Friday, October 26, 2012

Value Investing - Nucleus Software

Value Investing is all about buying stocks that are trading less than their intrinsic value or their actual worth. But finding such stocks is always difficult as the market prices in effectively most of the time. Market participants (People who matter the most) are aware of what is happening with companies in the market universe and they act swiftly to safeguard their investments based on the news flow. While finding such stocks are difficult, they do exist time to time as investors either fail to spot it or market is imperfect or something bad is happening that is known only to institutional investors and market participants who have insider information. I just found one and it appears to be an undervalued stock but I don't know if there is something that I am not aware. Anyways, it is a good exercise to discuss about it so that people will get to know what is "Value Investing".




Nucleus Software : (Rs.74.55 on 26 Oct 2012)

Nucleus Software Exports Limited provides software solutions to the Banking and Financial Services Industry. Very important details are briefly given below.

Market Capitalization : 241 Crores
Total Revenue in 2011 - 2012 FY : 282 Crores
Total Revenue in 2012-2013 (Q1 & Q2) : 145 Crores
Net Profit in Year Ended 2012 : 35 Crores
Net Profit in Q1 & Q2 2012 - 2013 : 22 Crores
Earning Per Share (EPS) in 2012 : Rs.10.9
Earnings Per Share (EPS) in Q1 & Q2 2012 - 2013 : Rs.6.91
PE Ratio based on 2012 EPS : 74.5/10.9 = 6.8 times

Looking at the 2012-2013 half year earnings, it appears that the stock is trading at less than 6 times the FY 2013 earnings. 

In essence this is a software product development and services company that generates close to 300 Crore rupees revenue and about 40 crores net profit. So given the small size of the company, one would argue market capitalization of 241 crores is fair and there is nothing irrational about it. That would be true until you look at the balance sheet. Lets look at it as well.

Note: All the numbers in this post have been taken from the Company Press Release for the September 2012 Quarterly Earnings and can be accessed by clicking the following link.



Balance Sheet Information

Equity & Liabilities


Consolidated Reserves and Surplus : 340 Crores
Liabilities (Including Short Term and Long Term) : 58 Crores
So Total Equities and Liabilities : 410 Crores

Assets


Non Current Assets : 76 Crores
Current Assets : 334 Crores
Total Assets : 410 Crores

Lets see the break up of Current Assets.

Current Investments (Mutual Funds or other liquid investments) : 116 Crore
Cash and Cash equivalents : 118 Crores
Trade Receivable : 59 Crores
Short Term Advances : 10 Crores
Other Current Assets : 28 Crores

Why I think this is Undervalued?

I don't know if you got it already.  If you have not, here are the reasons.
  • It is very rare for a service providing company trading less than the book value. But this company is trading less than the book value ( Rs. 74 Against the Book Value of Rs.96).
  • Considering the trade receivable of Rs. 59 crore, the debt is almost zero / negligible. 
  • But more importantly Cash and liquid investment is Rs.234 Crores ( Rs. 73 per share). In other words a company which has Rs.234 crore cash on hand is trading at a Market Capitalization of Rs.241 Crores.
So the stock is essentially trading at its cash value. Stock Price = Liquid Cash per share. 

What about the projects / deals that the company has on hand?
What about the products that the company has developed? 
What about the infrastructure? 
What about the people and their expertise?  
What about the decent net cash flow every year?

Its all free at the current market price and that's why I think it is undervalued. I searched extensively in the internet and it seems the company has a very good management and they apply good corporate governance practices. In fact this company was selected as one of the top five companies with good corporate governance practices in 2011. I know the growth has slowed down a bit and the latest quarterly revenue was less than estimates. But still considering the cash on hand and all other assets and expertise, this company is worth more than Rs.241 crores for sure. So I believe this company is undervalued. Hopefully there is nothing bad going on in the back ground that common man is not aware of. I would consider buying this stock around Rs.50 - 60 levels.


Kumaran Seenivasan

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