Originally posted by Janak.merchant1
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Very interesting situation but even in listed companies the problems originate because:
1) The deal to sell off land is not transparent i.e. you take some in cash some in cheque kind of stuff.
2) The Management might not give a one time dividend but continue to hold the cash. In that case company becomes cash rich instead of shareholders. For example Trent has maintained a Rs 100 per cash on its balance shjeet for the last 5-7 years!!!
3) Once this cash has been received the management might take up new diversification programs and that comes witha gestation so that is not why interested parties would have bought a stcok.
4) Shareholders are most uncomfotable when companies hold cash a cash equivalent can get a RoE of 9% only so putting a PE of 9 (growth) to this cash equivalent the final value is 81% which means that cash in balance sheet is always valued at lower of what it is and companies appears cheap! 
Best way to unlock value is the simplest which never gets done it entails:
a) Buy back shares from open market with cash received.
b) Declare a one time dividend with the money received.
We can discuss companies that hold cash on balance sheet here!
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Dear Basant, Trent will have to hold that cash for their future expansion. Same is the case i feel is with 3M. 3 M has plans to set up manufacturing base here when they get enough volumes. Otherwise it does not make sense to manufacture here. And they do not want to borrow at the time of expansion.
Management has to look at things differently. What you said abt lack of transparency in RE deals is fact which we have to accept. You are also right abt co becoming rich and not shareholders as there might not be one time dividend etc. So our view as outside investors wud be different than the promoters. I agree with you abt what u have stated.
So basically we are at the mercy of their decisions. But if u know what they r doing, then to a certain extent we can make out what thay are doing with cash. I am refering to honest managements. Who are holding majority of the shares and are shareholder oriented.
Lets us c this situation: The real one. Capacity 6000 tonnes, about five years back. Free cash flows all these years. Cash accumulated and invested in MFs. Capacity has slowly been built up from 6000 to 40000 recently during 2007-8. All the cash accumulated has now been put to use for the core business expansion. Share was quoted 24 when i bought it. It went down to 18. Now 150. All these past five six years, co kept on accumulating cash. I recommended them to go for buy back as market was not realising that intrinsic value was going up. Not becoz of cash getting accumulated but capacity was silently being ramped up without getting reflected on the A Report. Co did not want to borrow funds for their aggressive expansion plans.
They are targetting 200 crores sales within next two years. Capital is 6.5 crores. Products to a great extent are commodity type. But costing is their moat. MArgins will be under pressure as they also do not expect to maintan them. Now coming to the right point, they do not have any need for capex as their capacities have already been enhanced to the desired levels. So on 200 crores sales, if they make 8 % at the net levels, it wud mean 16 cr profits. Free cash flows are imp factor here. Since no major capex is expected, they do not need it, cash wud again go up.
How do u view this business developments? Wud u invest in this co tho products are of commodity nature? They have 12% all india market share. With added capacity that wud go up. Market share is not imp but it just gives idea abt the small overall market.
Your view wud be highly appreciated.
Best wishes,
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Are you talking about plastiblends here????? Mr. merchant, i generally dont look beyond three pages of Annual report to base my decisions, but sometimes I get into a stock for the management as well. If the company you were talking is indeed Plastiblends, then I think you should attach a good deal to the management quality. I came to know Plastiblends through the Annual report of Kabra extrusiontechnik, and Kabra was the first company I did an independent analysis in my undergraduate days. this company has done everything in creating 'value' for its shareholders, and i think Plastiblends should also go on its way.....
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