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-
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. :-}
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.
- 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. :-}
