"Risk comes from not knowing what you are doing" Warren Buffet

Buying stock for long term is like marriage, you marry wrong partner and then your life is not sorted and is full of troubles, similarly you pick wrong stock for long term investment you end up making no money or even destroying your money.

When analysing any company, “What we see is not important, what we don’t see is more important”. It should be viewed like a suspense thriller, part by part should be analysed. A well made thriller movie will change your perspective of life. Some thrillers choose to bring down the safe world you've built around yourself by bombarding you with possibilities that you hadn't seen possible.

In my classes, students ask me one simple question. Sir, "who makes more money, a trader or an investor?" People often get fascinated by those small 10%-20% they make in a month or so time horizon but miss the opportunity of growing their money multiple times. I just love this beautiful saying “When we Rest, Returns are active – When we are Active, Returns will Rest”. 

One difference between people who make money and who don’t is of one-word Patience. They don’t know the difference between which stocks they have to keep for long term and which they are opting for short term trading. One trend I have seen generally is they buy stocks for trading and if they are stuck, then they become long term investor. Thus, no preliminary research is done before buying those stocks, which is a wrong approach. One should take stop loss in those cases as that was clearly a short term horizon trade. Smart people do not book profits in a stock when it turns ₹ 300 which they bought at ₹ 200, probably yes they will book some profits but not at ₹ 300 levels, but maybe at ₹ 2000 or ₹ 20000 level or may be not. Money is made over their and not if one would have booked it at ₹ 300. If we look at any smart investor everyone follows this approach. I always mention about Sir Warren Buffet; do you even think he will be selling his stake of Coca Cola or Colgate which he has acquired 20-30 years ago? No, he knows that he has stake in Quality business and when that business is making money, he just needs to have patience to make money with them. Similarly, during Financial Turmoil’s one should pick a good quality business and stick with it patiently to earn. Or imagine I being the owner at Profit Idea - do you think I would sell stake in Profit Idea just because business has increased 10-20-30% after an year or in short term. One must understand, when you buy quality; stick with that quality asset that you bought or you own. I remember picking up stocks like Eicher Motors, Bosch, Oriental Carbon, Atul Auto, Relaxo footwear, Kovai Medical, Apcotex, Nesco, HUL, Asian Paints, PEL, etc. I stayed invested to the stock and yes it gave me a decent return or whopping returns.

Today let’s discuss what made me pick this stock at that price when it was completely undiscovered and what is making me so bullish on this even now. Like our previous cases we will be analysing this on certain defined parameters, so that can help you to understand it on ground level and also provide you with insights to find any Multi-bagger in future.

We analysed and picked up the company on 29th September 2016 at ₹ 125 per share and then according to the valuations we will check whether we paid an extra price or we picked up one of the Future Multi Bagger. For some time let’s keep the suspense and I’ll not disclose the name of the stock. Let’s first see few numbers of it and then slowly we will also uncover the name.   

This was the screenshot of when I shared the stock & bought the stock in my personal portfolio. Here are few reasons why I picked up this cherry :

1) Understanding the Cash Bargain

Cash bargain is like offering you a wallet with ₹ 500 for ₹ 100.

A cash bargain arises when the market value of a company goes below the amount of cash and other liquid assets in its possession, net of all current liabilities  and debt.

Cash Bargain here means, the extra cash available in the business of any company. There are many approaches of calculating cash bargain, but in this respective company we will find it by comparing the Market Capitalisation (No. of Outstanding shares x Current Market Price) and the Market value of the quoted investments held by the company.

When we bought this company the Market capitalisation was Rs. (CMP ₹ 125* No of Shares .60972 Cr) = ₹ 76.22 (Cr.) and the market value of Quoted investments was ₹ 249.17 Cr (Fig. taken actual numbers taken from annual report of FY 2016). So practically saying we can buy the whole company by just paying ₹ 76.22 crores and automatically we will be owner of investments worth ₹ 249.17 crores. What a tremendous amount of bargain one is finding. Stock was trading at 70% discount. Obviously it was shopping time when you find such discounts in market. 

I haven’t revealed the name of the company, but just by looking at this figure isn’t the company looking appealing to you. Even if we have to buy this company by taking a loan of ₹ 76.22 crores we all are ready to do that, no one is going to ask what is the business or what is its profit margin as we all are noticing that just after buying the business, I am getting a value which is much higher than my total investment. If that is the scenario, buying some shares of this company makes sense. 

But take a look at these assets that company has as quoted investments :

All these are liquid investments in good businesses of listed companies. What is more interesting is looking at FY2017 numbers recently published by company on 12th July, 2017.

In FY17 Annual report, the value of Quoted Investments is ₹ 282.30 Cr. As per today's close on 24th July, 2017 stock closed at ₹ 406. Till now the company is looking good by just numbers, we don’t know what the name of the company is, we even don’t have any idea about the business of the company, but yes we all are eager to buy and hold this in our portfolio. 

Ok! So let me unveil the name of the company. The company is DHUNSERI INVESTMENTS LTD.

Now if we see the MCAP as per today's close = ₹406.4*.60972 = ₹ 247.79 Cr. Even at current price stock is trading at 13.93% discount i.e., 282.30 Cr > 247.79 Cr. Clearly, it is still under priced.

More interesting part is when we look at the numbers of consolidated balance sheet.   

If we see the consolidated figure, it is 725.82 Cr. Which means even at current MCAP of 247.79 Cr the company is trading at quite undervalued valuations. Stock is trading at 34.14% which is 65.86% discount.

Other way of looking at these numbers are by finding the cash bargain price. Now let see those calculations.

a) When I bought the stock on 29th Sep, 2016 : Stock Price was ₹ 125/-

But the price as per quoted investments should have been ₹249.17/.60972 = ₹408.66/-

Clearly, discount of 69.41% was available. It clearly states that stock was available at dirt cheap valuations. It was trading 3.26 times lower than the price as per quoted investments.

b) If we see today, the price is ₹ 406/- already. But as per FY 2017 numbers, the value of quoted investments are ₹282.30 Cr. So the effective price should come at ₹282.30/.60972 = 463/-. So even now the stock is available at 13.93% discount.

c) If we take the consolidated value, the price comes at ₹725.82/.60972 = ₹1190.4/-. Hence, effectively stock is trading at 34.14% of actual price or 65.86% discount.

2.   Understanding how a Business Analyst would see this company

Let’s look at this company as a business analyst. A Business Analyst does not value the company, but he tries to find out whether the business is great or not. 

Dhunseri Investments Ltd is a holding company, means it is kind of mutual fund which makes investments in stocks of other companies and hold them to make profit.   

The company is able to maintain steady operating profit margin & net profit margin. In FY16 it's NPM was 53.22%. Even in FY17, company's NPM is 86.70% even though one might see sales decline on YOY basis but that is not a concern as company has decided to hold onto their investments.

Let also see the reason behind high NPM. As this is because of high capital turnover ratio.

Capital turnover =

Let check Book Value per share  - This suggests that if company gets liquidated today, what I’ll be entitled of getting.   

Book Value Per Share = Shareholders Fund/No. of o/s Shares

So, in FY16 Dhunseri BVPS was = (6.10+244.93)/.60972 = ₹ 411.70/-. So at ₹125 it was available at .3036 times of book value.

For FY17, BVPS = (6.10+257.96)/.60972 = ₹433.08/-. Hence, even now the stock is available at .94 times of BV. Company has certainly enjoyed the re-rating since we picked up the stock. Going forward, this re-rating can be a good sign. As company PE will increase & also looking at consistent increase in EPS; overall price can increase further.

Another key point on top of all this is something which we can't see. As what we see is not important, but what we don't see is more important. Dhunseri is a debt free business generating average return on capital employed for last 5 years of 682.91%. Company is generating CROIC of 1095.08% with nearly negative to no working capital required. The company is doing business on OPM(Other People Money). One of the great aspects of business is doing business on customer funded approach. Dhunseri is able to transform that while doing business. Company is creating assets on OPM. Excellent sign for a business.

3. Understanding Ben Graham Value/Number

Benjamin Graham was a British-born American investor, economist, and professor. He is widely known as the "father of value investing," and wrote two of the founding texts in neoclassical investing: Security Analysis (1934) with David Dodd, and The Intelligent Investor (1949).

What is the 'Graham Number'

The Graham number is a figure that measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in. The formula is as follows:

It is used as a general test when trying to identify stocks that are currently selling for a good price. The 22.5 is included in the number to account for Graham's belief that the price to earnings ratio should not be over 15 and the price to book ratio should not be over 1.5 (15 x 1.5 = 22.5).

Graham Value on 29th Sep, 2016 was = (22.5*28.21*411.70)^(1/2) = ₹ 511.20/-

Interesting, the company was available at ₹125 per share. So it was trading .2445 times of GV. Which was at 75.55% discount to Graham Value.

4. Understanding Old Fashioned Banker

Dhunseri Investment is a debt free business. Their are bankers who are quite strict while giving loans to businesses and would be quite conservative while lending money. Let's say if Dhunseri decides to borrow money from the bank, how much leverage can it get on it's balance sheet.

Company's EBITDA was 18.81 Cr. in FY16. A conservative banker would not lend more than 1/3 against the EBITDA. This means that the interest amount should not be more than 1/3rd of the EBITDA of any company, now this is very safe practice and companies generally get the higher amount of loan, but let’s analyse playing very safe.  

Interest that can be served easily by Dhunseri = 18.81/3 = 6.27 Cr

So, the amount of Loan that company can easily get is 6.27/.08 = ₹ 78.375 Cr. (Assumed if loan can be borrowed at 8% p.a.). So their would be a huge margin of safety on your loan because before your loan is in jeopardy, the earnings of Dhunseri must collapse by 67%.   

5. Understanding Hidden Loan Component Value per share

The conventional way of getting from equity value to per share value is to divide the equity value by the number of shares outstanding.

Imagine a company has outstanding only equity shares that under depression conditions are selling for less than the amount of the loans that could safely be issued against its property and earning power. In such instances the investor can obtain the margin of safety associated with a loan, plus all the chances of larger income and principal appreciation inherent in an equity share.

As we calculated that Dhunseri is generating EBITDA of 18.81 Cr a year, and even prudent banker has determined or agreed to provide a loan of ₹ 78.375 Cr to it. Now what if, instead of lending money to this business, I could buy the whole business, or parts of the business called shares, at less than debt capacity?”

IRONY, the banker who will lend Dhunseri ₹ 78.375 Cr will get only 6.27 Cr as interest whereas, equity analyst who will buy the shares can get the full company at ₹76.22 Cr (₹125*.60972). The equity will give all the chances of larger income and principal appreciation inherent in an equity share. The equity ownership is available at just ₹76.22 Cr which will enable us to get full ₹18.81 Cr instead of meagre 6.27 Cr. No wonder why we at Profit Idea & I was personally interested to buy Dhunseri Shares at ₹125 per share.   

6. Understanding Henry R. Kravis, LBO Artist approach

Henry R. Kravis (born January 6, 1944) is an American businessman. He is the co-founder of Kohlberg Kravis Roberts & Co., a private equity firm with $94.3 billion in assets as of December 31, 2013. He has an estimated net worth of $4.8 billion as of September 2015, ranked by Forbes as the 108th richest man in America and the 278th richest man in the world. He is the man who perfected the art of the leveraged buyout.

Let's put ourselves in the shoes of Henry and see what he would have done.

Let’s assume that we buy the whole company by buying all the outstanding shares by paying paying 20% premium above the ₹125 share price i.e., we need to pay ₹ 91.46 Cr (150 x .60972).

It’s time to act. Very quickly, you incorporate a company. Let’s call it “Acquirer.” You, Henry Kravis, inject Rs 91.46 Cr into that company, of which you borrow 85% or Rs 77.74 cr. The balance Rs 13.72 Cr is your money. Imagine that all shareholders of Dhunseri tender their shares to the “Acquirer.” What does the balance sheet of “Acquirer” look like after the acquisition? The cash on the asset side is replaced by a 100% ownership of Dhunseri shares. On the liability side, there is debt of Rs 77.74 Cr, and equity of Rs 13.72 Cr.

The procured amount as a loan has to be serviced interest over the years. As we saw that Old fashioned banker will easily lend us 78.375 Cr but we just need ₹ 77.74 Cr to buy all outstanding shares. Try to get the catch over here; once we buy the complete business we will definitely service interest of this loan from the proceeds of our business. Now that we have completely bought it, we can say that it is our business. The amount of interest on our loan would be Rs 6.22 Cr (77.74 x 8%) p.a. If we see our business is giving us EBITDA of Rs 18.81 Cr. So with time we can easily cater our loan and even pay a part of the principal amount, and after some duration the complete business will be ours with 100% stake.

Let’s have a look at the calculation even on steady amounts of Profit.

As we can see from the above schedule, in 8 years we will pay the full amount of loan with interest with an assumption that we will be earning profits at constant rate.

So using this method of Henry R. Kravis, we will become owners of the business in 8 years after full payment of loan with interest. With this approach, we owned a company which is worth ₹ 247.55 Cr (406 x 0.60972) by paying peanut looking price i.e., 13.72/.60972 = ₹ 22.50/-. Hence, in just 10 months it would have multiplied wealth by 18 times {Today Price ₹406/22.50}.

7.   Understanding Low PE supported by High Earnings

For Dhunseri when I bought the share, its PE was 7.27, which is quite low. But is it because of Low Earnings or Low Current Market Price. Let’s check. Company had PAT of 17.20 Cr where as the total market capitalisation of the company was just 6.10 cr. It was earning 2.82 times on it's capital. Hence, market was not valuing Dhunseri at its appropriate price. ROCE for last year is 1201.80% & ROIC is 1094.26%

8.   Understanding Altman Z score

This Ratio guides us about Financial condition of company, that whether it can pay back the debt it has or does it have any chances of filing bankruptcy.

Score below 1.1                     -         Company is near Bankruptcy

Score between 1.1 – 2.6        -          Grey area chances are there of improving or even downgrading

Score above 2.6                     -          Condition is good (Green Signal)

The Altman Z score of Dhunseri Investments is 182.90. So no chances of Bankruptcy.      

9.   Promoter Holding

Promoter Holding Abv 60-70% is a good sign. In case of Dhunseri, we can see that promoter holding is 74.95%, that suggests that owner has full faith over his business and he is not disposing off his shares to general public.

Owner is sitting at maximum Percentage of share holding, suggesting his full trust over the business the company is doing.

10. Understanding Hidden Dividend Value Approach

If a company pays a dividend then on ex-dividend date its value will simply fall by the amount of the dividend paid. MM theory on dividend further states that investors should be indifferent between dividends and capital gains because what they get by way of dividends, they will lose by way a decline in the market value of their shares. And if a firm does not pay a dividend, they will have equivalent capital gains on the stock.

Well, let’s apply this “theory” to Dhunseri. If Dhunseri’s stock price before the dividend announcement was ₹ 125 per share, then after the payment of ₹ 200 per share of dividend, its stock price should become negative ₹ 75! Is that possible? Can stock prices be negative? Of course not. Ok, lets grant MM this. Let’s say since the price can’t be negative, but because MM on dividends is holy grail, we have to grant to MM that the stock price of Dhunseri post dividend of ₹ 200 will go to zero! What?

How can this be? Let’s just do the math again.   

Logically, the value of any share cannot go below zero or cannot be negative, and if by giving that special dividend if the price of Dhunseri reaches Rs 0, with quoted investments worth ₹ 247.17 Cr in Balance sheet and a EBITDA of ₹ 18.81 Cr, buying that stock for free isn’t a bad deal at all.

If Dhunseri has to give ₹200 as dividend, it would need ₹200*.60972 = 121.94 Cr. Let sell part of quoted investments worth ₹121.94 Cr. So we would be left with ₹ 247.17 - 121.94 = ₹ 125.23 Cr. Can a company having 125.23 Cr of quoted investments and business generating EBITDA of 18.81 Cr be valued at zero. So even after paying ₹200 dividend, the value of stock should be ₹125.23/.60972 = ₹ 205.38. So buying at a price of ₹125 was such a steal. Isn't it :)

11. Understanding Hidden Share Repurchase Value

You are feeling angry at the market and you are feeling bold. You know your company’s stock is worth a lot more than its current price of ₹ 125. You announce a buyback at ₹ 250 per share!

What? Are you crazy? That’s double the current price.

Lets find out by doing the math. How many shares of the company can be retired at ₹ 250 per share by using quoted investments of ₹ 247.17 Cr. Multiply ₹ 250 by 50% shares outstanding i.e., (.60972*.50) = .30486 Cr or 30.486 lac. You would need ₹76.22 Cr to implement the buyback.

Let’s imagine that you go and implement this bold buyback plan and assume that it’s executed successfully. What will be the consequences?

The company would be left with only 0.30486 Cr shares. We would still be having ₹247.17 - 76.22 Cr = 170.96 Cr of our investments. The company would still possess the operating business capable of delivering annual average operating cash flow of Rs 4.48 Cr & EBITDA of 18.81*.6916(as 30.84% of our investments are consumed) = ₹13 Cr. Divide this by the remaining 170.96 Cr by 0.30486 Cr shares outstanding and you get the price of ₹ 560 per share! Not a Bad Deal!

To Conclude,

Dhunseri is clearly showing it outperformance over SENSEX, S&P BSE Small Cap and Financial Services Index. On all the parameters we studied Dhunseri Investments, it looked that we shall buy this stock and keep with us in our portfolio, which we did on 29th September 2016. At the current price of ₹ 406, precisely 3.25 times of our buying price in mere 10 months on investment. But remember as we discussed in starting of this case, Patience is the key of making money. Our target for such intensive study was not to buy a stock @₹125 and then sell it at @₹406 or @₹500. But the objective is to see this stock rising & becoming many bagger. If you see the actual money made is their and that will be called as a multi bagger. 

Thank you so much for reading the case & analysis. Do post your feedback & learning that you got from our writing. Special thanks to Dev for helping me in compiling what I taught in class. Proud to have students like Dev at Profit Idea.