Blue Star : A fallen hero

In the past, I have written a lot of praise about Blue Star, ranging from how management utilized buy-back effectively in 2002-2003 to reduce equity capital, how high dividend-yielding low-debt companies turn out to be good investment when Blue-Star price went up from INR 30 to 1700, and how to find next Blue-Star.

Two months back I was discussing the balance sheet of Blue Star for the year FY11 with one of my colleagues. The company had increased its net current assets from INR 297.16 Crore to INR 668.49 Crore, i.e. an increase of INR 371.33 Crore, i.e. 125%. The company's debt to equity ratio suddenly went up from almost 0 to 0.72, and anything above 0.5 for industrial companies is considered bad as per Benjamin Graham. Even in the years 2000-2001, it had hovered around 0.55, i.e. near Graham's cut-off. Even the June 2011 quarter results show that the interest payment of INR 7 Crore was more than 25% of PBDIT (Profit before Depreciation, Interest and Tax) of INR 27.65 Crore. The alarm bells had already started ringing about the company's financials and I told my friend that Indian manufacturing sector seems to be under heavy stress.

Here comes the latest results and the company's interest payment suddenly went up to INR 30 Crore, that is more than twice its PBDIT of INR 14.59 Crore and the company has shown losses.

This set of events show how good balance sheet analysis enables a person to move their money out of a particular scrip at the right time. Hats off to Benjamin Graham.

Image: worradmu / FreeDigitalPhotos.net

Fru****ted Promoters?

I want to introduce to you one fru****ted promoters, that of a company named FDC. Have you seen good companies buying back their shares at lifetime high price? (please exclude AA group companies from good companies). FDC is going to do that as mentioned here. The company is buying back its share upto a maximum price of INR 60 while the lifetime high for the company's stock price is INR 66 made on date 15 Dec 2004, yes almost 5 years back. That is the only reason why promoters are fru****ted. It has been five years and the company's stock price has gone down instead of going up. What about fundamentals? The companies profits have increased from INR 66.27 Crore in FY2004 to INR 83.21 Crore in FY2009, an increase of 25.6% while the stock price has gone down from INR 66 to INR 51.4, a reduction of 22.2%. This is not it. The company already bought back 51.82 lakh share at an average price of INR 34.31 aggregating INR 17.78 Crore during the first buyback plan announced on November 18, 2008. So the equity capital has decreased by around 3%, i.e. the market cap of the company from peak of INR 1263.64 Crore has gone down to INR 962.28 Crore i.e. by 23.85%. How is P/E of the company affected? The P/E in December 2004 was around 19.15 while today it is 11.56, a reduction of 40%. I agree with promoters that the company is undervalued at INR 51.4 and have a stake in the company but of course at a much lower price than the maximum buyback price. Happy Value Investing!!!!

Promoters and Directors seem to be confused

I am talking about Reliance Infrastructure. On the one hand, the company is announcing buy-backs followed by more buy-backs. On the other hand, the company is announcing private placement of shares followed by private placement of shares. The first buy-back is announced upto a maximum price of INR 1600 and then the second was upto a maximum price of 700. The maximum amounts were INR 800 Crore and 700 Crore respectively. The first warrants allotment were around INR 1800 for 4.3 Crore warrants, amounting to INR 7830 Crore. The latest allotment is at INR 1000 for 4.3 Crore warrants, amounting to INR 4300 Crore. What I know as an investor is that a company announces buy-backs when it has extra cash and it feels its share price is below its intrinsic value. A company announces allotment of warrants when it needs cash infusion and its share price is above its intrinsic value and equity dilution doesn't affect EPS a lot. When the promoters and directors feel that the company's share is undervalued at INR 1600 and overvalued at INR 1800 and again that the company's share is undervalued at INR 700 and overvalued at INR 1000, they simply are confused.

When buy-back makes more sense?

There are a lot of companies announcing buy-back these days. I would like to put here some points which helps investors differentiate between good and bad buy-backs. According to SEBI rules, a company can buy-back shares upto 10% of its networth without any EGM. To buy-back shares upto 25% of networth, the company needs to get shareholder permission in an EGM which most companies avoid. Let's take four examples two of which I consider good and two of which I consider improper:

Good Ones:

1. Blue Star in 2002-2003: The company bought back 23,35,606 shares at an average price of INR 65.4 for an aggregate amount of 15.27 Cr. This reduced the equity capital of the company from INR 20.3228 Cr to INR 17.9872 Cr, a reduction by 11.5%. Thus by utilizing just 10% of the networth of the company, the equity capital was reduced by 11.5%. This was one of the greatest buyback in the history of Indian Stock Market.

2. Britannia in 2001-2004: The company bought back 38,60,287 shares between June 2001 and September 2004 for a consideration of INR 225 Crore an average price of INR 582, at which the market cap of the company would be around INR 1500 Crore. The networth of the company was around 500 Crore. Thus the company used 45% of its networth to buyback 14.2% of its equity capital, not a great buyback but I would consider a good buyback.

Improper Ones:
1. I have already discussed one of the recent improper buybacks Here

2. The other buyback I consider improper is that of Reliance Infrastructure. The company bought back 87,60,000 Shares for a consideration of INR 795.53 Crore at an average price of INR 908. The company's net worth is around INR 11.7K Crore and debt of 5K Crore which leads to a net book value of 6.7K Crore. The company spent 11.8% of the net book value to reduce the equity by 3.7%, a meager proportion.

To me, among the latest buyback announcements, only FDC makes sense, but since it is part of my portfolio, I would avoid commenting more on it.