Rajasthan Cylinder and Containers Limited- A Brilliant case of valuation anomaly!

Rajasthan Cylinders and Containers Limited (RCCL) - Here is a relatively nondescript company of market cap 8 crore, turnover of 50+crore with some nominal profits. Its a a 40 year old company into manufacturing of LPG gas cylinder, valves , regulators and having a gas filling unit. This company was earlier listed in Calcutta and Jaipur Stock Exchange and only in last October'14 they got it listed on BSE. Before listing, in July, Promoters brought an Offer for Sales for 14% of equity to comply with 75% promoter holding requirement ( this was mostly subscribed by relatives and family members, so practically promoter group still holds above 90% in the company)

Most likely any investor is going to ignore this company on the first look because there is nothing "Exciting" in summarized financials or business/industry. But there is a lot more hidden in details if you notice the most eye-catching part in "Investments" section of Balance Sheet which is its investment of 49% stake in a group company called AGRIBIOTECH Industries Limited (ABIL).

Now, this investment is where the real fun is : This associate company , ABIL is a closely held unlisted group company (Bajoria Group) which is into spirits & Alcohol business with a 65000 KL per day licensed capacity of producing Alcohol. This company has grown its turnover from 70 crore in 2010 to 165 crore in 2015E with approximate profits of 4 crore, The brief financials of this company for the year 2010 to 2014 can be found from CARE ratings website. This company is doing bottling for one of the most successful brand of Allied distillery, Officer’s choice. Their bottling capacity is around 7000 cases per day, and distilling capacity of 65KLPD. They are one of the large producers of ENA (Natural Alcohol) and supply to all major alcohol companies like UB, Radico, Allied Distillery, Tilaknagar etc. Many brands like Jolly Rogers, Old Monk, officer’s choice bottling is done by ABIL currently. Apart from that they are largest suppliers to Country liquor in Rajasthan. Distillery ( Bulk Alcohol) being 60% of total income, 20% country liquor and rest comes from bottling.

The value of this investment can be gauged from the comparable listed companies like Associated Alcohol, Globus spirits, Pioneer Distillery etc. which are purely spirit companies with no significant brands of their own. Also based on some past deals in distillery industry (Allied distillery bought a Bengal based distillery in 2012 for 20 crore which had capacity of one fourth of ABIL ,also Allied bought a distillery in Andhra in same year for 300 crore which had roughly 3 times capacity of ABIL). Thus, on a most conservative estimate, going by the capacity of ABIL, and taking into account its rapid growth in sales & turnover, the full associate company is at least valued at 60 crore which means around 30 crore for a 49% stake.

Compare this to RCCL's own market cap of mere 8 crore which is holding 49% in this company which is doing a turnover of 165 crore and a profit of 4 crore and is worth of at least 50-60 crore market value. (Though this investment is recorded in Balance-Sheet at face value as per Accounting Standards since its not a listed/quoted investment). Also, not to forget, RCCL in itself is a 40 year old company with some mega asset like land of market value approx. 40 crore.

Now Look at the future developments which will bring this investment in ABIL in limelight and unlock the value for RCCL

• Agribiotech Industries limited (ABIL) is working on a greenfield project to set-up a new plant with a capacity of 120000 KL per day at a different location ( because as per management , no new capacity addition on existing site will be allowed because this place is in a Dark Zone and water availability will be an issue). There is a huge revenue growth potential since there is a capacity constraint in the market for bottling . Though this project is at a very initial level , once successfully completed, it will multiply the capacity by 3 times from 65KL to 185KL per day ( larger than listed Peers like Pioneeer Distillery, Assoicated Alcohol etc.) , and accordingly revenue & profits too will go up exponentially too. The size of the company itself will grow up to be too big to ignore. And certainly with that , RCCL and its 49% stake in this company will also be noticed.
  
  
• New companies act will require consolidating the accounting results of investments in associate companies. Imagine , by next year the company will have to report the proportional profits of 49% stake of its associates ABIL which is currently doing a profit of close to 4 crore. This will bring the company and its investment into limelight as investors will take notice of the company with mcap of 9 crore and investment worth over 40 crores.
  
  
• Allied distillery (Kishore Chabaria owned, the makers of Officer’s Choice Whisky – world’s largest selling Whisky) is on a buying spree to acquire bottling plants and distilleries, especially the units which do bottling for it. ( this is because there is a bottling capacity constraint in industry ) . They have acquired almost 4 distillery and bottling units of various capacities and bottling units for sums ranging 20 crores to 300 crores. If Allied distillery becomes interested in acquiring stake in ABIL too, the value of this investment will boost the RCCL valuation to 3-4 times.

• Agribiotech has its own Listing plan in next 2 years ( most likely to finance the new project for capacity addition) , if this happens, RCCL will most likely dilute its stake partially or fully and even if no stake dilution happens , the value of this investment in ABIL will be unlocked. Also going for a listing will give a lot of confidence about promoter group & corporate governance practices (as these days getting a good response in IPOs isn't easy unless promoter image is clean )
• Over all Alcohol Industry outlook - Needless to say about the changing lifestyles, increasing income , Cultural changes in no more looking Alcohol as a sin, addition of females consumers and all these triggers, Alcohol industry is on the verge of a vertical growth. And given the high entry barriers to this industry , existing players are set to reap maximum the benefit of Industry growth.

Another Interesting Finding :

Current holding pattern is:
Promoter - Approx 74%(Would not be interested in selling given the huge growth plans of associate company)
Promoter relatives- Arpx. 14% ( Same as above)
Directors - Apprx 2% ( Same as above )
Large Investors- Apprx 2% (Would not be interested in selling - as most likely are expected to be tracking the Company & its growth plans closely )
Unknown Unfound non responding retail investors - Approx 5% ( if you notice in shareholding pattern of retail investors, huge difference in total retail holding and retail holding in Demat form will make this point clear, this is because its is a 40 year old listed company in Calcutta stock exchange - there are many old shareholders who are not traceable/dead/changed address/holding in physical certificates which are lost/or their following generations don't know that they own shares in the company). This takes out another 5% floating stock.

This leaves only 3% shares in the market with some odd 500 retail shareholders ... hardly 1 lac shares floating in the market - Which means there is no risk of any operator/insider dumping the stock at higher levels since there are no stock available with anyone to dump.

The math looks pretty straight forward and simple. This is a huge value mismatch situation and current market cap of 8 Crore (CMP Rs. 28) offers a very high margin of safety as even if the price rises by 3 times, company will still be undervalued based on intrinsic value. Current investor might have to wait slightly longer till these triggers unfold but they will be the early investors before the value of this investment unlocks and will stand to benefit the most.

Note: I own some shares in this company. Most of the futuristic statements are based on discussion with Company Management ( not necessarily promoters).

 

Why hasn't company ever given any dividend to it's shareholders inspite of repeated profits ? Check out the cons here.

https://www.screener.in/company/?q=538707

 

It is a very small stock with mcap of only Rs. 14 crore. So, there is no liquidity for stock. Also PE IS 1416???????? How can it be Is there a mistake in Screener?

The contingemt liability is Rs. 16.33 crore it is more than the mcap. How can it be? The return of equity is low at 2.05% for three years as per screener.

I Think this is also a DANGEROUS Stock. BE VERY CAREFUL!!

 

Well there is no mistake with screener. If you look lower down its EPS is just at 3 paise so at cmp it turns out to be p/e of 1416. I agree its a dangerous stock and it doesn't has any liquidity.

 

On Dividend - The company has investments in its books ( 49% in Agribiotech Industries Limited) , How promoters will get the money to invest in ABIL & its massive expansion if they keep distributing dividends. Its a far better policy not to distribute dividends if the company can deploy that cash in a much more profitable manner and created long term wealth for shareholders.

On Contingent Liablity- There is no contingent Liability of 16 crore - Come out of screener and look into actual reported financials. The only major contingent liability i could find is a pending litigation with Competition Commission for a penalty imposed of 2.3 crore , the matter is subjudice.

The Contingent liability of 16 crore that this screener is talking about is probably Guarantee given by RCCL on loan raised by ABIL. This loan too is now paid off and there is no such contingent liability exists now.

On low interest coverage- The total term loan itself is close to 5 crore, I dont see this as a significant leverage risk for a company with tangible assets ( Land market value worth 40 crore) and Investments ( market value worth at least 30 crore) . The interest coverage ratio will obviously low if company's own profits are less.

On low eps of 0.03 paise - If you are too focused on RCCL's own EPS, then probably you have missed the whole story. The real worth of this company is for its "49% Investment in ABIL" . RCCL's own profits - significant or insignificant are just a bonus. And anyways, from next year company will have to report its profit after consolidating the proportionate profit share of ABIL. The EPS will go up significantly at that time - Assuming annual profit of ABIL 4 crore, proportionate profit to be added to RCCL will be 2 crore, which will add almost 7rs. to the EPS of RCCL. So from next year , contribution of ABIL to RCCL's EPS alone will be RS. 6-7.

 

My Friends here who are too dependent on Screener - there is no free money - If you want to make true wealth from Stock markets - go to the minutest of the details - The Contingent liability of 16 crore that this screener is talking about is probably Guarantee given by RCCL on loan raised by ABIL. This loan too is now fully paid off and there is no such contingent liability exists now. ( except 2.3 crore of pending litigation against CCI order )

 

Stockguru, If you are too focused on RCCL's own EPS, then probably you have missed the whole story or didn't read it in detail. The real worth of this company is for its "49% Investment in ABIL" . RCCL's own profits - significant or insignificant are just a bonus. And anyways, from next year company will have to report its profit after consolidating the proportionate profit share of ABIL. The EPS will go up significantly at that time - Assuming annual profit of ABIL 4 crore, proportionate profit to be added to RCCL will be 2 crore, which will add almost 7rs. to the EPS of RCCL. So from next year , contribution of ABIL to RCCL's EPS alone will be RS. 6-7.

 

Srouta - I am surprised how people are so eager to pass their judgement - Dangerous stock without going in detail, for that matter Reliance Industries and Dr Reddy's were also dangerous stocks when they were at rs. 40-50. Same people will be chasing stocks like RCCL after it will be multiplied 4-5 times, when every shrewd so call 'expert' investors will be talking about it on media and their blogs . If you are a veteran in stock market, you must be knowing it very well that real money can only be made in identifying true gems early before everyone else, at a very low price when the company is in dust and noone is talking about it.

 

Yes You Have valid Point. I am only very worried because I have lost a lot of money in chasing stocks that have become multibeggars. That is only why I was cautioning you. But you have done deep study into stock. I like your research and ability. Keep it up.

 

On liquidity - If you want liquidity - chase Infosys & TCS , do not look for hidden multibaggers. The stocks like RCCL have low liquidity because its issued capital is small, Promoters and its associates are holding almost 90% shares, and even others also whosoever has invested has invested for long term and not trading. Its a boon that an ignored stock like this has a low liquidity - every stock once bought will reduce the floating stock in market and reduce the supply of share and if the supply is less - the price will have to go up !! All the recent small cap & medium cap mulitbaggers had this thing common - low liquidity - when they were low priced.

 

Well as far as the dividends are concerned, I usually see them as a way of shareholder friendly management. I usually believe the quality of management of the company to be of utmost importance. Since this is a micro cap company I don't even know the pedigree of management. hence I put a greater importance on dividend payout of the companies. Every company needs to make investments for their future but they also do give out a share of their earnings as dividends.
Regarding the value of unlisted entity that you have mentioned, I usually don't look at them while investing in the stocks. If I want to invest in a company I would invest in a company for it's own business. Not for an unlisted entity which is into a totally unrelated sector. If I want to invest into a distillery or an alcohol producing stock I would directly like to invest in that company.
Anyways if you are convinced about fundamentals of the company then nobody is stopping you from buying the same.

 

If you notice- all the high growth companies prefer to reinvest their profits in their own business if they are confident that they can use this money for better return. And RCCL has actually done that - from an investment of only 7 crore - they now own 49% of a company with 165 crore turnover and 4 crore profits , i think this is still a better use of profits than distributing dividend.
On Management - I only know as much as you know about management - except some research on publicly available information. However I can observe some leads - (a) The company is in existence for 40 years with listing in Calcutta exchange. From the days of 80s , when there was virtually no regulation and fly by night companies were very common - it would be very easy for them to siphon off everything and run away with shareholder's money, or could dumped their stake to innocent shareholders at higher price, but they are still in business, and still holding 90% (b) They almost hold 90% in this company - and don't have any plans to dilute stake, still they got the company listed on BSE once the trading on Calcutta exchange is negligent - only as a friendly gesture to shareholders. (c) If they wanted, before listing the share in BSE, they could have bypassed this investment to any of their closely held companies at a cheap price once ABIL became successful , but they carrying it in their BS and this investment belongs to all the shareholders.
I guess above pointers are sufficient to highlight management.
On your view of investment in unlisted companies - A large value of Aditya Birla Nuvo is because of its investment in Birla sunlife , L&T's 2 lac crore market cap is not just becuase of its construction business, but its investment in unlisted (& unrelated) companies like L&T infotech, and for that matter - Wipro has unlisted FMCG subsidiaries ( unrelated business) which do contribute to Wipro's market cap. These lacs of investors can't be wrong in giving value to unlisted investments.
True, if you have to invest in alcohol business, you can directly do that - but there you are paying market price & not a bargain price - here you are getting a worth of 30 crore by paying 10 crore.
Hope I have satisfied your doubts.

 

Well this conversation can go on and on. Like I said, If you are convinced about the company, go ahead and buy as much as you can. Happy Investing

 

Dividend : My take on dividends is this " Companies that don't have any scope for further expansion can give dividends, but those companies which have plans to expand and do new investments, its OK not to give dividends instead use that money for these investments.

 

You should consider the debt on ABIL balance sheet.

 

There is no debt now - If you look at CARE Rating website - They borrowed 25 crore in 2008 or 09 , which they have gradually repaid and finished last year in 2014. So there is no debt on ABIL and there is no Guarantee ( Contingent Liability) on RCCL's website anymore !!

 

Good & detailed analysis Abhishek. Only regret you should told this forum before....

 

There is not need to regret-as long as the stock is undervalued its never late to enter - Generally this is investors' most common biases of "recency" and a "loss aversion" . Investors give too much importance to recent events - Doesn't matter what has happened to the price in past - If at the given price & given value , if you find it an attractive investment with full conviction - you can go ahead - It is almost impossible to enter and exit at the bottom and top price respectively in any stock.

The added advantage that is working now in your favor is: Currently the momentum is also with this stock as it has drawn attention of many people recently.

Below is the finding I posted earlier on why this stock is out of Operators play and most of the buying happening is the genuine retail buying.

Current holding pattern is:
Promoter - Approx 74%(Would not be interested in selling given the huge growth plans of associate company)
Promoter relatives- Approx. 14% ( Same as above)
Directors - Approx 2% ( Same as above )
Large Investors- Approx 2% (Would not be interested in selling - as most likely are expected to be tracking the Company & its growth plans closely )
Unknown Unfound non responding retail investors - Approx 5% ( if you notice in shareholding pattern of retail investors, huge difference in total retail holding and retail holding in Demat form will make this point clear, this is because its is a 40 year old listed company in Calcutta stock exchange - there are many old shareholders who are not traceable/dead/changed address/holding in physical certificates which are lost/or their following generations don't know that they own shares in the company). This takes out another 5% floating stock.

This leaves only 3% shares in the market with some odd 500 retail shareholders ... Which means there is no risk of any operator/insider dumping the stock at higher levels since there are no stock available with anyone to dump.

 

To all forum members and moderator please look into this type posting which is trying to create an unnecessary hype and spoils the decorum of this forum. MEENAKSHI THIS GUY IS BANNNED FROM VALUPICKR.COM BY DONALD FOR POSTING THE SAME HE TRIED IN VALUPICKR AND GOT BANNED FORUM MEMBERS PLEASE TAKE NOTE

 

Praisesingh- Good observation. Please go through the whole write up and highlight what are the objectionable or overstatements that you have found. I will take them out.
In my opening note itself I have mentioned about my posting At valuepickr. They have put on high watch category and not banned , because I had breached some of their guidelines without knowing (being a new member there).
I have already taken out any subjective statements which were giving impressions of overstatements, or hyperbole. Will appreciate if you can still find out and highlight to me so that I can remove the same.