After KRBL, narrow escape from Care Ratings
Nobody can dispute that Mohnish Pabrai has the luck of the Devil.
Some of his investment decisions have landed up in serious trouble.
However, Providence has always bailed him out.
KRBL is a classic example of this.
Mohnish bought a massive truckload of the stock in Feb 2018 (see Is Mohnish Pabrai’s Latest Stock Pick A “Screaming Buy” Multibagger Or An Overvalued Compounder?)
Now researching, what crying bargain has @MohnishPabrai seen in KRBL at Rs 600/share and 33 times earnings.
— Rajeev K (@rk_health) February 13, 2018
He was enticed by the business model of the Company, which entails converting raw rice into Basmati and selling it to customers under the brand name “India Gate” at massive premium.
Naturally, such a business model is expected to churn out mega multibagger gains for investors.
Unfortunately, KRBL got embroiled in nefarious activities such as the “Augusta Westland Helicopter Scam” and the stock price tanked like a ton of bricks.
To Mohnish’s good luck, the Enforcement Directorate ruled that his purchase of KRBL shares from the Balasharefs was null and void.
This spared Mohnish a crippling loss of Rs. 150 crore (and counting) and he and his fans heaved a sigh of relief (see Mohnish Pabrai Escapes Loss Of Rs. 150 Crore As Fav Stock Tanks In Bribery Scam).
CARE Ratings is yet another example where Mohnish escaped in the nick of time and was spared massive losses.
Mohnish’s theory was that credit rating agencies are great investment candidates because they have a “bullet-proof” business model, which is unaffected by vagaries of the economy.
He cited the example of Moody’s, a renowned credit agency, which continues to thrive despite admission of bungling during the great sub-prime crisis of 2008.
He described Moodys as the “prime culprit” of the sub-prime crises because it issued ‘AAA’ ratings to even Junk Bonds and fooled investors.
“There is no business on the planet which has a deeper and a wider moat than rating agencies … they almost have a license to print money …. its a phenomenal business,” Mohnish gushed in admiration in his famous drawl.
Here is the full interview I had with @Nigel__DSouza of @CNBCTV18News last week:
Part 1: https://t.co/c1XOnfwcOo
Part 2: https://t.co/Kkm9LjXOX8@FiatChrysler_NA @maruti_corp @PoloniusHamlet @MoodysInvSvc @spglobal @CARE_Ratings @rain_carbon @SunteckR @koltepatilltd
— Mohnish Pabrai (@MohnishPabrai) October 31, 2018
— CNBC-TV18 (@CNBCTV18Live) September 28, 2018
However, Mohnish soon realized that the fact that Credit Rating Agencies are able to hoodwink regulators in the USA did not mean that they would be able to do so in India as well.
Mohnish was right because SEBI and SFIO are tough as steel and are able to see through BS and call the bluff.
CARE got hauled up by the SFIO for the role they played in the ILFS scam.
Also, its top brass, a worthy named Rajesh Mokashi, was given marching orders by SEBI.
#Exclusive | @NayantaraRai learns from her sources that the Serious Fraud Investigation Office (SFIO) is probing ICRA & Care Ratings for the role they played in #ILFS Group's fall to disgrace. Watch this exclusive report here:#ILFScrisis #ILFSmess pic.twitter.com/CySEz6ftST
— ET NOW (@ETNOWlive) November 2, 2018
CARE Ratings: Send MD Rajesh Mokashi On Leave With Immediate Effect
TN Arun Kumar Appointed As Interim CEO
— BTVI Live (@BTVI) July 18, 2019
Naturally, the stock price plunged to levels never seen before.
Stock in Action: Due to poor financial performance and bleak outlook on the rating business Care Ratings cracked again today by 20 percent. Yesterday too, it was down by 20 percent.
— Marketsmojo (@Marketsmojo) August 2, 2019
However, Mohnish had a wry smile on his face because he had already made good his escape from the junkyard stock.
And Mohnish Pabrai himself downgrades CARE RATINGS as he sold off 4 lac shares @985 purchased @1250 in the month of September'2018#WTF LONG TERM INVESTING MANTRA GOING 2 THE DOGS??? https://t.co/reF3kniaRA
— SURYA N BANERJEE (@banerjeesurya) December 20, 2018
Mohnish suffered a loss in the fiasco. However, it is always better to admit a mistake and book a loss rather than to be defiant and be saddled forever with a junkyard stock in the portfolio.
BSE Ltd – Latest stock pick of Mohnish Pabrai
Mohnish’s latest stock pick is BSE Ltd.
He and his assorted PMS Funds hold 2.43% of the equity capital of BSE Ltd.
This information is revealed by the latest investors’ presentation.
|BSE LTD – KEY FUNDAMENTALS|
|MARKET CAP||(Rs CR)||2,401|
|EPS – TTM||(Rs)||[*S]||34.57|
|LATEST DIVIDEND DATE||27 JUN 2019|
|BOOK VALUE / SHARE||(Rs)||[*S]||507.10|
[*C] Consolidated [*S] Standalone
|BSE LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||JUN 2019||JUN 2018||% CHG|
(Source: Business Standard)
Stock exchanges & brokerages – textbook examples of operating leverage
Prima facie, Mohnish’s decision to invest in the stock exchange cannot be faulted.
This is because stock exchanges (and broking companies) are textbook examples of the benefits of ‘operating leverage‘.
They are able to service large volumes of business with no increase in operating and fixed costs.
This means that the additional margins from the increased business flows directly into the P&L account.
This is the reason why Rakesh Jhunjhunwala and Radhakishan Damani invested in MCX Ltd (the commodities exchange).
BSE Ltd is a value buy: HDFC Sec
HDFC Sec has conducted an indepth study of the affairs of BSE Ltd and recommended a buy.
It is emphasized that “Value is emerging with net cash of Rs 20bn (~80% of MCap) and a dividend yield of ~7%“.
It is also pointed out that BSE has been constantly innovating and investing in technology and is building future platforms for growth.
It is emphasized that BSE has huge net cash of Rs 20bn (~Rs 440/sh, ~79% of MCap) which is excluding SGF, earmarked funds, and the buyback amount.
The current dividend yield of ~7% is attractive.
The stock currently trades at 11.1/9.7x FY20/21E EPS (steep discount to MCX valuations).
HDFC Sec has opined that BSE should be valued on SOTP basis by assigning a TP of Rs 320 to CDSL and 25x to BSE’s core earnings (ex-CDSL) and adding back net-cash of Rs 15.8bn (excluding buyback amount and for buyback tax).
The Target Price is Rs 655 (36% upside from CMP), which includes the core BSE value at Rs 169/sh, Net Cash of Rs 351/sh and CDSL stake value of Rs 134/sh.
Yeh Share Kyun Nahi Chalta?
BSE Ltd is notorious for disappointing its investors owing to its sluggish performance on the Bourses.
Anil Singhvi and his colleagues at Zee Business conducted a forensic inquiry into why “Yeh Share Kyun Nahi Chalta – एक अच्छी कंपनी होने के बावजूद जानिए क्यों नहीं चलता BSE Ltd का शेयर“.
The report provides valuable insights into the matter.
What about the NSE IPO?
Some punters at MMB pointed out that BSE Ltd is likely to suffer in the short run because of the overhang arising from the impending IPO of NSE Ltd.
NSE Ltd is the arch rival of BSE Ltd and is generally more preferred by investors and speculators when trading because its volumes are higher.
It may be recalled that NSE is presently in the dog house because it has been banned by SEBI from accessing the capital markets for its alleged role in the ‘co-location’ scam.
However, Vikram Limaye, the boss man of NSE Ltd, opined that SEBI will give clearance for the IPO after the 6-month ban period gets over.
— Business Standard (@bsindia) December 29, 2016
Prima facie, NSE’s IPO will adversely affect investors’ sentiments towards BSE Ltd though this ought to have no bearing for long-term value investors like Mohnish Pabrai!