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January 2, 2011

New Year Value Pick : Chowgule Steamships Ltd

Iwish very happy and prosperous New Year 2011 to all of readers, their family and friends. I wish all you will get cheap value stock and sell at higher price, if you are asset value investor and if you are growth value investor then you will find few “GARP” (growth at a reasonable price) stocks in new year.
                My new year value pick is “Chowgule Steamships Ltd” . This value pick is of type asset value stock .
            Chowgule Steamships Ltd (CSL) is part of 90 plus year old Goa-based Chowgule group with interest in a range of industries including iron ore mining & pelletization, shipping,shipbuilding, automobile distribution, real estate development, explosives, breweries, industrial salt & gases, education, and machine fabrication. There are various categories of ships depending on the cargo they move. Key categories are Tankers (for transporting wet cargo like crude oil & petroleum products), Dry bulk vessels (for transporting dry cargo like iron ore & coal), and Container ships (ships that carry cargo in truck-size boxes that help in intermodal transport). Then, there are specialized ships to carry niche cargo. CSL owns only Dry bulk vessels and currently having a small fleet of 2 ocean-going & 3 coastal dry bulk vessels.
CSL has 4 vessels and SOIL(wholly owned subsidiary of CSL)  is having 1 vessel

1)      MARATHA PROVIDENCE
2)      GLOBAL TRIUMPH   (With SOIL)
3)      MARATHA COURAGE
4)      MARATHA CRYSTAL
5)      MARATHA CORAL

            Buying & selling ships (vessels) is a more or less regular activity with most ship owners depending on their market outlook. During the 2008, a wholly owned subsidiary of CSOL sold a Panamax vessel, for a consideration of US$ 35.20 million. The said vessel was purchased in 2006 for US$ 19 million. CSOL had placed a new building order for a 37,000 MT DWT super box bulker with a Japanese Yard and has also paid advance of 10% of the acquisition cost. The vessel will get delivered in April 2012. Last year also company had sold a vessel and made profit of 61.5 crores on it.
           On March 28, 2008 Chowgule Ports & Infrastructure Private Limited (CPIPL) signed a Concession Agreement with Maharashtra Maritime Board for development of Port Infrastructure and Ship Repair facilities at Jaigad , in Ratnagiri district. CPIPL is a special purpose vehicle (SPV) co-promoted by the Company along with Chowgule & Company Private Limited (CCPL). CPIPL will implement the above projects through its subsidiaries.

How Value Buy :-  Mr. Market sometimes throws good opportunity to buy stock cheap or even less than cash on the book. Mr. Market had given us opportunity during 2008-09 to buy stock less than cash on book one of them was Lakshmi Machine Works Ltd . But in the current market it is rare case. Very few companies are having cash more than market cap. I believe, best among that pack is “Chowgule Steamships Ltd” a value buy with huge growth potential.
            Lets come to the stats . Today, CSL is trading on Rs. 35 with market cap of merely 125 cr on equty base of 36.31 crores . But CSL has cash of 342.92 crores on the consolidated balance sheet i.e. Rs. 94.44 / share . Refer annual report from website of CSL (http://www.chowgulesteamships.co.in/Chowgule%20Annual%20Report%202010.pdf) . Most of this cash is generate by making profit on selling ships/vessels. They are master in buying and selling ships at appropriate times. It doesn’t mean that they are bad in earning from real operations of the company. Current poor quarterly results are due to bad phase for the whole shipping industry. If you see total of PBT- Other income from last 3 year’s it’s comes to 205 crores  on consolidated account , that is also more than market cap of 125 crores.  CSL has cash of Rs. 94.44 / share on consolidated balance sheet and 36.76 crores in Mutual Funds (mostly debt oriented) i.e. Rs. 10.12/share  , same time it has debt of 191.48 crores (With low interest rate) i.e. 52.73/share . So net liquid cash per share in Rs. 51.83 whereas it is trading at Rs. 35 . So difference is almost Rs 17/share ( 33 %) . So buying this share at current price you are getting additional Rs 17 liquid cash + Fixed asset free.
            You will surprise free fixed asset is also not few crores , it is huge . I am not expert of shipping industry and valuation but I got following valuation from internet which is 2 year old.
MARATHA PROVIDENCE      225 cr, GLOBAL TRIUMPH   293 cr ,  MARATHA COURAGE    45 cr and I am assuming MARATHA CORAL  and MARATHA CRYSTAL each at 45 crores .
So asset value of complete fleet is 653 cr . Company has also paid advance of 10% of the acquisition cost that can be adjusted with differ tax liability of around 36 crores will be paid in next 2-3 years. So leave it.
              CSL has also property at Nariman point , Mumbai which was valued more than 20 crores (total 23.24 crores) in March 2002 . There is no guess said properly value should be more than 60 crores as Mumbai has seen reality price boom in last 9 years. Company also has property in Goa and Ratanagiri but I don’t have any idea of current value but sure not significant.
             So total value in company is
             Fleet 653 + Real Estate 60 + cash 342.92 + MF 36.76 – Debt 191.48 = 900 cr .  
So NAV is 240 against share price of 35 .  There is also very low risk of erosion of value, since in this bad time also company has reported very nominal loss in previous quarters and shown nominal profit in last quarter.
             Current Market cap is 125 crores and value in company is 900 cr . Now it is upto you to give appropriate discount to NAV and come to real value of the share and if you are expert of shipping industry the recalculate NAV and let us know. I believe, this discount should be low since company is very quick to realise profit from sale of fixed asset ships. Imagine what will happen when Port Infrastructure and Ship Repair facilities at Jaigad start functioning since Mr. Market love this business. It is expected to be functional from 2013.
Finally, prompter has stake of 67.76 % , which boost confidence in this company.  Not only we are getting cheap stock, but also getting quite impressive dividend yield of 4.4% at current price of 35.

Management and corporate Governance:-
            CSL is part of 90 plus year old Goa-based Chowgule group. But seeing 90 year old group I feel they have could not have achieved expected success level and reorganization in india. Sametime, Chowgule Steamships Ltd was one of the few Shipping Companies that survived the distressing times the Shipping Industry faced in the end seventies early eighties when most other promoters allowed their Companies to sink. The closed down Companies included the likes of Scindias Steam, Dempos, Salgaonkars, Moolobhoys etc. In the recent times the Birlas (in Century Shipping), India Cements, Chetinad, Ballarpur, Larsen and Toubroclosed down their Shipping divisions. Through these torrid days and years the Chowgules have weathered the stormy times and kept going on (of course with intermittent booms also). So far timing of management of buying and selling ship is quite good.
            I believe, corporate governance level of CSL is not bad if we compare with same market cap companies. Of course we cannot compare CSL with Infosys . I quite like balance sheet of the company. Sundry Debtors is quite low at only 1.26 cr. Only concern, I found that is so many subsidiaries specially that too in Marshall Islands . Marshall Islands is tax-friendly nation. Ships registered in India, which have had to employ only Indian nationals. In 2008, the regulator eased the clause on hiring only Indian nationals, but ship owners say strict conditions still apply to employment of foreigners. Even Mercator Line had registered crude tanker in the Marshall Islands. Mercator registered some of its ships outside India to skirt tight local regulations on staffing, yet at the same time, somehow try to reap the benefits of tonnage tax, a levy based on the cargo-carrying capacity of ships that reduces the tax burden of shipping firms.
            Around 8 mutual fund houses has invested in Mercator Line in 20 various fund schemes. They might have done their due diligence before investing in Mercator Line. So we should now worry much about Marshall Islands subsidiary of CSL. If you know something about management of CSL and corporate governance, then please share with us.

Why it is available so cheap :- There are couple of reasons for trading on low price .
Currently whole Shipping industry is facing tuff time and going trough bad phase. Baltic International Freight Index (BIFFEX) which is a barometer of dry bulk freight market is quite low. It is better than Oct 2008 – Jan 2009 phase but still quite low . http://www.bloomberg.com/apps/quote?ticker=BDIY:IND .  Outlook for next 2-3 quarter is also not great. Value stock available cheap, when near term outlook is not great.  If near term outlook is great and stock is showing good profit growth then will it be available cheap? Answer is clear NO.
1)    Standalone balance sheet has cash of 82.07 crores against 342.93 of consolidated balance sheet. Most of the famous website shows standalone balance sheet, which does not reflect true value buy.  I checked dozens of famous website only http://www.indiainfoline.com/  shows standalone & consolidated balance sheet.
2)     Very few analyst follow small cap that too in shipping industry which is facing tuff time. Lot of courage is required for research analyst to go against tide and give value buy call on value stock, which facing difficult time. That’s where opportunity gets created for true value investor.
3)     CSL is a low profile Company not in the limelight.

Catalyst to achieve true value :- 
1)      CSL has net liquid cash per share of Rs. 51.83 with gap of Rs 17 which is likely to be quickly reduced. Sensible and value investor will go through annual report and will take decision to buy or not.
2)     Baltic International Freight Index (BIFFEX) which is a barometer of dry bulk freight market is quite low it is not going to be low for forever. Improvement in BIFFEX and good outlook will bridge gap between true value and stock price value.
3)     CSL placed orders for seven handysize vessels in 2008 with Japanese shipyards. These ships are scheduled to be delivered between Oct-2010 and 2013 .Timely delivery and operation will boost income and profits in next few years.
4)      On March 28, 2008 Chowgule Ports & Infrastructure Private Limited (CPIPL) signed a Concession Agreement with Maharashtra Maritime Board for development of Port Infrastructure and Ship Repair facilities at Jaigad , in Ratnagiri district which is expected to be operational from 2013 . Mr. Market loves this business  but I feel one year delay is quite possible. Valuation of this business itself will be more than 1000 crores . Company has mentioned “The excavation work for  the  projects  has already  started and the major orders for construction work will be  placed shortly” in 2010 annual report .
5)     Company has cash of 342.93 and 37 crores in MF, which gives margin of safety and comfort level but Mr. Market loves deployment of that cash, profit growth and higher return on that capital employed. Any steps toward this by management will reduce gap between true value and current stock price.

Downside Risk :-  Quite Low. All negative news are already captured in current price.

Upside Potential: -  Huge
         
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8 comments:

  1. hi,

    I have been in stock market for over 10 years. I am still learning every day form various forums. I really like your analysis. As a matter of fact i was just going through the annual report and found the same facts that you pointed out just before i read your article. If you dont mind can you share your email id or send an email to sree2k7@yahoo.com inorder to exchange views.

    thanks once again for the wornderful post.

    regards,
    srinivas

    ReplyDelete
  2. Srinivas ,
    Thank you for putting appreciation comments , it will really help me to put more quality posting and devote more time toward my blog.

    My email id is value.wealth@gmail.com.

    Thanks,

    ReplyDelete
  3. Hi Nataraj,
    I prefer to give picks once in a month , probably first week of every month. This gives me enough time to analyse company and get enough other details. Asian oilfield is on my radar , I was waiting for price of Rs. 50 but S P Tulisian sir spoiled my party by giving buy call before me .I am not sure whether it will touch again 50 or not but I sure of current price is also very good for accumulating it.

    ReplyDelete
  4. Great and indebth analysis. You might have invested your more valuable time. I come across your blog while searching CSL and gone through others as well. My answers for your queries:
    1.Stanrose Mafatlal : I tried to buy at Rs 80 and below as a case of MF with discounted NAV and a good div yield. The stock is illiquid and cannot be purchased in Online platforms. One of their core investment Standard Industries is worth a look. I purchased at Rs.10 two years before.
    2.Navin Flourine: Mafatlals are known as a good management with integrity. In case of Navin - it was a part of Mafatlal's chemical division and hived of as per the condition of BIFR. Atleast both companies are saved thanks to BIFR but the companies have to honour the fine prints. Original shareholders of both the companies are same.
    3.Sicagen: It offered a great value but it is also carrying a baggage of Sical Logistics hive off. I bought it at Rs.4 Already Sold in Rs12 - Rs.24 -Rs30.

    ReplyDelete
  5. Hi,
    could you address the following issues -
    http://www.equitymaster.com/outsideview/detail.asp?date=07/26/2010&story=7&title=Chowgule-Steamships-Steaming-ahead-clueless

    Also stock is now at 17 ... 50% down .. could you change the article to reflect the same ? I am seeing change in cash in bank etc.

    Regards

    ReplyDelete
  6. Hi, what's ur view on this stock now?

    ReplyDelete
  7. Hi, whatz ur view on this stock now

    ReplyDelete

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