Q&A: Sandesh Limited, Negative CFO, Learning about New Industries

Modified: 02-Jul-20

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Sandesh Ltd

Sir after reading this and a book written by John greenbalt I searched in screener and found and analysed with the knowledge I learned from your blog. Please have a look and correct me if you have any spare time thanks and regards

Sandesh Ltd:

At today price of ₹800 the enterprise value is ₹485 cr which comes to 4 EV/EBITDA and the earning yield is 25% and assuming the MCap to be at 750 cr the enterprise value is 645 cr operating profit of 125 cr the EV/EBITDA 5 and the PE Will be 10.

  • At the present EBIT/ enterprise value the EARNING YIELD IS 25% and at 750 cr MCap and EV OF 645 the EARNING YIELD IS 20%
  • Even on taking the media alone the revenue is 341 cr and operating profit is 95 Cr and the net profit is 58 cr on media alone even if media segment to be valued at 10 EV/EBITDA this comes to 950 cr
  • Or even on market cap to sales of 2 it is 700 cr without finance segment
  • Now the current investment and non-current investment comes to nearly 110 which I have not considered
  • On finance segment there is 300 cr which is fetching around 29 cr operating profit and 21 cr net profit. This at least we can give a 50 cr MCap
  • Lastly 209 cr investment in debentures in the real estate
  • The sales growth has consistently above 8% profit growth above 15% this time is above 30% even if take the total balance sheet value as asset which is 637 cr and net profit 81 the return on the total assets is above 12.5% the RoCE is consistent above 30% the return on equity this Fy is 15%.
  • The growth factor is 6 P SCORE IS 9 and Alt Z score is 6 and modified c score 1 the current book value is 700.
  • No debt 90 yr. history the management is conservative in rewarding dividend but have never given negative result in last many years.
  • Finally if they decide to merge the Sandesh Procon Pvt. Ltd with the parent company the same way they merged Sandesh Digital that value unlocking has huge potential.
  • Now for an enterprise value of just 485 cr backed by asset and cash and equity of more than 880 cr there can be very limited down side from here and even assuming a fare EV/EBITDA of 5/6 the market cap should be above 750/850 cr

Discl. I have bought a small qty

Author’s Response:

Hi,

Thanks for writing to me and providing your valuable inputs on The Sandesh Ltd.

I appreciate the work done by you while analysing the company from “Sum of the parts” methodology in which you have tried to look at each of the business segments, assets, investments done by the company and have tried to opine the valuation levels at which the company is available currently.

I as an investor believe that when we try to analyse any company from sum of the parts method, then we should analyse each segment as a separate company altogether and assess the performance of such parts under the framework of financial, business, management competence for this segment, operating efficiency of each segment, comparison with peers of each segment.

Once we have done the in-depth analysis of each of the parts as separate businesses, only then we should combine them together.

Read: Detailed Analysis Of A Company: A Framework

Many a times, when investors value the holding companies or conglomerates, then I have noticed that each business segment does not get the deserved attention of in-depth analysis that it would have, if the business segment were a different company altogether.

Moreover, due to lack of granular information details, many a times, it is not possible to properly analyse each business segment. Therefore, most of the times, conglomerates/holding companies trade at a discount to the scenario where all the business segments are hived off into different companies.

On similar lines of the above argument, the value unlocking happens mostly when a business segment is demerged from a holding company. Therefore, I am not sure whether merging an entity in itself would lead to value unlocking.

After reading your analysis, I find that you may conduct further in depth analysis of each business segment before you make a final opinion about the company.

All the best for your investing journey!

Regards,

Vijay

 

What does a negative cash flow from operations (CFO) mean?

Sir, what does negative number in cash flow mean, under the head ‘cash from operations’? I read in your article on Ambika Cotton that you must compare PAT and Cash from operations of a company for the last 10 years and see that the difference is not much. However, for many companies, I have noticed that the number for cash from operations is negative for few years (3 or 4 years out of 10). Why would that be and is it good or Bad?

Is it that these companies have invested in some capital expenditure (CAPEX) etc. and used internal accruals for the same? But that would still not impact ‘cash flow from operations’ right?

Author’s Response:

Hi Sunny,

Thanks for writing to me!

A negative number in CFO means that the company did not make cash from operations and on the contrary it used up cash from other sources like investing (sale of assets) and financing (debt or equity) to meet its operating requirements.

To understand this relationship, I would suggest you to read the cash flow statement in the annual report of any company, which would show step by step calculation of CFO from PAT/PBT.

Read: Understanding Cash Flow from Operations (CFO)

This calculation would clearly show how the profits/funds get stuck in or get released working capital and the impact of depreciation. It would be a good learning exercise for you to understand in which cases PAT would be higher than CFO and in which cases it would be lower.

In case after reading and analysing the cash flow calculation of company from its annual report, you have any query, then I would be happy to provide my inputs on your analysis and query resolution.

All the best for your investing journey!

Regards,

Vijay

 

How to learn about new industries?

Good evening sir, I want to know about how to do analysis of cement, sugar and power company. Please do a analysis of any cement sugar and power industry you like, so that I can learn from that as cement and sugar are the hottest sector these days. However, I have one company in mind. Yes, of course, I am invested in that “kakatiya cement, sugar, power Ind”

Also, Sir, I want to know how one company in cement sector like shree cement trading at 88 P/E, while ultratech is trading at only 40 p/e, why it is so, as it is very difficult to know that in future market will give what p/e to any company.

Thanks and Regards.

Author’s Response:

Hi,

Thanks for writing to me!

P/E ratio measures how much market is willing to pay for a company. P/E will depend on many factors. Many of these factors are measurable like EPS growth, debt levels etc. however many others are subjective like market perception. Therefore, there is no definite answer to your query.

P/E may increase or remain constant with increasing EPS depending upon other factors that influence a company’s performance.

Read: How to do Valuation Analysis of Stocks

Moreover, you may use the framework in the following article to learn more about the companies that operating in industries, which are new to you:

How to Analyze Companies in Industries new to you?

In addition, to understand the cement industry better including the working of a cartel of manufacturers in the cement industry, an investor can read the analysis of one of the cement companies, Heidelberg Cement India Ltd, on our website: Analysis: Heidelberg Cement India Ltd

All the best for your investing journey!

Regards,

Vijay

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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