

30.97

32.02

Interpretation: The interest coverage ratio has been increasing YOY which shows that it is able to service its debt with the help of earnings that they are able to generate. ROCE has been pretty good even in 2008-09 which shows that it has not been affected by the economic crisis of 2008.

Rakesh Jhunjhunwala’s Perspective:

He has been investing in Lupin since 2002. He has been accumulating them till 2011. On 9th October he along with his wife Rekha has hiked the stake to nearly 3%. He bought them at around Rs460 levels after a stock split in 2006. In the year 2002 stock was quoting at Rs95 levels and if we calculate the intrinsic value of Lupin using margin of safety principle we were getting a value of Rs90. Thus, seeing these we can say that Rakesh Jhunjhunwala had bought these shares at decent valuations. Since then upin has given him a return of almost 650 to 700% return till date.

Table : Lupin Financials - Valuation using "Margin of Safety" and other Multiples

Year

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Price Earning (P/E)

30.28

23.51

22.98

14.29

9.44

Price to Book Value ( P/BV)

6.33

5.88

5.71

4.15

3.08

Price/Cash

EPS (P/CEPS)

25.91

20.76

20.34

12.26

8.35

EV/EBIDTA

21.23

19.97

18.71

11.46

7.41

Market Cap/Sales

4.36

4.09

3.94

1.94

1.55

Lupin

All figures in INR

Net Current assets

61587100000

Total debt

3886400000

NNWC

57700700000

No. Of shares

446376248.6

Value per share

90.48530276

Implications:

Thus, what we can interpret is that here Rakesh Jhunjhunwala bought Lupin at decent valuations and had the patience to hold it for 10 years. He has been successful because he has been accumulating these stocks over a period of time. Lately in 2012 there was some news that he has reduced his holdings in Lupin but even now he holds more than 1.5% stake in the Lupin.

Lupin currently has a market cap of Rs.26537 crores and the industry P/E is 20. Thus, Lupin now is highly valued but as long as it continues to generate a growth rate of 15 to 20% it is still a safe bet.

TITAN INDUSTRIES Ltd.

About the Company:

Titan Industries Ltd. is the organization that has revolutionized the Indian watch market. The company was established in 1984 as a JV between Tata Group and Tamil Nadu Industrial Development Corporation. It functioned out of a small room in Bangalore. The company at that time decided to manufacture only quartz watches when the market was dominated by mechanical watches and released its first watch in 1987. That was a path breaking move by the company. It also pushed the then market leader HMT Watches into gradual decline. 

Currently, it commands over 60% market share and is the world’s 5th largest watch manufacturer selling over 135million watches. But most of its business/ revenue is generated from its jeweler brand Tanishq.

Diversification: Titan diversified into jewellery business in 1990 and started manufacturing eyewear products in 2007. It operates in countries including Africa, South-East Asia and West.

Rakesh Jhunjhunwala’s love with Titan:

Rakesh Jhunjhunwala bought the shares of Titan in 2002. Two years hence, he still finding there was far more huge potential in Titan. The year was 2004 when two of his analysts presented their findings on robust prospects of Titan, especially in jewellery business based on the 5 year projections.

The analysts name was Utpal Seth who persuaded RJ about Titan’s potential. Now, he is the CEO of RJ’s company, Rare Enterprises.

Five years later, Titan Industries has exceeded those five projections and appreciated enormously. RJ still owns Titan and has not sold a single share over the years. The stock has appreciated approximately 12000% since RJ has first entered in 2002.

"I wish I could find the next Titan, but I do not see any on the horizon at the moment,"

Rakesh Jhunjhunwala

Table : Titan Industries – Top Shareholders (excluding the Promoters):

No.

Name of the Shareholder

Total Shares held

Shares as % of Total No. of Shares

1

Jhunjhunwala Rakesh Radheshyam

71,509,100

8.05

2

Jhunjhunwala Rekha Rakesh

20,041,120

2.26

3

Matthews Pacific Tiger Fund

13,593,760

1.53

4

Merrill Lynch Capital Markets ESPANA S.A. S.V.

9,121,538

1.03

5

IIFL Inc A/c Vontobel India Select Fund

9,241,253

1.04

Total

123,506,771

13.91

Source: Money Control

RJ holds more than 10% stake in Titan. He increased holding in Titan by over 71,000 shares in during July-September period and his holding was valued at Rs 2471.52 crore as on September 30, 2012. [11] He increased that stake from 8% he held in 2010.

Titan’s Performance:

Titan is the country’s largest jewellery retailer, with almost twice the sales of Dubai’s Joyalukkas, the No. 2, but it has holds a mere 6 % market share in the $28 billion Indian gold jewellery market which is highly unorganized. [12] 

In the past decade, its market cap has surged from $45 million in 2002 to $3.5 billion in 2012; its revenue jumped from $153 million to $1.74 billion ; and profits have zoomed from $1 million to $118 million. In 2011 itself, Titan was sitting on a cash pile of about Rs 1,000 crore.

"Bhat (MD of Titan) brought it from the jaws of death onto the road to success," says Jhunjhunwala.

Table : Titan Financials - Valuation using "Margin of Safety" and other Multiples

 

 

 

Rights Issue

 

 

 

 

 

Stock Split & Bonus

 

 

Mar 03 

Mar 04 

Mar 05 

Mar 06 

Mar 07 

Mar 08 

Mar 09 

Mar 10 

Mar 11 

Mar 12 

NNWC

-151.60

-48.48

-35.41

10.25

47.65

180.96

275.50

455.55

654.02

988.82

 

822.80

822.80

822.80

822.80

443.90

443.89

443.89

443.89

443.89

8877.86

Shares outstanding (crores)

8.23

8.23

8.23

8.23

4.44

4.44

4.44

4.44

4.44

88.78

Value of Share using NNWC

-18.42

-5.89

-4.30

1.25

10.73

40.77

62.06

102.63

147.34

11.14

 

 

 

 

 

 

 

 

 

 

 

MPS

6.84

9.06

40.68

40.39

73.94

44.93

73.01

180.07

173.60

283.85

MPS (March month Closing price)*

2.53

5.35

11.59

41.75

42.08

53.12

38.99

92.04

190.54

228.60

   Book Value (Unit Curr.)

18.91

29.76

31.67

46.49

75.94

100.43

125.67

164.88

233.30

16.46

BV (Adjusted)

1.89

2.98

3.17

4.65

7.59

10.04

12.57

16.49

23.33

16.46

P/BV

1.34

1.80

3.66

8.98

5.54

5.29

3.10

5.58

8.17

13.89

 

 

 

 

 

 

 

 

 

 

 

   EPS before Minority Interest (Unit Curr.)

4.33

13.81

3.91

17.97

21.55

31.88

35.23

54.12

93.52

6.49

EPS (Adjusted)****

0.43

1.38

0.39

1.80

2.16

3.19

3.52

5.41

9.35

6.49

P/E

5.84

3.87

29.64

23.23

19.53

16.66

11.07

17.01

20.37

35.22

Source: Capital Line, Yahoo Finance, Economic Times

** MPS is March month closing price (Yahoo Finance) adjusted to all the Corporate actions (FV = Re.1)

*** Book Value is also adjusted to a share with a FV of Re.1

****EPS is adjusted to a share with a FV of Re.1

Implications:

Assuming RJ entered Titan in 2002, it would be for a MPS of Rs. 2.61 (as on March end 2002). Its adjusted Book values over the years, are on a increasing scale. This investment again is not Value Investing based on Graham’s margin of safety. It’s purely based on the potential of the company and its capacity to generate revenue and profits.

He acquired the stock when the P/E was approximately, 4-5 in 2002 (it was 5.84 in 2003). Over the years, it grew more than 7 times, but still he didn’t exited the stock. But instead, he increased his stake further. This only means that RJ presumes that Titan still has the potential to grow and this P/E ratio is not at peak. The P/BV ratio also increased from mere 1.34 times the MPS to over 13 times in 2012.

Is RJ taking high risk by not exiting his investments at such a high P/E or P/BV?

The above question only depends on the future earning potential of Titan. As Titan is focussing more on expansion and still as a company has not reached maturity stage, we can negate the above question on this note. But the Current P/E of Titan is almost double that of SENSEX at about 16-18 times. This shows that there is a risky proposition attached to RJ with the current valuation of Titan.

To conclude with, the stake acquisition in Titan is a clear investment based on Top Down Approach. Even RJ has mentioned in an interview that the basic strategy behind the investment in Titan is the potential of domestic Indian consumption. He said that India would grow at a rate of 7-8% and the demand for FMCG and Consumer Durables will surge in future. With Titan ruling 55 to 60% of India’s organised watch market and also had a jewellery business, there would be tremendous growth.

CONCLUSION

Rakesh Jhunjhunwala is an investor who looks for potential companies for investment. His investments are not based on the Graham’s principal of "margin of safety", but is based on identifying a company whose current market price is lower compared to its intrinsic value. In other words, acquiring a stake in the company when its valuation is close to its book value. This proves wrong in some of his cases, for example Compucom Software, where he entered when the company was at a very high valuation or almost close to its All time high MPS.

RJ always says that for every investment he has made, there is a story attached. He has very specific reasons behind each of his investment. But Graham’s value investing concept is completely different from this strategy, wherein, the company is acquired at a price that even time business downturn or company liquidation (excluding liquidation costs), the investor can earn return from his investment. Graham himself has mentioned that there will be very stocks in that valuation. But once it’s identified, one will make huge returns.

Investing in Geometric ltd would be regarded as value investment. Though it has not appreciated to give him whooping returns even then it has given him more than 100% return. He believes that it will surely be one of his best stocks in future.

In case of Sterling Holidays and Resorts, he bought this company’s shares at 75 but I don’t think this was a value investment as this company has not given positive earnings and even intrinsic value was coming at a low of Rs6.37. His idea of buying warrants at a price of Rs35 could be considered good investment but overall, it is a very niche player and to get to high levels this would take some serious time. Here he invested in this stock based on his call on India macro

Lupin was really a great investment where he has been accumulating this stock ever since 2002 when it was trading at Rs. 95 pre stock split. Now the value of 1 share is almost Rs.600 post stock split. This can be regarded as a value investment.

Compucom is in nascent stage to understand the strategy.

Provogue was a pure value investment exit in terms of P/BV multiple. It also exposed his insider trading involvement.

Titan is the Kohinoor in the portfolio of RJ, his most valued investment. He is betting on the potential of the company and its intrinsic value and holding his stake in the company.

RJ’s investments are mostly based on Top Down Approach, investing in a highly potential company with strong fundamentals at a low price in most of the cases. It is hard to understand the reason behind his investment in Compucom; whether he gets to know any insider information which influences him to purchase or sell a stock – in case of Provogue which he purchased even before it hit the markets and sold before the stock split; his continuation and further increment of stake in Titan Industries when it’s highly priced based on the multiples.

To conclude with, in RJ’s words, it is the company’s fundamentals which drives him to purchase a stock and he exits the stock only when he is out of cash or the valuation is so high that (multiples) there will be a fall in the future.

APPENDICES

Appendix 1 - Complete Portfolio of Rakesh Jhunjhunwala

Appendix 2 – Titan Industries Corporate Actions

Key Dates

Incorporation Date26/07/1984

Public Issue Date

Face Value1.0

Splits History

Announcement Date

Old FV

New FV

Record Date

Ex-Split Date

29/04/2011

10

1

24/06/2011

23/06/2011

Rights History

Announcement Date

Right Ratio

Face Value (Rs)

Premium (Rs)

Record Date

Ex-Right Date

Existing Inst. Name

Offered Inst. Name

31/08/2005

1 : 20

0

340

06/03/2006

27/02/2006

Equity Share

Partially Con. Debenture

Note: The PCD will comprise: a. Part A will be converted into 1 Eq Share at Rs. 350 per eq share (F.V. of Rs 10 inclusive of prem. of Rs 340). b. Part B will be 1 NCD of Rs. 250 per NCD carrying an A.I. of 6.75% p.a. & redeemable at par at the end of 5 years.

Bonus History

Announcement Date

Bonus Ratio

Record Date

Ex-Bonus Date

29/04/2011

1 : 1

24/06/2011

23/06/2011