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Teledata – Proves my low P/E idea wrong!

A reader commented on my Mudra post:

Deepak..nice analysis. I remember your succesful calls like BHEL and after a long, long time, you have given a stock idea. What is important is that – low p/e, growth, cash – all these are there for dime a dozen shares in BSE. for eg,.the above given Teledata, I had to exit at 17, after buying at 60. The problem seems to be – since the list of low p/e, decent growth stocks are high, we have to pick winners – given our limited capital. I don’t have Bufffet style capital, obviosuly and I can not spread. Given that and also the fact that mid caps and small caps take 3 times the time to bounce, as opposed to large – I feel that Mudra 3 year time frame is realistic. But believe me, there are dozens out there of this nature and I will be interested in far more exciting ones than Mudra, where the visibility is till low.

Teledata is interesting. The company quoted at a very low P/E, at Rs. 60 or so, in November 2007. Since then it has demerged the marine, technology and shipping operations into separate businesses, for which existing shareholders have been given shares. The base teledata share is now quoting at Rs. 19. This, for a company that has done Rs. 4.7 on EPS last quarter. That’s a P/E of less than 2 annualised.

Now these demerged entities are yet to be listed, and only on their listing will we find out how much value was lost in the process. The idea was that each shareholder of Teledata got 1 share of the demerged entities for every two shares they held. (Sirius and Teledata Marine will be merged) So the two new entities must list for a total of Rs. 80 together to make up the difference.

There have been questions about the management and also that operators run this stock, which is why it seems to have run so low. Quality of management is important to understand how companies are valued – the more transparent and open they are, the better the valuation. I don’t have any personal experience with the management but there is some fear that they owned a very small percentage (<15%) which may correct to a higher value as the demerger progresses. (Already Teledata shows a 25% promoter ownership).

Other issues: Low dividend (50 paise per share for a high earning.) They use the money for acquisitions of which there are quite a few in the recent past. These acquisitions have been EPS accretive, but the P/E has contracted.

There are some repeated auditor notes on taxes not being deducted or accounted for, about them booking sales when only agents have purchased (i.e. agents could return them and reverse the entry) but management says that is the way it is and no returns will be accepted. I doubt that is true, so there is some danger here.

EPS growth is not huge – but still around 10-20% at this point. And they have a huge number of GDRs out there, and are out to dilute another 500 cr. through QIP/FCCBs. This may be a price trigger.

After all this analysis – what do we have? A growing company with lots of profits, yet being valued at lower P/E as time goes by! It shows that buying purely on P/E can be very very wrong. My Mudra idea wasn’t a pure P/E post but I had mentioned that I didn’t quite see the risk of further P/E contraction. But looking at Teledata it is indeed possible for a low P/E to become EVEN lower!

That is a risk with Mudra, but I think it’s in a slightly different league and doesn’t have the management issues or accounting issues that seem to be a problem with Teledata. The risk remains though, and Teledata is one stock where there is a serious problem with pricing. Let their demerged entities list and we will see exactly how much further the P/E has contracted – hopefully there will be more clarity in the value there. What if, after demerging, value is “unlocked” in the subsediaries? It might actually be profitable for the people who held before the demerger.

In all the conclusion is – don’t go on P/E alone. Lots of factors may contribute to the price of a share and you shouldn’t jump on “undervalued” without going through all the various options available. I will list the options in a separate post.

  • Shankar says:

    >Teledata doesnt show any signs of being a compliant, transparent company. There have been atleast 5-6 occassions where the company has been knocked up for some creative accounting practices.

    One instance I remember is where, Teledata used to record development costs as a deferred expense and move it to the balance sheet. None of the Indian IT companies do that .. and for good reason. The software development costs are REAL, OPERATING costs which contribute towards the operating profit of the company. Only non-core or capex based costs should ideally move to the balance sheet which is not the case with Teledata.

    You can never be happy playing in a muddy pool of diamonds. Thats my assessment of Teledata (or atleast their book-keeping)

    Warm Regards
    Shankar
    http://scrip-tures.blogspot.com

  • Madhavan says:

    >Have you had a look at Prithvi Info? At 2.8 PE, it looks spectacularly cheap, discounting US clients, weak dollar, stagnant EPS and a deferred buyback program. As beaten down as it can get, which is why it is so tempting.