Mr Market is noticing us

A few days back I had pointed out Mr Market's discrepancy in valuing two companies with almost the same kind of business profile. It seems that Mr Market has taken notice of our findings and the discrepancy and gap is reducing. I am talking about valuation gap between Titagarh Wagons and Texmaco. The market capitalization of Titagarh Wagons was 625 Crore at the time of writing previous article compared to 1717 Crore of Texmaco. Now Titagarh Wagon's market cap has gone up to 770 Crore while that of Texmaco has remained stagnant. Thus Titagarh Wagon share price has appreciated by 23.2% and that too in a span of just over three months. Our assumption was that Titagarh is undervalued by around 40% compared to Texmaco and we were expecting a market cap of around 1050 Crore for Titagarh which translates in to share price of around 550. Let's see if we get there or not.

You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. - Warren Buffett

Why so much discrepancy?

I am talking about valuations of two companies whose name I will mention at the end of the article. First I would provide comparison of the companies based on their financial statements. Have a look at the following table:

Parameter	Company A	Company B
Market Capitalization	1717 Crore	625 Crore
Price/Book	5.8	1.6
Price/Earnings (TTM)	20.7	12.8
Dividend Yield	0.56%	1.48%
Debt/Equity Ratio	0.24	0.03
Average Sales of five Years	585 Crore	350 Crore
Average Profits of five Years	42 Crore	35 Crore
Price/(Profits of five Years)	41	17.86
Average ROCE of five Years	24.75	31.1
Price/(Net Current Assets)	17.5	1.98

If I tell you that the first company made 4701 units of a product and the second company made 3597 units of the same product during FY2008-09, don't you think the second company is undervalued compared to the valuation of the first company? The name of the first company is Texmaco and the second one is Titagarh Wagons. The product they make is Railway Wagons. Texmaco earned 75% of its total sales from this segment while Titagarh Wagons earned around 95%. Both the companies' future depends on the spending of Indian Railway and now also private sector container transport companies. But according to me, Titagarh Wagons is undervalued by at least 40% compared to Texmaco.

In the field of common stocks, the danger of paying the wrong price is almost as great as that of buying the wrong issue. - Benjamin Graham

Arbitrage Opportunity in IOC and BRPL?

According to the November 2006 BSE announcement here, BRPL is going to be merged with IOC in a share swap ratio of 37:4. The amalgamation was approved in March 2008 here. The BSE closing share price of BRPL and IOC on March 5, 2009 was INR 37.95 and INR 437.95. If you buy 370 shares of BRPL with INR 14041.5, you will get 40 shares of IOC worth 17518, a return of 24.75%. The record date for merger is not announced yet.

You are protected till the share price of IOC goes below 351.04.