Industrial & Prudential Investment Company Ltd. - Is it worth investing?

In my previous article "Nalwa Sons & Investments Ltd - Value Investing", we tried to understand what value investing is and analyzed Nalwa Sons on certain parameters to complement our understanding of value investing. Let's quickly have a brief recap!

Benjamin Graham, an American economist, investor, and professor, pioneered a new method of investing in stocks known as ‘Value Investing’ in the 1920's. He is known as the “Father of Value Investing”, and his methods ring true to investors till date, with notable followers such as Warren Buffet, Peter Lynch, etc. 

Value investors carry the belief that share prices do not justify the long-term fundamentals of a company because such prices are considerably dependent on market behavior.

Today, we will be analyzing a stock named Industrial & Prudential Investment Company Ltd. and based on certain parameters we will see whether it's worth adding to your portfolio or not? Also, there is a little surprise element at the end of the article which really motivates me to write about the same.

About Industrial & Prudential Investment Company Ltd.

The Company is a zero debt company and along with its 100% subsidiary, New Holding & Trading Co. has an excellent equity investment portfolio.

The Portfolio is managed conservatively without large scale churning. The portfolio consists of a 20% holding in KSB Pumps and in companies like Infosys, Siemens, TCS, Karur Vysya Bank and others.

Let's start with our analysis..................

1.     Low Market Float

The term market float simply means the number of shares a company has issued to the public that are available to trade or either invest. It is an important number for investors because it indicates how many shares are actually available to be bought and sold by the general investing public. Also, you’ll appreciate the rationale behind investors looking for low market float. The rationale behind this is nothing but there is an inverse correlation between the size of a company's float and the volatility of the stock's price. This makes sense when you think about it, as the greater the number of shares available for trade, the less volatility the stock will experience because the harder it will be for a smaller number of shares to move the price.

Now look at the screenshot above, you’ll be highly amazed to see, the number of equity shares available in the market or its market float of INDUSTRIAL & PRUDENTIAL INVESTMENT COMPANY LTD. is 17,45,340 or 0.17453 Cr. Out of 17,45,340, 65.89% i.e. 11,49,978 shares are held by promoters of the company. Let’s make an assumption here, the promoters are not ready to sell their stake as they believe in their organization. In that case, the number of shares available to general public now becomes 5,95,322 or 0.05954 Cr. only. Now it is well known that investors who invest in companies usually do not sell their holdings until the holdings reach its fair value. So, the investors will not sell their holdings whereas desperate buyers will take the price higher and higher.

2.     Cash Bargain Approach

First let’s understand what exactly cash bargain means. Suppose you went to buy a wallet. You bought a wallet worth say Rs. 1000. You are happy that you purchased a branded and a high-quality wallet but now try to get the feeling, you went home and open the wallet and you found a gold coin in it! What will be your reaction? You’ll be thrilled to see that. This is how a cash bargain looks like. Now being practical you say that the above quoted example is entirely fiction and it’s rarest of the rarest thing that could happen. But what if I tell you, there’s an advantage when it comes to stock market i.e. you actually get to see the value a company hold even before buying it.

Value as of today

Note: I have taken valued only equity and mutual funds due to which quoted investment is less than actual. As company holds preference shares and debt instruments as well. But still this stock holds so much value if we take only these two instruments into consideration.

Look at the screenshot above and you’ll realize, Value of investments held by Industrial & Prudential Investment Company Ltd. have a book value of Rs. 38.5654 crores and the market value of the holdings as on Wednesday’s closing (19th August 2020) is Rs. 245.43 crores. Also, if you look carefully, I have highlighted few stocks with a green colour. This company holds Bluechips and evergreen stocks at such a cheap price! So, you can estimate the amount of potential this share has!

Also, if you are a cricket enthusiast here’s a little gift for you this company holds stake in Chennai Super Kings. 

3.     Low Tax Rate

Low tax rate is sometimes seen as a matter of concern but let’s understand the reason behind low tax rate in case of Industrial & Prudential Investment Company Ltd. and how it a positive attribute. Industrial & Prudential Investment Company Ltd. is holding company. Holding company is similar to that of a Mutual Fund Company as they both hold shares of other companies and earn return on them which will ultimately get reflected in their own prices. However, there is one undefeated advantage of Holding Companies that these company enjoys the benefit of Long-Term Capital Gain Tax (LTCG). In India, in case of shares, any share held for a period of more than 12 months is considered to be eligible for the benefits under the LTCG and the benefit of the same is that these shares become completely tax free. Yes, COMPLETELY TAX FREE, which means that any gain that they make on their investments is their net return.

4.   Hidden Dividend Value Approach

In my previous article we discussed MM model, and we know as per MM model, the amount of dividend paid to existing shareholders will be substituted by issue of new share capital. The benefit of increase in market value as a result of dividend payment will be offset completely by the decrease in terminal value of shares.

Hidden Dividend Value Approach basically tests a stock based on assumption that if today company declares a dividend more than the current price of the share will it still hold some value or not?

Let’s apply the same to Industrial & Prudential Investment Company Ltd. and check if MM Model holds true or not.

Assume that the company pays a dividend of Rs.1000 per share. Then they need to pay a total of (Rs.1000 x 17,45,340) Rs. 174.53 Crore. In order to pay the dividends, they have realized the same amount by selling the investments they hold. After declaration, as per MM Model, stock will fall to (859.95 – 1000) -140.05. Since the stock price cannot be negative it will be trading at 0 but the best part is company will still be holding investments worth 70.90 Cr. And as per the quoted investments, the fair value of the stock should be Rs. 406.24 and you will be getting the same stock at zero. Not a bad deal!

5.     Zero Debt Company

Being a debt free company, it means that the company has no obligations towards payment of interest or debt and they are a cash rich firm. And whatever they earn after tax deduction, is available to equity shareholders. Also, in the times of economic slowdown, many a debt-heavy firms profits witness a dip owing to declining sales and payments of fixed interest and if the slowdown stays for a longer period these firms can go bankrupt. On the other hand, the debt free companies do not have certain obligations. Thus, they have greater chances of surviving even if the slowdown stays longer.

The only disadvantage for debt free companies would heavy tax as there is no deduction of interest in comparison to that of companies having debt. But here is the amazing thing, as stated earlier Industrial & Prudential Investment Company Ltd. is a holding company which enjoys LTCG benefits i.e. the company is already enjoying lower taxes.

6.     Low PE – High Earnings

Investors always look for Low PE ratio because of a simple reason that LOW PE means that stock is currently undervalued and have potential to outperform in the future. But does Low PE always stand good? The simple answer to this would be “NO.”

So, in case of Low PE, we should always look for the reason behind Low PE. If PE is low due to the price of the stock then we can consider the stock from investment point of view but in case it is due to low earnings then you should always avoid that stock. Now let’s quickly apply the same to Industrial & Prudential Investment Company Ltd. and check. 

As on today, the current PE stands at 6.99. Let’s have a look whether this PE is lower because of Low Earnings or Lower Market Price.

CMP is Rs. 859.95 of Industrial & Prudential Investment Company Ltd. and having a PE of 6.14x times. Here we can conclude that stock has Low PE not because of lower earnings but because of lower Market Price. This stock will be classified as Value Stock, as it has a lot of potential, which can be unlocked in future once people realise the actual price of INDUSTRIAL & PRUDENTIAL INVESTMENT COMPANY LTD.. Also, if we look at the book value of share, it is 2.14x times greater than CMP. It's obvious that a company is trading for less than its book value, we have to ask our self why other investors haven't noticed and pushed the price back to book value or even higher. The answer is that the market is unfairly battering the company as we can clearly see how undervalued the stock is based on the above-mentioned parameters as well.

7.   Promoter Holding

Promoter holding is an important factor while considering any investment opportunity. Promoter holding above 60% is considered as a good sign as it suggests that the owner have faith over his company and is not ready to sell his stake. Here in case of Industrial & Prudential Investment Company Ltd., promoter holds 65.89% shares which is a good sign.

8.   Graham Value

The Graham number is a figure that measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued and thus worth investing in. The formula is as follows:

So, the Graham Value for Industrial & Prudential Investment Company Ltd. comes out to be Rs. 2415.92 per share which is 2.80x times greater the CMP of Industrial & Prudential Investment Company Ltd., Rs. 859.95 per share. In order to reach its graham value, the stock has to appreciate 180%. What you think is it still not worth a place in your portfolio?

9.     Altman Z Score

The Altman Z-score is the output of a credit-strength test that gauges a publicly-traded company's likelihood of bankruptcy.

The Altman Z Score of Industrial & Prudential Investment Company Ltd. is 81.30. So, there are no chances of company going bankrupt.

10.     Hidden Share Repurchase Value

Put yourself in the shoes of the owner of Industrial & Prudential Investment Company Ltd. and imagine you are feeling irritated on the market for not appreciating the value of your stock. You know your company’s worth so you decide to buyback the shares at a price higher than the current market price let’s say Rs. 1200.

What you think about this decision? Do you feel like a fool paying more than the current price? Let’s me make you realize the power of your stock!

In order to buy back 50% of the outstanding shares, as owner we need, 1200*0.087265cr. (0.5*0.17453) = 104.72 cr. Now, lets assume the whole buyback process has been done. Let’s see whether it was a foolish decision or a wise?

The company would be realizing this amount through sale of investments. So, the company will be left with (245.43 – 104.72) 140.71 cr. The company would still possess the operating business capable of delivering EBITDA of 9.93*0.17453(as 57.33% of our investment are consumed) = Rs. 1.733. Divide the remaining investments of Rs. 140.71 cr. by 0.087265 cr. shares outstanding and you get a price of Rs. 1612.45 per share! I guess now you feel how good you are as a decision maker!!

11.     Intrinsic Value

Intrinsic value simply means what worth an asset carries. In simpler words, intrinsic value tells an investor what value does an asset holds in actual. If the current price of the asset is greater than intrinsic value then it means the asset class is overvalued which means that It is not worth what an investor is risking that is his wealth whereas if current market price is less than intrinsic value it means that the asset class is undervalued and it is worth taking risk.

If you look at the intrinsic value of the stock then you’ll be amazed to see that it carries an intrinsic value of Rs. 54,019 per share! Can you imagine a stock worth Rs. 54,019 is available at a such a cheap price of just Rs. 859.95. This is the surprise I was talking about in the beginning of the article.

Conclusion

So today we analysed Industrial & Prudential Investment Company Ltd. on certain parameters and in my opinion the stock was able to make me realize the unlocked potential that it has! In my opinion it’s a definite buy as this company looks good on fundamentals and also the kind of holdings it has will definitely help this stock in outperforming.

I would like to thank my mentor and inspiration Mr. Varun Aggarwal. Whatever I have discussed in the above article was taught by him and because of his blessings and teaching, I’ve started looking out for value investing.