Infinite Comp: Value Investors' Delight

What would a value investor ask from his picks (at the time of deciding whether to buy or not)?

1) UNDERVALUATION

He would want his picks to be undervalued- i.e market price to be much less than the value of the stock. For a 100 Rs value, he would want market price to be Rs 40-50 or less.

2) CATALYST
To bring market price to intrinsic value, there should be some catalyst (in the future) to trigger the change.
Just because its very difficult to tell when & how the catalyst will come, value investors practice diversification. And in absence of that catalyst, we will end only with Value Traps (cheap stocks which will remain forever cheap).

Let me explain with a live example- Lets say I buy an NBFC stock selling at Rs 27/- each. Now, the book value is Rs 140/- per share. The business is making Rs 9-10 EPS per year. So, from this knowledge, with a P/B of 0.2 & P/E of 3, the stock seems undervalued. What if I say two more things-
1) The business did a buyback 2 years back at Rs 133 per share.
2) The promoters have injected their own money into the business at Rs 45 per share recently.

So this satisfies my criteria 1- It is undervalued. I will easily value it at 60-70 Rs per share.
But for it to move to its true value, it will need a catalyst- Earnings jump/ Dividend/ Buyback/ More visibility.
Till then it will remain undervalued & the opportunity cost will hurt me.

What if a stock satisfies both the criteria- Undervaluation & a Visible Catalyst?
That will be the time to say ALL IN for a poker player, I guess.

Years ago, Prof Bakshi found a hugely undervalued stock which he loaded & then he became his own catalyst. I guess with catalyst in sight you can afford to do that- ALL IN !!!  

Here is an undervalued business which comes with its own catalyst- Infinite Comp Solutions

Why is it Undervalued?
At 120 Rs per share, the stock is selling at 4.2 times FY12 earnings. The business is asset light, generates enough free cash flows & management has given a 20% growth guidance for FY13. Insiders are buying the shares from the open market. 1Q13 results were good.
In nutshell, a 20% growing business having good ROCE is cheap at 4 PE.

Where is the Catalyst?
The catalyst is the Dividend. The management has clearly announced a policy of giving 30% of net profits to shareholders as dividends.

At an EPS of 33-34 Rs for FY13, that would be Rs 10 as dividend per share. The dividend yield works out to be a whopping 8.33%. {Remember the business is doing well, management is positive about the business, insiders are buying.}

If one can find 10-15 dividend yields of this quality, who needs a Fixed Deposit???

Risks- The company caters majorly to Telecom sector & US based clients. If clients' business faces a slowdown, Infinite will feel the heat. However, risks are overhyped at current price, in my view.

Fair Value- I would value it at around Rs 230-260 (Rs 33 EPS * 7-8 PE). Hence, I expect it to double in next 4-5 quarters.

Biases that may have affected my thought process- Endowment Bias, Confirmation Bias. So, please do your own due-diligence.