A Stock Market Fairy Tale
Context:
Imagine yourself as the kid in Dhamaal movie who is crying and Sanjay Dutt is trying to convince you not to. Then you hear about ₹10 Crore and immediately your face shines with sparkles. And then Sanjay Dutt tells you that he'll share ₹1 Crore from the ₹10 Crore that he gets and you being the kid, don't want just ₹1 Crore. He offers you ₹2 Crores and ₹3 Crores too but you don't stop crying because aapko to Poore "Das Kalol" chahiye.
The same is the case between the investors of a Mumbai Based Holding Company Elcid Investments and the company itself. The company's stock which trades in two digits and is a penny stock is actually worth way much more. The company Elcid Investments at one point in time was also ready to pay the investors 3000 times the share price to the investors holding it as a buyback offer, which was not accepted by the shareholders as they wanted more.
Stock Markets have their own set of fascinating stories be it scams, biggest wealth wipeouts, mega dividends, etc and this - the story of Elcid Investments is going to be a part of fascinating stories of the Indian Stock Market. So let's just start right away.
The Story:
Elcid Investments Ltd. - going by the name of the company it might sound like just another company. There's even a high chance that you might be hearing this name for the first time. But in reality, it is not just a normal company. The current share price of the company is ₹15.47 but if you see the volume it doesn't trade much i.e. there are no buying or selling transactions in this stock. Maybe because it is a small company and there aren't any buyers of this company as nobody knows about it. Possible, right? But, as it turns out, the stock has a lot of buyers but no sellers! Parkour!
What if someone wants to still buy the stock? Of course, they can but in the Grey Market. The Grey Market Price of the Stock is around ₹80,000 - ₹1,00,000. Yup, a stock that was last traded on BSE at ₹15.47, trades in the grey market at around ₹1,00,000. But what makes the stock so fricking valuable?
Elcid Investments Ltd. is a promoter of India's largest paint company - Asian Paints Ltd. Elcid holds a 2.95% stake in Asian Paints Ltd. which closed at ₹2773.6/- per share on Friday. So it means Elcid Investment's holding stands at around ₹7853 Crores. The company has no other business. It is just a holding company.
Holding companies are companies that invest in companies and earn revenues from the investments that they make i.e. via capital appreciation or by dividend/interest income. The difference between the Investment made and the Selling Price is the Profit/Loss for the company.
Coming back to the story, the company also pays the dividend of ₹15/- per share, so even you are able to buy the shares at their current market price, you will be getting about 100% returns just from the dividends. And so if we were to value Elcid Investments then we should value it on the basis of the Investment that it has made right? So as we saw earlier, the investment of Elcid Investments is valued at ₹7853 Crores. So if someone holds the stock of Elcid Investments, it means that they own a part of Asian Paints Ltd. But how much? Let's try to determine the intrinsic value or the book value of each share of Elcid Investments.
Book Value of a share means the Net Assets owned by the Company divided by Total Outstanding Shares. The outstanding shares of Elcid Investments stand at 2,00,000. If we divide ₹7853 Crores by 2,00,000 we get the intrinsic value per share as ₹3,92,000. As per Money Control, the book value stands at ₹3,47,598.
Who in their sane minds would sell a stock that is worth around ₹4,00,000 at a price of just ₹15? That is the same reason why Investors denied the buyback offer of the company when they offered ₹11,000 for a stock that was worth ₹3 on BSE at the time of the buyback offer.
They wanted more! (Das Kalol)
So if the stock is actually worth ₹3.50 Lakhs, why is it so undervalued at the Stock Market?
Why is it so undervalued?
As we discussed earlier, Elcid Investments is a holding company and thus it does not have any other business other than its investments in companies like Asian Paints Ltd. Elcid Investments is a promoter of Asian Paints Ltd. and it holds around 2.95% of it. So being a promoter it can't actually start selling stocks of Asian Paints Ltd. Because if a promoter starts selling stocks of their own companies, it creates panic in other shareholders which could negatively impact the share price of the company.
So usually, holding companies which are promoter companies as well can't really sell their stake easily. And also these holding companies usually hold a huge amount of shares in companies, which makes it difficult for them to sell those shares without impacting the market price. So basically their stakes are frozen and can't generate cash flows for them except dividends. And hence, for this reason, holding companies are usually valued at 40-60% of their actual book valuation.
But in the case of Elcid Investments, the valuation as per the book and the valuation as per the market price are two poles apart. There is a huge gap between them. Almost around 99.996%. So this company is actually valued at a 99.99% discount than its book value. Isn't it crazy?
Why such a huge gap?
As of Friday, the share of Elcid closed at around ₹15. Now, for a share price to increase or decrease, it needs to be traded. Because, if there is a buyer on one side and a seller on the other, then they can arrive at a middle point somewhere and can trade the shares. But in this case, there are no sellers and only buyers. So, even so, there's a demand for the share, the price isn't rising because there are no sellers available. And even if a seller were available, the share gets locked in due to circuits whenever it rises 5% or so. So for Elcid Investments to rise even up to ₹2,00,000, imagine the number of trading sessions it will need to reach there. But unless and until there are sellers, the share price can not rise. We researched the number of shareholders of Elcid has and we found that Elcid Investments has only 229 shareholders in total so we can't expect it to rise to its actual book value unless and until there's some miracle.
So what is the way out?
The company has already tried to buy back the shares from the existing shareholders but the shareholders didn't buzz because they have realized that it is actually worth more than what they are getting. Going forward, we can only think of a few ways out of this situation which are:-
1) The company decides to get delisted from the exchanges and buybacks all the shares from the shareholders at a price they are ready to accept.
2) The company gets merged with another company and gives investors an exit option.
A third way could be that the stock exchange conducts a Price Discovery session after which they list the share again at an optimal rate and resume the normal trading in the share.
Whatever option the company chooses, the shareholder will definitely get benefitted. Maybe less than the actual value but definitely a huge benefit. We don't know about you, but we are definitely going to queue up those purchase orders.
So that is it for this week's FinMail, stay safe, keep learning and we will see you in the next week.
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