Is India's most expensive stock...really expensive?

Not many may have heard of Orissa Minerals Development Corporation or OMDC, oddly enough, considering it is India’s most expensive stock in absolute terms at Rs 29,000 a piece. But here’s the real leap-out-of-your-seat fact: OMDC’s life high is Rs 92,220 a share, which it scaled on November 15, 2010. While it’s all-time low is Rs 20,475, which it made on August 4, 2010.

And strangely not many of the major brokerages are tracking OMDC.

Let’s start with the basics. The company's trailing 12 month EPS is Rs 257.49 on a low equity base of 6 lakh shares. This translates into P/E of 106 compared to industry average of 5, way too expensive. The face value per share is Rs 10. The book value of the stock is Rs 13,325, converting it into P/BV of more than 2.

Rashtriya Ispat Nigam, is the parent company with 50% stake, followed by LIC, second largest shareholder with 15% stake. A major trigger for RINL could be its listing once the cloud of uncertainty over the sector fades away. RINL is likely to top the list of government’s divestment to-dos. 

Major concerns

All six mines of the OMDC are shut owing to lease expiry. It also needs further clearances from the government for the same. Its sponge iron plant production, a joint venture with East India Minerals Ltd, is at a standstill due to non-availability of iron ore.

But the main concern, going forward, could be the draft mining bill that is likely to erode profits, if becomes a reality in its current form. 

The board of OMDC deferred stock-split proposal twice in last one month. Earlier, the board at a meeting held on November 9, 2011 deferred stock-split proposal, citing absence of government nominee director at the board meeting. Liquidity is a key issue, so stock split/bonus will be an ideal option for the company to increase liquidity and affordability for investors.

OMDC shining?

If one had to go by the management say its latest annual report, then OMDC share can reach mind-blogging valuations ahead.

“All the six mines are currently inoperative and it is expected that one mine, namely Kolha Roida, may come in operation in third quarter of the current financial year 2012 and all remaining five mines may be operative by the end of the financial year, so main benefit will accrue in next financial year, 2013,” the report said adding, “These achievements will lead to expected productions of 10 MTPA of iron ore and 1 MTPA of manganese ore in near future. It is also planned to set up 2 MTPA iron ore beneficiation plant and 2 MTPA pelletisation plant.”

Based on the management talk, the cash EPS for FY13 works out close to a staggering Rs 24,000. 

FY13E	Iron Ore	Manganese
Production	10 MTPA	1 MTPA
Realisation (in Rs per tonne)	Rs 4000/tonne	Rs 8000/tonne
Sales (Rs in Cr)	4000	800
OPM (%)	50%	50%
Gross Profit (Rs in Cr)	2000	400
Interest (Debt-free)	-	-
Tax rate @ 40%	-800	-200
Net Profit (incl Depreciation)	1200	200
Shares	0.06	0.06
Cash EPS (Rs)	20000	3333
Other Income (Rs in Cr)	50
EPS on other income	833
Total Cash EPS (Rs)	24000

 

OMDC is a debt free company. Also, it has reserves of close to Rs 800 crore of which Rs 700 crore are in fixed deposits. The other income is the interest earned on fixed deposits assuming an annual interest return of 8%. The realisation figures are based on polls of various analysts.

Adding two and two- reserves of Rs 800 crore and FY13 expected profit of Rs 1400 crore, the total reserves comes to be Rs 2200 crore. Considering the current market-cap is Rs 1800 crore, the stock is trading at a mind-boggling discount to future estimates. 

In simple terms, the company is up for grabs at almost no cost as returns are going to be far greater in the future.Again, the whole valuation parameter is based on the management comments. Therefore, one should not jump the gun and start buying in lots.

An investor should wait for further clarity on news of mining license clearance and then take a call.

The company clocked an EPS of Rs 3030 in FY09. Assuming conservative industry P/E of 5 on FY13 expected EPS of Rs 24000, one can do the math on the target price. However, in the present gloom and doom scenario, shareholders of the company can just hope for the best. 

-Riken Mehta, Sagar Salvi

Chart Check: Hindalco Vs Aluminium prices over last 11 yrs

As seen in the charts, Aditya Birla Group's flagship company, Hindalco has a very positive correlation with LME Aluminium prices. An investor both long-term or short-term should check trend of LME aluminium prices going forward before buying Hindalco.

Hindalco is Asia's largest integrated primary producer of aluminium. Bauxite and power cost are two key components for aluminium producers. Hindalco has an advantage over its peers with captive power plant and smelter production plant situated in Orissa, one of the largest states with bauxite reserves.

Note: Data Period: Jan 2000 to Dec 2011. Monthly Average Prices of LME Aluminium (in USD)and Hindalco

-Riken Mehta

Looking to build a portfolio? Check out holding companies

In a volatile market scenario like the present one, everyone is looking for an investment which holds the promise of decent returns without being too risky.

Holding companies are a good bet for investors with a medium-risk-medium-returns approach. A holding company is one that owns sizeable stake in companies within same group, to the extent that it has influence over the policies and management of that company.

The benefit of investing in a holding company is that you indirectly own the shares of the group companies. For example, if you buy into Bajaj Holdings, you get the advantage of investing in Bajaj Auto, Bajaj Electrical and Bajaj Finserv as well. This is because Bajaj Holdings owns close to 9 crore shares or 31.49% in Bajaj Auto. So when the share price of Bajaj Auto moves higher, so will Bajaj Holdings, in theory at least.

Another positive is that the share price of a holding company is less volatile. Due to the nature of the auto sector, Bajaj Auto may see adverse moves. While this will affect Bajaj Holdings, the price change will not be as sharp.

However, it is the same on the flip side also. Even if the fundamentals of the holding company are good, it may not be a good investment if it owns majority stake in a sick businesses. For example, debt-laden Kingfisher affected the prices of other stocks under the UB group.

How to check it?

Investors should check out the latest annual reports available on the company’s website. One should go to Balance Sheet section and hunt for Investments. A detailed schedule of investments made by the company in equities, fixed deposits, mutual funds, government bonds will be available.

The Schedule will further classify Investments into Quoted and Unquoted. Quoted means the companies which are listed on the bourses and vice versa, so an investor should only consider quoted investments value. Also one should subtract debt value from the current market value. Reason is if the company borrows money and invests in another company, then it makes that investment non-viable.

Below is a list of 10 prominent business groups who hold substantial stake in other companies listed on the exchange.

- B K Birla, Aditya Birla: Pilani Investment
- Adani: Adani Enterprises
- Bajaj: Bajaj Holdings
- Aditya Birla: AB Nuvo
- United Breweries: UB Holdings
- Tata: Tata Investment
- Binani: Binani Industries
- Jindal: JSW Holdings
- Baba Kalyani: Kalyani Investment
- Kirloskar: Kirloskar Brothers Investment
- Godrej: Godrej Industries

Penned by Anisha Mappat, Riken Mehta

Corporate fixed deposits: Friend or foe in volatile market?

Investing in the stock market is not for the weak hearted, more so in today’s volatile scenario.

A year back, investor X—who prefers risky bets for high return—had invested Rs 1 lakh in JP Associates. Investor Y, cautious by nature, invested Rs 1 lakh in JP Associates’ fixed deposits scheme offering a fixed annual interest return of 10.50%.

Now, assuming the FD matures today, Mr Y would have made Rs 10,500 (pre-tax) on his investment, while Mr X, who had bought the share at Rs 112 apiece, will be staring at a 40% loss on his investment.

How do corporate fixed deposits work?

Corporate fixed deposits are unsecured loans that do not guarantee anything to an investor in case of a default. When you invest in a bank fixed deposit, the Deposit Insurance and Credit Guarantee Corporation ensures that Rs 1 lakh per bank is repaid to you in case of a default. But there is no guarantee for deposits with companies and NBFCs.

Popular instruments of investment

Corporate fixed deposits (FDs) have gained a fancy among investors because of high fixed returns that these products offer. Typically a corporate fixed deposit offers much higher return than a bank FD; however it comes with a high risk tag.

Why does a company raise money through fixed deposit schemes?

This is usually done when other modes of funding dry up. The stock price may be too low for the promoter to offer shares to new investors. Or it is possible that banks may not be willing to lend money, and if they are, the interest rates would be very high.

In the past, there have been instances wherein companies like Panjon Pharma, CRB Capital, Morpan Laboratories offered high returns but defaulted. Even today there is a noise that one of the real estate companies is not making timely repayment to its fixed deposit investors. However, that does not make corporate fixed deposits a bad destination to park your funds. Just like any other investment, you need to study the company, its credit rating and other parameters, before investing in the FD.

Speaking to Moneycontrol.com, Umesh Rathi, CFP, Arihant Capital has listed some of the key parameters to review the corporate fixed deposit before making your investment.

1. The issuing company should have a strong goodwill and track record in the market and should be running its business for at least 15- 20 years.

2. Only invest in FDs of profit making companies that have a constant dividend paying track record for last 5 consecutive years.

3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. Assuming a company is rated then invests only in a company having AAA or AA rating and if company is not rated then one should deeply study financial statements of the company. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.

4. The sector outlook in which the company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance.

5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.

6. Check the history of the company, how they have paid the principal and interest to the investors.

Credit rating is your most important deciding factor while selecting a fixed deposit. Understanding different ratings can be difficult for a layman as they may not be well-versed with various jargons and rating numbers. The ratings will be in the descending order, where AAA is the best rating while D is the worst.

-Riken Mehta