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Stocks

The Majesco Experimental Closes Today, Ending Weeks of Upper Circuit Agony

Majesco-scaled.jpg

It’s 12% in three months, folks. On what was effectively a fixed-income-ish trade – relatively low risk.

The story: Majesco. 

But first read: A special situation only for those that don’t pay tax.

Gimme a synopsis

Okay.

  1. Majesco India (listed) owned Majesco US (listed), and nearly nothing else.
  2. Majesco India sold Majesco US for a truckload of money.
  3. That truckload worked out to over Rs. 1000 per share after tax.
  4. The company promised it would pay out nearly all of it as dividend, On December 25.
  5. The stock was at Rs. 950 in November 2020.
  6. So the trade was: buy Majesco, get dividend, sell the remaining, and you should get a very good return (compared to other fixed income investments)

But there was a catch: Dividends are taxed. So getting a fat dividend would just see those insane income taxes- which can be 30% to 43%. So we specified: don’t do this if your taxes are very high already.

What Happened?

Majesco gave a dividend of Rs. 974. Lesser than we thought, but still.

Then, the shares listed back – they started at around Rs. 13, and then saw upper circuits continuously.

Why? Because the company still has Rs. 100 cr. of cash (roughly Rs. 34 per share) and then some land in Mahape, Navi Mumbai, which is worth more than zero. So the share price kept going up, with a 5% circuit.

Action: Sell at Rs. 91.65

We suggest a sell on the remaining shares after agonizing on the decision for days on Slack. I mean if the share was supposed to be sold at 35 or so, then why shouldn’t we at 80? At 83?

The Slack channels kept us going – you asked us to think seriously about why we should have exited. And we did. So here’s the justification.

Note: Anyone can justify anything, given enough rope and an excel sheet.

Justifying the exit price

Look, this is a momentum market and it makes no sense to exit anything. However, because we feel the need to use our advanced and highly trained skills on valuation, it is also important to create a framework beyond which an exit is justified. (Bonus points if you can make out I’m pursuing an MBA)

But let’s value Majesco as a sum of the parts

  • The company’s entire job now is to put out press releases.
  • No, I’m serious, they have nothing to do, so they’ll do something, but that doesn’t means they have something to do.
  • They sold Majesco to the US entity for which they have been paid.
  • They have about 100 cr. of cash remaining after they paid out the dividend.
  • They have about 3 cr. shares in total. 
  • They own a piece of land in Mahape. This is about 120,000 square feet. They are expanding this to 160,000 sq. ft.
  • Looking online, commercial property in Mahape costs between Rs. 10,000 and Rs. 15,000 per square feet.
  • So on average, you might say 12,500 per square foot, so the value of the property is around Rs. 200 cr.
  • But there’s taxes when you sell a property – about 20%. And there’s an acquisition cost etc. to offset, but let’s just say they make only 180 cr. post tax on the property
  • Add them up: 100 cr cash + 180 cr. property = Rs. 280 cr.
  • For about 3 cr. shares, this translates to about Rs. 96 per share

Now you start working into the reality matrix:

  • The excel sheet tells you Rs. 96 per share
  • You might have to wait a  year to get it, so that waiting is going to cost you some interest.
  • Basically Rs. 96 one year down the line = something lower than that today.
  • And then there is the fact that Deepak is just justifying this using fancy numbers and come on, there’s no way that land will sell for that much etc. etc.
  • So you have to adjust for an embellishment factor (thank you MBA)
  • And boss, someone’s willing to pay you Rs. 91.65 today

“Maal lao” is a phrase that comes to mind, which is the Hindi-language answer to “Show me the money”. Effectively, “bring it home”.

So yes, we sold.

The “Hisaab-Kitaab”

We bought at Rs. 950.

We got a Rs. 974 dividend.

We sold at Rs. 91.65.

Effectively, we received Rs. 1065.

That’s a profit of Rs. 115 – or about 12% in three months.

Oh, and this helped an NRI do something spectacular

You know that Indian regulations restrict NRIs from taking out money from India easily. They can, at max, do $1 million a year, apparently.

There’s an exception: if you actually “earn” that money as current income (not capital gains) then you can take all of that out after paying the taxes on it.

Turns out that dividends are taxed favourably for NRIs – they pay only 5% to 15% tax in certain jurisdictions, because of treaties India has signed. (UK and Hong Kong have such treaties)

It appears that an NRI was able to use this route to legally earn this Rs. 974 per share as “current” income, and thus transfer a figure larger than $1 million over. Entirely legal, and with only a 15% tax rate – any other mechanism would have involved much higher tax rates.

This was an unintended consequence, and entirely legal. Just saying because sometimes you just have to try different things and more doors open up on the way.

We’ll find more interesting things too. Subscribe to Capitamind Premium and join #experimentals on Slack. If you are a member, you’ll find the experimentals at https://app.capitalmind.in/experimentals/

 


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