Shivalik Bimetal Controls Ltd (SBCL)

I heard and read quite a few times on this forum that the Shivalik Bimetals has now been over-valued and it’s not a right time to invest. While on the technical side, this might not be the right time but in my view, fundamentals are still very strong and stock price is still undervalued.

To back it up, I performed Price Implied Expectations (PIE) suggested by Michael Mauboussin in his book called “Expectations Investing”. This method provides an overview about the future expectations which are built in the current price of the stock.

As MM (Michael Maubossin) refers to another MM (Modigliani and Miller) in his famous paper (What does PE multiple mean),

Value of Firm = Steady State value + Future State value.

Steady state value assumes that current level of NOPAT will be sustainable indefinitely and that incremental investments neither add or destroy value. It’s very much like terminal value calculation in DCF model.

Steady State Value = (NOPAT / Cost of Capital) + Cash – Debt

Based on March 2023 numbers, NOPAT is 78 Crs. I have assumed CoC of 12.8%. Cash is around 40.5 Crs and Debt is around 52.5 Crs.

Using above figs and using the formula above, Steady State Value will be 601 Cr.

Future State Value refers to how much company invests, the spread between ROIC and CoC and for how long the company can find investible value creating opportunities or the competitive advantage period which MM refers in his book.

Formula for Future State Value as given in his paper is as follows:

Future value creation =
Investment * (return on capital – cost of capital) * competitive advantage period / Cost of capital * (1 + cost of capital)

Here, the inputs are (based on March 23 figs):

1. Invested amount – 246 Crs.
2. ROIC = 29% (tax adjusted)
3. Competitive advantage period – 25+ (I calculated this based on the online tutorial at his website – Online Tutorial #8 — Expectations Investing

In his book, MM explains that the market always takes a long-term view and its expectations are already built into the current price. This is the period where company is expected to maintain its competitive advantage period before decline to a phase where reinvestment earns no more than CoC.

Using above formula and inputs, future state value comes to around 6945 Cr.

Total value = 601 Cr + 6945 Cr = 7546 Cr.

Value per share = 7546 Cr / No. of outstanding shares i.e. 5.76 Cr = 1310

If I apply 50% margin of safety, value per share comes to around 655 which is higher than current price of 545.

Caveats:

1. This is not a DCF calculation. I did that as well in much detail and that also indicates that current price is undervalued. I performed DCF based on both FCF and EVA.
2. With the help of this exercise, I just wanted to figure out what does current price imply and what kind of expectations are inbuilt into its current price.
3. A couple of quarters of shunted performance may not be an indicator of the long-term performance of the stock, at least in this case, market agrees with this view.