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Friday, July 8, 2011

Money Matters Financial Services Limited-the ultimate value investing pick

Someone famously said that the market is a voting machine in the short run and a polling machine in the long run. Well, in a bear market, stocks get voted upon all the time. And in the scam infested environment, investors are wary(rightly so) of stocks with regulatory issues etc. But sometimes, this penalty goes too far. Even when companies respond by changing their business model, markets are slow to recognize that. And Money Matters is a prime example.

The infamous LIC Housing Finance scam(just Google it if you have not heard of it) led to the arrest of several top executives of banks and finance institutions, who had supposedly taken bribes(routed via Money Matters), to sanction loans. Now, I would not dismiss a CBI enquiry, so lets presume this to to be true, that Money Matters's business model revolved around being a conduit for companies to get loans by bribing the staff. Perhaps, the earlier mainstay(advisory business) may not remain for long, as no issuer/borrower would want to tarnish itself by using Money Matters. That is why in its FY2010-11 annual report(http://www.money-matters.in/InvestorRel/MMFSL%20Annual%20Report_2010-11.pdf) , the company has decided to deploy its QIP funds into funding business(loans/deposits) rather than advisory. It hardly has a choice, atleast not till its name is cleared in the courts.

Assuming that investments earn atleast the inflation rate of return, the company should be valued at Price to Book Value of atleast 1. But now, the book value is around INR 833 Crores, while the market cap is around 300Crores.  One may have several concerns about the company namely, which I address in parenthesis.
  1. New team of directors, auditors, employees due to attrition in advisory business etc(The promoter Rajesh Kumar is still involved though. And this-new team- would inspire confidence)
  2. The investments in subsidiaries may need to be written off due to business prospects becoming worse-they had to abandon foreign expansion/mutual fund plans due to reputation hazard(Granted. But these amounts are quite small and already considered).
  3. What about debt/bad loans?(The company is virtually debt free, and bulk of cash/investments is in very safe securities. For example, SBI, Infotel Broadband(owned by Mukesh Ambani), Future Capital Holdings, some debt mutual funds etc). 
  4. Won't they make cash losses when advisory fee income falls?(Possible. They lost Rs 60crores this year in operating cash flow. But the interest income should make up for that, so on a net basis they should not make a cash operating loss and destroy investor value).
  5. What distinguishes this story from a typical holding company? There also, money seems on the table but promoters will never allow you unlock value by divesting etc.(In this case, the holding company is itself an operating company Promoter holding is just around 50%, not adequate to pass special resolutions etc. Retail shareholder holding is quite low also around 3%. So, so chance of active shareholder participation is there).
While I urge you to read the entire annual report linked above, below are a few telling extracts.

Money Matters Balance Sheet Mar-11..nearly debt free, only concern is loans around INR 145Crores


Around INR 305Crores is in safe, income yielding assets which are stellar. 


The cash and bank breakup does give some mental comfort of ANOTHER Rs 340crores.


Takeaway:-For a company with market cap 300Crores odd, the breakup value is atleast Rs 645 crores(cash+investments-inventory). This is without considering the Rs 145crores worth of advances and other assets-these will offset the little amount of debt). And Rajesh Kumar's(promoter's) competence is not in doubt, so adding some 200crores for that, the company should be atleast valued at Rs 900odd crores, around triple its existing share price. In my opinion, this is a perfect example of purchasing when there is blood on the streets.

3 comments:

TanMan said...

Impressive analysis AS.

I understand from your posts on your other blogs that you are a voracious reader. would love to know the books you have been reading because your knowledge on various subjects is amazing.

I am a CA Final student. Landed up your blogs through caclubindia.

sendrk said...

Instead of trying to pick value buys (available at price lower than the perceived normal market price due to some reason), one must look for companies which have a robust, future proof business model, solid cash flows, past record of consistent organic growth of topline and bottomline.

if some extra funds have to be paid for growth stocks of thekind mentioned above, you would still come out a winner over the years.

Anandh Sundar said...

@TanMan..too many to name. Nowadays, mostly fiction. The books I read are listed on Goodreads under my profile(http://www.goodreads.com/user/show/4075111-anandh-sundar).

@Sendrk..maybe, but the market does not agree. The share is up 10% today, with no signs of a respite. And forecasts can go wrong, but getting Rs 100 worth for Rs 50 is a no brainer