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SmartLink Declares Rs. 32 Dividend (Rs. 84 share)

Smartlink, which recently sold it’s Digilink unit to Schneider for Rs. 503 cr, declares a dividend of Rs. 32 per share in their board meeting today. I’ve refered to the stock earlier as one that’s interesting because it has 2x more cash than its market cap.

See full post: SmartLink: Cash 2x of MarketCap (Live)

From the BSE:

Smartlink Network Systems Ltd has informed BSE that the Board of Directors of the Company at its meeting held on May 23, 2011, inter alia, has recommended a Dividend of Rs. 2/- per equity share of face value of Rs. 2/- each (i.e. 100%) for the financial year 2010-11.
The Board of Director has also Declared a Special Interim Dividend of Rs. 30/- per equity share of face value of Rs. 2/- each (i.e. 1500%).

This is hugely interesting because the price of the share is Rs. 84 today. The price might shoot up by Rs. 32 tomorrow to 116, but let’s wait and see.

Stock Falls 12%

Interestingly, the stock fell 12% today. I wasn’t sure in the morning if it was a head fake. (that is, some people feed the wrong information by taking down the price big time, but in reality, it turns out like great news)

I’m kicking myself for not buying. But this is not going to stop here; it will go much much higher, I think.

And it seems one company – Asian Markets Securities Pvt. Ltd. – sold 195,000 shares on the BSE (and anoteher 190,000 shares on the NSE for around Rs. 86.

BSE Block Deals

Selling nearly 400K shares at 86 is about 3.4 crores; the volumes in SmartLink were around 22 cr. (BSE+NSE). Of this the delivery volumes in Smartlink were 4 cr. on the NSE and 3.2 cr. on the BSE. That means this transaction was 15% of the total turnover, and more than 50% of the delivery turnover on the exchange. Obviously the stock will fall. I guess the seller may not be very happy on hearing this news.

Is it still interesting?

The stock’s at 84. Assume it doesn’t move at all. Then you get Rs. 32 as dividend, and the stock will fall to Rs. 52. With 3 cr. shares outstanding, that puts the company’s market cap at Rs. 156 cr.

Of the 503 cr. cash received, they’ll pay out about 20% in taxes – about 100 cr. With the 95 cr. or so that they have in the bank they’ll still have about 500 cr. in the books. They’ll pay out 90 cr. as dividend, and another 15 cr. as dividend taxes, so they’ll still be left with about 395 cr.

Then look at their current businesses. According to the results, the company has two sets of operations – the “discontinuing” operations (whatever’s been sold) and the “continuing” operations. They need to bifurcate results on release. The current release says that for FY2011, the continuing operations had

Revenues: 20.11 cr. (up from 18.05 cr. in FY10)

Loss: (4.94 cr.) versus (9.26 cr.) in FY10.

So they have lower losses and higher revenues. That is good and the cash they have can help turn the business into a profitable one.

Even if they did nothing with the cash they are likely to earn about 7% post-tax yield, which is at least 26 cr. – if they make another 5 cr. in losses, they’ll still have 21 cr. in profits. That’s Rs. 7 in EPS, for which, remember, the stock’s at Rs. 52 and the cash is still with the company. This is if nothing changes.

What if the stock goes up to 116?

Then it’ll fall to Rs. 84 post dividend (Jun 1). That’s a market cap of Rs. 250 cr. for a company that has 395 cr. in the bank. With the only risk of promoter siphoning out money (which I don’t think is happening in this case at the moment), this is still a screaming buy.

And you won’t get any competition from mutual funds or FIIs. They have no enthu for stocks that have only 250 cr. in market cap. For them buying even 10 cr. worth of shares will move the stock price tremendously, so they won’t even bother. But you and I, we don’t have 10 cr. to move this market. We can buy a few thousands to a few lakhs worth, and we’ll exhaust the 10% of our portfolio that we allocate to any one stock. When the funds and FIIs find out about this stock, it’ll be time to book profits.

Disclosure

Long the stock. I’m biased. Please help me by telling me why I’m being stupid.

  • kunal parikh says:

    Well, great pick.Congratulations.

  • piyush modi says:

    okay so this reminds of a time when a colleague, starts investing in equities, reads up & learns various fundaes, comes across PE ratio, and then one day someone gives him a tip. He looks at the fundamentals, PE is 1.2 or something. He becomes very very excited, and buys a lot. Some time later, a group of us are discussing this, and on hearing this I ask him to run a screener in bloomberg for PE less than 2. Threw up hundreds of results. Does that mean all are awesome buys. Same is the case here. Do a simple screener in bloomberg for companies trading at less than book value, or less than half book value, or even better, less than a third book value. One can even throw in a threshold for market cap. You will be surprised at the number of results that show up.
    I’d say if the management comes out and says its gonna pay everything out as dividend, then its a screaming buy, else I really wouldn’t know how it would be different from all the other results the screener throws up.

    • deepakshenoy says:

      Piyush: P/E less than 2, yeah there are tons. And trading at < book also there are tons. But I don't believe book value. Because companies in India can charge whatever they want as book value, for the most part. For example, certain companies decide to carry investments in downstream subsidiaries at cost, even though auditors have noted that there has been a dimunition in value. Book is distortive also because of FCCB treatments or networth calculations or even lax depreciation. I'd take cash minus debt as a consideration if there is a controlled risk of promoters doing something shady.

      • CC says:

        Sorry for asking a naive question. If a company is trading for less than book then won’t it be simply acquired for its assets ? How come there are so many companies trading under book ?

        • Good question. Multiple reasons:
          * Can’t just buy without raising the price like crazy. Free float may not be enough.
          * Regulations restrict purchase of >15% stock by any entity without an open offer. That can be expensive.
          * If there is a hostile acquisition attempt, management may try to siphon off the assets – it’s not very difficult in India. (For cash, simply merge a promoter owned company, or pay obscene rents for promoter owned property etc.)
          * “book” is not reliable in most cases. An investment in a subsidiary may in book at cost, but in reality it could have been impaired or money could be lost. There is absolutely no reliability in Book value, unless it’s just cash (even that needs an auditor verification)

  • Gaurav says:

    I am also biased and an investor here, but Smartlink seems to be a good buy. I think the main concern of the people was promoter siphoning off all the money – as is typical of a lot of small/mid-caps. In this case it doesn’t seem to be happening and this should give more confidence. Hopefully the stock will rise up tomorrow.
    Anyway, great site!

  • DJ says:

    “The price might shoot up by Rs. 32 tomorrow to 116”
    Huh? Why should that happen?

    • Gaurav says:

      I think his logic is like this:
      Cash/share > stock price – the primary reason is that investors did not believe the company will give any significant cash payout to the minority investors.
      Dividend announced is Rs30+2/share – the extra Rs30 is an incremental one-time value which the shareholders likely didn’t expect (and hence the discount).
      So since the shareholders got and extra 30 bucks, stock price will likely increase by this amount and then go down but the same amount, at least theoretically. (Very high, one-time dividends should reduce the market cap, recurring dividends, may/may not have that effect).
      Anyway, he also considers the case where the dividend expectation was already incorporated in the price of Rs84, which will likely reduce the stock by the price of the dividends (special one time dividend IMO).

      • DJ says:

        I don’t agree with your logic, I don’t understand it either. I think what the dividend does is show the investors that the company indeed has the money. That might improve the impression among investors but I don’t see why the stock price has to increase by the amount of the dividend. It may increase (more or less than the dividend) because company profile has improved with the dividend announcement.

        • deepakshenoy says:

          DJ, it always happens that after the announcement of dividend the stock goes up. Check out Hero Honda when it declared the special dividend of Rs. 80. Or the Infy special dividend. If there was a june future (this stock is not traded in the futures markets) the june future would have fallen to Stock price minus 32 immediately.
          It could of course increase more or less, from other factors, of course.
          It went to the upper circuit at 20%, ending at 100.6. Not bad at all. Let’s see if it sustains.

        • Sandeep Chavan says:

          In fact, why should it only increase by Rs.32? Shouldn’t it increase keeping in mind so many things, few among them are:
          1. Value – At a minimum the present value (current assets – current liabilities) per share
          2. New products revenues and profits
          3. Management – Looking at dividend payout it gives a good feeling that management is good
          If #1 is higher than current market price then rest of it, as they say, is free!!

      • DJ says:

        Additional point, without much information about the company, I would view it as a pump and dump effort.

  • Siddharth says:

    Deepak,
    Like Hero Honda, this one also good find.
    Congrats for picking up some time back.

  • Sanjiv says:

    Who all are eligible to get the special dividend of Rs 32 by Smartlink ?

  • Rahul says:

    Just a curious question, what if someone would have just short selled on 30 May, just prior to going ex-dividend. Then he would have covered the short once the share is ex-dividend.
    So in Smartlink case this would have helped in almost Rs40/share profit, that too without any investment.
    Is it possible?

  • Rahul says:

    I am not very sure on how to short sell, my online account (Sharekhan), does give an option to short sell. I think, it expects the trader to cover the position by EOD, but if he defaults, then it buys the share from the auction at T+2.

  • Santhosh says:

    Hi,
    Just wanted to know when will be the dividend credited to the account ?

  • kunal parikh says:

    Hey hi, well i am following the stock after you post. I have made few observations which i would like to share.
    1. This slump sale of 90% business has made the company cash rich. But there is no clarification on what the company intends to do with the cash.
    2. I agree in theory that the company should deserve double the valuation it presently enjoys. But in reality,Mr. Market wants to value on future earnings potentiality. Till that time, it doesn’t want to change this valuation.
    3. In your blog, you mentioned the company would put its Rs.400crore in the bank. It would make the most sense. But since we don’t know what it is going to do, we will not get our moneys worth.
    4. Ex-Dividend the company’s price has gone down.
    I have bought the stock since it enjoys great margin of safety, but are we missing something? Is Graham wrong,in practice? Or should we wait for this anomaly to correct till the next quarter?

    • For Future earnings – consider that a lock in at about 7% on cash will make the company return the entire share price in earnings in about 5 years. Without doing anything special that is. Of course it could lose the money but I don’t see that as a problem either with promoters running away or with the remaining business doing that badly.
      Ex-dividend: This is not a few days pick – it’s a long long term trade. 5 years plus. It’s my first such trade after a while. so the fact that it goes up or down a little bit doesn’t bother me…
      I don’t know about Graham and all, but you have to take a call based on your assessment of promoter honesty, and of the business line they’re pursuing.

  • Saurabh Aggarwal says:

    Hello Sir , would appreciate your views on Shalimar Paints , it has risen from Rs.290 on 3 May this year to Rs.919 today.

  • kunal parikh says:

    ok, i did not know that you had such a holding period in mind. and the lock in argument about the 7% makes sense too.

  • Atul vora says:

    “This is not a few days pick – it’s a long long term trade. 5 years plus. It’s my first such trade after a while. so the fact that it goes up or down a little bit doesn’t bother me…”
    Deepak
    This means you have encounter this situation before. What was the outcome then and which was this stock and when. Why do you think market discounts cash by 50%?
    Atul

  • sathya says:

    Hi,
    aS of today smartlink is at Rs.47.15/share? Is it still worth a buy at this range? Or is it set to go lower given the market scenario?
    sathya