Dealing with Cash Bargains

One of Graham's famous theme was Cash Bargain. When market cap of company is less than net cash (cash minus debt), then essentially everything ( fixed assets, working capital, management, intangibles) is available for free. This strange situation is what he used to call as cash bargain.

But those times and location were different. Such companies were take-over and/or liquidation candidates and shareholders used to receive cash after liquidation (worst case scenario). But this is India.
Hardly any take-overs attempts (Exception- GESCO Corp. in 2000.). Hardly any liquidation..

So, we need to be skeptical even with cash bargains. Lets try to see the negatives. Why should a company deserves to be available at less than cash-

1. Cash is only on the books. Actual availability is uncertain. Market is basically saying- Show me the money!!!
2. Management is fraud. They are taking away the cash from the company.
3. Business is burning cash & is expected to burn cash for a long long time.
4. Cash in balance sheet is not cash of the business but is customer's cash (basically get money from customers in advance while giving to suppliers sometime later)
5. If company can't invest the cash to earn returns at rate more than WACC, then also they deserve to be valued less than cash. (They are not returning cash & are not investing it properly, either)

Plz share if i am missing something and there is some other logical reason for cash bargains!!

PS- As I write this, there are a few cash bargains that are available & I am trying to find whether they deserve to be cash bargains or not!! 

Sensex & Its Ingredients- Cause & Effect Relationship

Sensex and CNX Nifty are two of the most followed things in India. A lot of people actually know Sensex is at 20,000 (or 18,000) without knowing what is Sensex, what is the meaning of 20,000. Even there are people who think today Sensex has fallen, so all stocks have fallen today.
For these kinda people, I have one line to say- " Revise cause-effect relationship from your high school English book. Think whether Sensex is the cause or the effect."

Clearly, fall (or rise) in Sensex is the effect of fall (or rise) in prices of its 30 ingredients & not vice-versa.

But then nothing is black & white. Sometimes, Sensex becomes the cause... movement in underlying stock prices becomes the effect. Read This.

Think now... A lot of money follows Index funds... A number of MFs have restrictions to buy & sell only Index stocks. All these will have to sell RComm & RInfra and buy Sun Pharma & CIL.
Artificially high demand for Sun Pharma & CIL and low demand for RComm & RInfra. So Sun & CIL should go up till Aug 8th. While RComm & RInfra could well become bargains by Aug 8th.

PS- This is going to be my first experience of this kinda price behaviour. Reality may be different than my thinking. Lets observe!

Sezal Glass & Debt pay-down Theme

The developments in Sezal Glass makes an interesting case (if your own money is not involved). Sezal glass is in the business of processing glass since year 2000. It was making profits (small though) in the business. Then, they decided to manufacture glass. Came first indigenous float glass plant. Since it a was capital intensive plan, huge debt and IPO also came with it. CRISIL assigned a rating of 1/5 to this IPO. Read here.
Management, however, was highly optimistic of the business plan (Over-confidence bias, as it turned out).

Result- Huge debt and competition led to losses.. unsustainable losses. And hence, management is now selling float glass business for 686 crs which will make Sezal a debt free company with some free investable cash. This catalyst brings Graham's debt pay-down theme to the mind... Hugely leveraged company becoming debt free.. no interest cost will increase EPS.. & hence stock price. Lets see the positives and negatives of this situation.

POSITIVES-

• Since 2000 till last year, company was in positive. Hence, management seems to have technical know-how to operate in this business.
• After paying all the debt, cash left should be about 45 crs (686 crs from selling float business, total debt 623 crs, cash 2 crs). Market cap is 126 crs. Liquidation value of left over business should definately be more than 100 crs. Liquidation value should provide some comfort to the investor.
• Just 3 months ago, 2 crs shares have been alloted on preferential basis at Rs 10/- per share. With current stock price at Rs 4, some safety is there.

NEGATIVES-

• In current year, company has made operating losses even in left over business. So, if this situation prevails, even debt free nature won't help much.
• Even in previous years, company was earning average PAT of 2-3 crs only with poor ROCE. Even on net market cap basis (market cap- cash), PE is very high.
• Industry is highly competitive with MNCs having big brands. The possibility of some adverse development for Sezal in the future can't be ruled out.
• Insider selling in recent times doesn't gives much confidence either.

So, I think, risk reward ratio is not good in this case and hence I would like to give this a pass. Sorry Graham,don't mind... will apply your theme in some other situation in the future. :-}

When can I win?

As investors, we try to beat the market. But the big question is can we win?

I (and you) can consider stock market as a game... a game between me and Mr. Market. In this game, market is powerful, experienced, knowledgeable (mostly) and has tons of money while I am inexperienced, have little knowledge and have only 'thode se paise'. So how I can win? Lets see how and when case by case.

Case I. Market knows, I don't know
Welcome to the world, my child!!!
For a starter, most of the situations fall under this category.... outside one's circle of competence. Market knows the business (has its own analysts, investors) and correctly values it. I have no idea. So can I win? No, I can't. The best strategy in this situation is to not lose! Just get some experience and expand one's circle of competence over time.

Case II. Market knows, I know
Child is growing!!!
Well there are cases when I can clearly say that I can make money in this. But then market also knows this and hence won't allow me to get huge returns in this case. Let me clarify with an example. I read this announcement. Delisting... Minimum support price Rs 178.5... Market price on that day was Rs 160. So clearly there was negligible downside risk. So, I know this. Time to act. But, hey, wait a minute. Even market knows this. So, not much money, boss. Result- Upper circuit in the stock for 3 consecutive days and  price of Rs200 is on the cards now.

Case III. No one knows
Welcome to the world of UU!!!
There are cases when no one knows due to uncertainties involved. Sold the business.. no one knows what ll company do with cash; did some M&A deal... now what..synergy or realization of stupidity?; building huge and huge assets... will (and when) the revenues come? I can win in this situation with margin of safety and diversification (and decent luck).

Case IV. I know more than the market
Welcome to my world, Mr Market!!!
Here is your chance to win. Load it up, sit back and relax. Though it is easier said than done. But a few opportunities in this category over a lifetime ll make anyone super rich.