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Friday, June 22, 2007

Ashish Chugh - Kothari Products


Kothari Products manufactures pan masala under the brand name of Pan Parag, which has now become a generic name for pan masala. This company has got an excellent distribution network and this product is sold through lakhs of pan shops located all across the country. What we like about this company is the strong balance sheet of the company and its cash flows. If you take a closer look at the balance sheet of the company - this company has an equity capital of about Rs 6.63 crore. Promoters hold roughly 81% of the equity capital. This company has investments to the tune of about Rs 293 crore. Now this Rs 293 crore is the book value of the investments, as on March 31, 2006 and the market value of this investment was close to Rs 400 crore.

Assuming an increase of about 25% in the market value, where the Sensex has gone up by almost 30% from March 31, 2006 levels. To be conservative, if we assume that the investments have gone up by 25%, the present value of investment would be close to Rs 500 crore. This company also had a cash and bank balance of Rs 27-28 crore and they have loan side advances of close to Rs 90 crore. This makes the total
liquid assets available with the company at more than Rs 600 crore. Against the liquid assets of Rs 600 crore, this company is totally debt free. This company is going at a market cap of just about Rs 350 crore. I am not even including the valuation of the business, which over the years has been responsible for creation of such huge assets.
Even if you take the valuation of the business, I am sure it will be a few 100 crore.

For the first 9 months of the current financial year, this company has already made a profit after tax of about Rs 77 crore, which means an EPS of more than Rs 150 for 9 months. This company has been a regular dividend payer, for the last 8 years it has consistently paid dividends of more than 100% going even upto 160% in some years. Here we have a company, which is a debt free company, which has got a small equity, very high promoters stake.

Now in spite of the fact, that this is a business, which has always been looked at with suspicion and perceived to be on the declined because of health factors and social reasons, the company has been adding about Rs 100 every year to the shareholders' kitty for the last few years.

Here you have a company, which is trading at substantial discount to the liquid assets available with the company. It is creating huge value for the shareholders, whereas the market price is not going up even by the amount of cash which the company is generating every year for its shareholders. At the current price of about Rs 530-540, this stock is a pure value play.