Balmer Lawrie Investment Ltd: Special Situation ...?
Company Details: Kotak Securities
Balmer Lawrie Investment (BLI) holds 1,00,64,700 shares of Balmer Lawrie & Company (BL) and is available at 50% discount to market cap.
Some facts to start with...
Balmer Lawrie & Company (BL) Numbers
Total number of shares outstanding: 1,62,86,081
Price per share (as on 03APR07): 405.10
Total Market Cap: 643 crores
SEBI EDIFAR reports that Balmer Lawrie Investment holds 1,00,64,700 shares of Balmer Lawrie & Company (or about 60% of outstanding shares).
60% of 643 crores is roughly 397 crores. Ideally, Balmer Lawrie Investment should be worth 397 crores give or take few crores.
Numbers for Balmer Lawrie Investment Ltd however, show a different picture.
Total number of shares outstanding: 2,21,97,269
Price per share (as on 03APR07): 89.45
Total Market Cap: 196 crores
Put simply, for some reason Mr. Market has decided to price a company worth 397 crores at 196 crores. A whopping 50% discount or 100% potential profit.
Now the obvious question. Should we or should not we?
I would not buy Balmer Lawrie Investments because ...
1. Since it is only a holding company (BLI was created when govt. decided to divest stake in IBP and needed another vehicle to hold BL shares), it is very unlikely that they will liquidate their position in Balmer Lawrie. The value in Balmer Lawrie Investments will stay locked. My money would also get locked in the vehicle.
The annual report says "Your Company is not engaged in any other business activity except to hold the Equity shares of Balmer Lawrie & Co. Ltd. and accordingly matters to be covered under 'Management Discussion and Analysis Report' are not applicable for your Company."
2. The stock price of Balmer Lawrie Investments can move up if Mr. Market suddenly sees opportunity or BLI starts making more investments in other companies. So far neither of the two has happened and I don't know when it would happen in future. I am happy loosing my shirt by betting on probability but I am not happy winning a bet on uncertainty.
Further the annual report says "Your Company as you are aware is prohibited by the Reserve Bank of India to do any sort of non-banking business. Dividend received from Balmer Lawrie & Co. Ltd., is the only major income of your Company. Estimated surplus money instead of keeping in the Current Account is deployed in the Fixed Deposits Schemes of the Banks. As of 31 March 2006 the total amount of deployment in the Fixed Deposit Schemes of the Banks stood at Rs. 733.56 lakhs. Your Company during the financial year ended on 31 March 2006, out of such deployment in Fixed Deposits earned to the tune of Rs. 35.28 lakhs."
3. The business Balmer Lawrie is in (its a govt. company all right) might also go down and subsequently the book value and price of BLI might go down. I don't know if this would happen but this is another aspect that has to be kept under consideration.
4. Then there are other things like low trading quantities that make the stock unattractive.
On the other hand, I would buy Balmer Lawrie Investments because
1. Its trading at close to 52 week low (of course... this is a bad strategy but I have used it earlier and reaped rewards .. am not scared to use it again
2. A lot of mutual funds, institutional investors hold positions in BLI. Proponents of follow-smart-money theory (including me) might argue that they seek safety in crowds and if MFs and FIIs are putting money here, their money is also safe. (assuming that institutional investors ARE smart !!)
3. This is like one of those opportunities where you don't know how long would it take to reward the shareholder. Tomorrow all of a sudden, govt. might announce the merger of two entities, buy back or something else. At this time, we don't know.
Google Finance Profile for Balmer Lawrie & Company
Kotak Securities Profile for Balmer Lawrie & Company
Thanks to Mohit for idea and numbers!