- Wealth PMS
After a long time I’ve found something worth buying. A company with a 3.9 P/E is very interesting, though there are risks. But note that I am the kind of guy who is willing to lose money so if you want a “safe” investment please consider a fixed deposit instead.
So Mudra Lifestyle is a garment manufacturer that has been beaten down to death, or nearly so. At the current price of Rs. 36.1, the company quotes at a P/E of around 4. But why is this company interesting?
Solid growth: EPS on 06-07 was about 6.3. The EPS in the first nine months of 07-08 is already Rs. 6.5, and probably will reach Rs. 9 for the year. They announced in December of a 35 crore order set to be completed in four months, that might be accounted for in the current quarter or the next. On an equity of 3.6 cr. shares, and average margins of 10-12%, this set of orders itself should yield a Rs. 1 EPS.
Promoter Interest: The promoters have just been granted 30 lakh warrants at Rs. 120 per share. Remember that the IPO was at Rs. 80 and the price has been to about 110 since then, but the promoters still decided to take on warrants at a high price. The warrants themselves will yield Rs. 36 cr. when subscribed to. Additionally, the company secretary and CFO have bought shares in the market, and have not sold.
Lower than book value: According to some sites, the book value of Mudra is Rs. 80 per share. While I don’t know if this plays a part in this kind of business (of custom orders etc.) it is a good metric to know that if the business goes bankrupt today you can get more than the share price by selling assets. At least in theory! In practise this is not a fantastic metric, but I have seen how it has really boomed in the case of Sintex, another textile play. Sintex, in 2003 was quoting at Rs. 75 (Rs. 15 after adjusting for splits) which was below its book value. After being beaten up a lot, it is at Rs. 300 today, a 2000% return in four years! (and it was Rs. 500 recently)
Cashola: Yes, this company seems to have oodles of cash. They have used just 9 cr. of the 86 cr. IPO proceeds, all towards expenses. (You see how Investment bankers get rich? More than 10% of the issue!) They currently have 83 cr.in the bank according to their Jan announcement. That itself is a good Rs. 23 per share.
So what I would pay for this business is the price of Rs. 36, of which Rs. 23 is cash. They do have Rs. 71 cr. of loans, but most of that has assets behind it. At a P/E of 4 I am not quite afraid of P/E contraction, and the company is growing at around 33% on EPS.
There must be something wrong though. What?
The textile industry has been hosed nearly all of last year, with the declining dollar. Mudra isn’t so reliant on exports so it is less affected, and it may be the white knight of the sector. Still, the sector has been impacted much, and perhaps there will be news we haven’t yet heard about. At a P/E of 4, I would need Mudra’s growth to reverse massively to make an impact – I don’t quite see that as a huge risk right now.
I do not know if there are other risks like currency risk, derivative risk etc. But I can’t predict all of that right now, we have to work with what is known.
Overall world slowdown is a concern, but the cash base allows it to make acquisitions and grow in turbulent times. Having a cushion is important.
Finally the concern is that the market will never recognise this as a good buy. There isn’t much institutional interest, with no mutual funds holding it and some FIIs only (about 10% being held by institutions). But that just means it’s undiscovered, and I am happy to take the risk earlier.
This is a downright buy for me. I am holding for a 100% return within three years. Why three? Because the current market conditions don’t allow a one year story. If I do my 100% earlier I might exit. My stop loss is a further 25% down from here, at Rs. 27.
Disclosure: I own this stock, it is about 10% of my portfolio now. (Why would I write all this about a stock and not buy it?)