A Simple idea
15 Dec 2024
I posted below on 17-Oct-19 on blogger.com and reproduced the content here except minor changes which will not impact the earlier intent.
I wrote below in the month of October 2015 as the thesis for an investment. This is the first time I created a 100% position in a single “trade“ and the decision was made overnight after reading the company updates available on the stock exchange.
A Simple Idea
Investment made around 16-Sep-15 (~5% of portfolio).A company demerged from the parent company and business listed separately. The market cap of this demerged company compared to the parent company is very small and a significant % of shares are held by institutions. The price of the demerged company fell significantly from its peak within a month of listing, as institutions started dumping this tiny Company, as it may be below the market cap mandated to the fund / institutuins.
This demerged company is in the Real Estate business, mostly developing properties on its own land or in collaboration with land owners. Market cap is less than 100 cr, revenue of more than 100 cr, operating margins of ~30% and net profit margins of 12% on consolidated basis. Made net profit of 10 cr in previous year, P/B = 0.3 and PE =9. With the ongoing & future projects, the company is expected to achieve revenue of Rs 2500 crs in next few years.
Assume sale is going to be 80% of projections – 2000 cr
Operating profit (30%) – 600 cr
Net profit (12%) – 240 cr.
Market cap < 100 cr.
Even if you consider this company is going to just finish the projects in hand, distribute the profit after paying off debt (80 cr debt) & shut down, you will still make money.
Additionally - this Company is from a reputed group, so they will not let this Company be a 100 cr company in future and definitely do something to grow at the industry rate.
Markets sometimes provide such opportunities and you have to be lucky to notice and grab.
Fast forward - Within 3 years the market cap peaked at about 600 cr+ and currently 300 cr due to slowdown. Please note my initial assumptions were never realized (2500 cr sales in a few years). The company recorded a revenue of ~750 cr in the next 4 years and net profit of less than 100 cr. There was enough margin of safety that even after partial fulfillment of my initial thesis, I achieved desired results.
How the company is going to perform in future - I have no idea. However management is trying to work within the asset light model (working with land owners, buying limited land, etc). I am still holding the Company, though trimmed the position slightly when position size was more than 12% of my portfolio at the peak of stock price.
Status today
I am still holding the company, though trimmed about 45% of initial quantities. The management continues to execute as per their business model - i.e partnership with the land owners, maintain low debt to equity, continue to focus on the locations they understand i.e Bangalore and Ahmedabad, etc and slowly expanding to other geographies.
During this period they diluted the equity several times, mostly preferential shares to promoters, which I did not like - due to timing / low valuations at that time. But since business continues to perform, even when the market was down, I continue to hold.
If you would have noticed, returns from 2018 to 2021 were negative but I never thought of exiting as management continued to improve the business by securing land partnership and funding though partnership with a Real Estate Private Equity Investment Manager.
Lesson Learned
I think there are 2x key lessons to be learned:
When you are fortunate enough to find an opportunity where the odds of making good returns with less risks are good, do not waste time and go for it with right allocation.
Hold on to the company where management continues to operate business rationally, particularly during the slowdown, even though market is not recognising it. Ignore management actions which may appear wrong but not impacting the business in long term. Operational performance is important vs stock market performance. If business continues to perform, stock prices will catch up, sooner than later.
