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September 19, 2017

Value Pick : FOMENTO RESORTS (Cidade de Goa)


Hello Everyone,
                  My next value pick is Fomento Resorts & Hotels Ltd. I have moved from value to growth over the years. But nowadays, growth stocks are trading at higher multiples range. Fomento Resorts is not just value pick but it is the combination of growth plus value along with the good margin of safety. It is having the market cap of 206 crores, with the enterprise value of around 300 crores at the average trading price of Rs 129 on Friday (15-sep-2017).
About the company:
                Fomento Resorts & Hotels Ltd runs Goa’s premium 5-star deluxe resort Cidade de Goa
                Cidade de Goa : Situated in the land of sun, sea and surf, the property comprises of 207 rooms that showcase the unique Goan Portuguese architecture and ambience. The property is preferred by discerning travelers worldwide due to its proximity to the beach and its courteous staff that lay emphasis on providing warm Goan hospitality. Cidade de Goa provides Goan experience and feel to its guests. It is situated on Vainguinim Beach and has a distinctive advantage with its proximity to the Capital Panaji and most of Goa’s frequently visited locations. Cidade de Goa is also a holiday destination by itself as it has something for everyone. One can find a variety of restaurants namely
Alfama, Chef’s Speciality restaurant that serves authentic Goan and Portuguese cuisine. Alfama has also been ranked amongst India’s 30 best restaurants by an independent customer survey conducted by a leading Media House.
Barbeque, the evening restaurant with a live kitchen. The Beachside Barbeque allows one a unique dining experience of grilled seafood, meats and vegetables.
Cafe Azul –Poolside coffee shop provides the ambience of an Italian café with a choice of varied menu. One can savour global cuisines at our buffet restaurant Laranja. Other Food & Beverage options include
 Doçaria a charming tea and coffee lounge operating round the clock;
 Taverna – the lobby bar;
Bar Latino, the pool side bar.
Visitors can de stress with the state of the art Health Club- Clube Saúde and Pavitra – The Ayurveda Spa. For the adventurous at heart, Cidade de Goa offers a vast array of options that include water sports, tennis, bird watching, beach games and an outdoor chess. For the business traveler, Cidade de Goa offers a variety of conference and banqueting facilities along with its Business Centre. Cidade de Goa can be summed up as “ Goa in a resort”.

Shareholding of promoters:
 

The promoter used to own more than 95% a few years back before 75% cap rule came into implementation. This 20% went to AJMERA family which might be the proxy to promoters.So this is very tightly held company. Thus, the liquidity is very less.

Revenue of the company:
  •  Sale of Room Nights
  •   Food and Beverage
  •   Wine and Liquor
  •   Lease rental income from the Casino (Right now in closed not sure when it will re-open)
  •   Interest on cash/FD.
Growth of Company:

Shown good growth, profit double in last 4 years. It has 54 rooms in 2009, which has increased to 270 in 2017.
 
Negative points and Questions :
          1)The Fomemto group is known for its clout with the Goa's political leaders. Cidade de Goa has often been the base for major political discussions for both BJP and congress; Congresses passed amendment in 2009 to save jobs and portion on Cidade de Goa http://realty.economictimes.indiatimes.com/news/regulatory/goa-land-act-sc-dismisses-pleas-challenging-validity-of-amendments/51600783
              This is positive as well as negative.
         
          2) One of the negative points that emerged after GST roll out was that MICE activities (Meetings, Incentives, Conferences and Exhibitions) and other events held in hotels outside of home state are not eligible for Input Tax Credit.
         3) A hotel accommodation with the declared tariff of less than Rs 7,500 a night will attract GST of 18 per cent. For a room with the higher tariff, the GST rate will be 28 per cent. An online search suggests room rate of around 10000 per night (non-peak season).  So, GST will be around 28% unless they reduce tariff below 7500.
            They paid the tax of around 35% (around 9 cr on 26 cr PBT) , not sure if GST will reduce it or not. However, one of the earlier annual reports mentioned multiple taxes as a negative point. So, GST will bring relief.



 
Red Flags :
               Fomento Resources Pvt Ltd. (FRPL) is an associate company of listed Fomento. The Company has a sanction to avail unsecured inter corporate borrowings not exceeding an amount of Rs. 150 crores at simple interest not exceeding @ 11% per year from FRPL for the purpose of funding the ongoing 2 hotel projects of the Company.
                Some investors may see it as a red flag but if you see from builder's or construction companies eye then this is a good deal . For example, a builder or construction company has land, now they want to make hotel on it. After all/major permissions are in place Bank/Financial Institutions fund project on construction linked finance. Rates vary from 12-18 % from Banks for unsecured loan. Sometimes builders invite Private equity players or investors to the project. Typically they are promised high double-digit IRR (18%-27%) . The only advantage of these investors returns are after project completion or after 3-4 years , therefore cash flow management is better till that time.
                I am not much worried about it but I am worried when the company has 60 cr cash then they can reduce this debt by at least 50 crores, why get low-interest rate through FD and pay a higher interest rate to Fomento Resources Pvt Ltd for at least this amount. I couldn’t get the logic of it.
                If retail investors hold less than 5% in any company then that company is not going to gain anything from cheating minority shareholders. So, chances of wrong-doing are very less.

Valuation:
 


The ministry of company affairs (MCA) vide its notification in official gazette dated 16th Feb 2015 notified the Indian AS (Ind AS) applicable to certain class of companies. Fomento Resorts And Hotels Limited adapted Ind AS from the accounting periods beginning April 1st, 2017. If they had continued with GAAP then profit for the quarter could have been 2.95 cr. I am still figuring out this diff , CAs can you please help .
As per GAAP , TTM profit is 16.82 crores(2.25+5.65+5.97+2.95) which give valuation of 206/16.82  = 12.24 . It is trading on PE of just 12.24 .  If we remove cash of 60 crores from market cap and reduce interest income 3.94 crores ( 30% tax then PAT contribution should be around 2.76cr ) then new PE will be = (206-60)/ (16.82-2.76) = 146/14.06 = 10.38
That is the valuation when the market expects zero (in fact negative) growth in coming years. Leave alone upcoming expansion, market not even factoring inflation related growth. That is the opportunity for us.

Expansion Plan:
             Cidade de Goa The civil and construction works are in progress to set up a 5 star convention hotel consisting of 300 rooms at the plateau of Vainguinim Beach, Goa.
Investment in hotel at Aarvli The civil and construction work is in progress for setting up a 5 star (luxury) 32 room boutique resort at Aarvli, Sindhudurg,Maharashtra.





Capital work in progress (expansion plan) they already spent around 167 crores.  I believe, this is not a book value but also includes interest as well. So, if the company today decides not to complete expansion plan but sell to some hotel chain (a lot of foreign hotel chain might be interested) then they will fetch around at least 167 crores plus price of land which I believe not included in 167 crores since they might already own it at least for Goa.
             Getting clearance /permission is a very tedious job; you can view details at http://www.cidadedegoa.com/upcoming_projects.php . Aarvli project looks to near completion.
                The Company has also sought an approval of shareholders to purchase a plot of land admeasuring 5425 square meters situated at Curca village, North District, Goa for a consideration not exceeding an amount of Rs. 4.10 crores from FRPL.
             The casino is right now close but if it opens again then the company can earn around 4-5 crores from it.

Margin of safety:
             We will try to evaluate margin of safety by two cases.
Current Bussiness: As we know the company can fetch around 167 crores plus land plus some premium to do all clearance/permissions work done by the management? This figure can go beyond 200 crores but Assume only 167 crores.  Now for calculating current business valuation, assume they sold it for 167 crores. What will be the valuation of the current business?
Market cap : 206 crores , debt for expansion 97 crores , cash 60 crores , got 167 crores by selling expansion projects
             Gain through selling expansion 167-97 = 70 ;
 So, effective enterprise value/market cap = 206-70-60 = 76 crores with zero debt.
So, zero debt company which is having PBT 26 crores, paying 35% tax is available for only for effective 76 crores. Isn’t it bargain in the current bull market where everything is so expensive?

With Expansion: With the current capacity of 207 rooms they are making PBT of 26 crores, with new Goa hotel of 300 rooms plus 32 rooms of Aarvli (Maharashtra) they are likely to do more than double, in fact much more, may be around PBT of 65 cr ( 47 cr profit). If casino resumes then can touch even 50 crores and if we assume they will able to pass on inflation on rate then it may be increased by inflation. This figure of 50 crores is excel sheet person guess, actual figure may vary. But, if we assume that in next 4-5 years they able to reach 50 crores profit then the market will reward them with high PE .So, re-rating will be defiantly on the card. Of course, the market condition of that time will decide PE.
Selling to hotel chain:Recently a lot of foreign chains bought Indian hotels. If any hotel group is interested to buy it then re-rating will happen. I had discussed Mac Charles ltd ( Link ) but this idiot couldn’t hold for such long time (discussed price 245.65 (bonus adjusted 123) , Embassy Property Developments Pvt. Ltd, given the open offer for Rs 670 ) . I and my blog follower who acted on my sell call missed getting 5.5x in discussed Mac Charles ltd .
               
High ROE and good ratios:


         The company enjoys whopping operating profit of 48%. How many non- commodity companies in India enjoys better operating margin than this? Somewhat comparable peer Wonderla Holidays Ltd used to enjoy 50% operating profit margin but now it came down to below 30% . Didn't study it, but maybe before and after IPO difference or might be having some valid reason behind it.
Above picture shows the return on capital employed of just 11.66 . Is it real or misguiding? Let’s calculate by adjusting figures.
         Total asset is 265 crores out of this 60 crores is cash and 167 crores is Capital Work in Progress for future expansion which is not contributing to any return so far.
So adjusted asset come around just 38 crores . Reduce interest income from EBIT to get the accurate figure.


It gives ROCE access of 100 for current business. Since, this high ROCE is hidden behind other numbers, this stock will not appear in your high stock ROCE filter. One will have to put little effort to dig and find this type of business.                             

Luck Factor: Expansion is going on from last 3 years or so. Not sure when it will be get completed and start contributing to profit.If we have good luck then it will start contribution on time else it can get delayed.At least, this idiot can’t control or predict it. However, Aarvli project looks to near completion.

Conclusion:
This is a starting point for your research, please don’t conclude to buy it. If you decided to buy then remember this is low liquidity stock, don’t show desperation to the sellers. Avg selling price is around 130 and there is always the gap of 5-10 between seller and buyer price. I believe one should try to get below 150, don’t chess if moves fast. Due to Indian AS (Ind AS) it may show less profit and that may give you the good entry point.



P.S. (20-09-2017)



One of the my blog follower(@samanaabhakthi) on twitter pointed me red flag mentioned by @leading_nowhere (https://twitter.com/leading_nowhere) . I would like to thanks for pointing red flags.




I missed to analysis preference shares. So very good point raised by him. I will explain major concern one by one.
1) Loan from related parties with 9.8% interest rate : I already explained that is not concern but beneficial for the company .Company couldn’t have got better deal from
 Outside for unsecure loan .
2) Fixed asset concern: Whole purpose of CWIP to show assets which are not productive yet and in-progress , those will move to assets once project get finish. Nothing unusual.
You can find this in n number companies which are asset heavy companies . e.g. Reliance Industries






3)Related party transactions : This is little concern but they give business to company . You will find very few companies where related part transaction are zero and it is value pick . however , Amount is very less and if they have done something wrong then profit might have impacted badly . But, that is not the case. Also remember they will not achieve much by cheating just 4.5% retail investors.
4)7.5% dividend to promoter and 1% to investors: The word dividend of 7.5% is little confusing. That born misunderstanding. These are Preference Shares with face value 100 and not equity shares. First of all we need to understand difference. Preference Shares are almost like debt instruments but some has option to convert into equity but in  our case it is like debt with fix dividend coupon 7.5% ( In fact , it is 7.5% interest rate). Coupon of 7.5% to preferences share is not abnormal though .Most of the other companies has same . Preference shareholders has some legal preference over the equity shareholder .Fomento has 7.5% redeemable cumulative preference shares would be redeemable at par after 5 years from the date of allotment i.e. 10th January 2015. These shares would carry a fixed dividend of 7.5% p.a . This is type of debt till 5 years.
Redeemable Preference Shares Definition: A company may issue this type of shares on the condition that the company will repay the amount of share capital to the holders of this category of shares after the fixed period or even earlier at the discretion of the company.
So in other term company is paying just 7.5% interest for debt type instrument. That is pretty much acceptable rate of interest. Minority shareholder should not worry of Redeemable Preference Shares. However, Indian AS (Ind AS) standard will reflect it properly. GAAP was not reflecting it. The mystery of difference between profit of  Ind AS) standard GAAP is solve .





So. Most of those are not valid concerns for me. He did very small mistakes but I must appreciate he covered all aspects. I also did mistakes by not including preferences share in my analysis. Some numbers may need to revisit based on that. Everyone does mistake. We need to learn from those. At least he is attempting to do some in-depth analysis, if one don’t do then one will not do mistake. And one will not evolve over the time. I am sure he will be master of forensic accounting in next few years.
I learn from everyone including my kids. I believe even I can learn lot from @leading_nowhere . Please follow him on twitter https://twitter.com/leading_nowhere .
 
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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a SEBI qualified financial adviser which I am not .











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