Friday, July 15, 2011

Graham Stock - Polyplex Corporation

Last post was all about Graham and his book "Security Analysis". In this post, I am taking one step further explaining methods which Graham recommended to unearth the so called "Undervalued" stocks with an example. In general Graham talks about the following rules.

1) Book Value of Less than 1

2) PE Ratio of Less than 10

3) Debt Equity Ratio of Less than 1

4) Good Dividend Policy

If the stock fits all the above said criteria, then Graham applies his famous "Margin of Safety" principle (Stock Price trading at a Huge Discount to Book Value) to decide if a particular stock is worth buying. Most of the articles that quote him throw some light on said rules. But what they have not written about is his strong views on "Net Current Assets". More than Book Value, Graham considers "Net Current Asset" value as the very important one to consider when analyzing a stock. This is due to the fact that Book Value lost its significance because of the following two things.

1) The Value of the Fixed Assets as stated bore no relationship to the actual cost.

2) Fixed Asset value bore no relationship to the figure at which they would be sold.

Net Current Asset

Net Current Asset is what we get if we deduct the Current Liabilities from Current Assets. Current Assets section consist of the following in most of the balance sheets.

1) Inventory (Goods not Sold)

2) Receivables or Sundry Debtors ( Goods sold but payments not received)

3) Cash and Bank Balance

4) Loans and Advances

Graham recommends to take Cash and Bank Balances as it is (100%), Receivables at 80% of what is stated in the balance sheet and Inventory at 50% of what is stated (Because it needs to be sold). Calculating the Current Assets by this revised rules will reduce the actual stated value in the balance sheet to a new "Current Asset" value. Then Current Liabilities stated in the balance sheet needs to be deducted from the newly calculated "Current Asset Value" to get the "Net Current Assets".

The next step is to calculate the "Net Current Asset" per share by dividing the "Net Current Asset" by total number of outstanding shares. If the current price is huge discount to "Net Current Asset" per share, then that particular stock is the one which he terms it as "Undervalued" because he sees no reason for a company to trade below the "Liquid" value. Market imperfections lead to undervalued stocks and Graham believes sooner or later, Market will value the stock at the original or fair price. One such stock I identified currently (July 15, 2011) is Polyplex Corporation and will explain why this stocks fits the Graham criteria.

Polyplex Corporation (Current Price : Rs. 194)

Polyplex Corporation is the Indian multinational Polyester film company having operations in India, Thailand, Turkey and USA. The products are used in Packaging, Industrial & Electrical applications, Magneteic Media and imaging applications.

Please download the latest (2010-2011) results and balance sheet from the following link in order to understand the explanations.

Lets calculate the usual Graham figures. (From Consolidated Figures)

1 ) Book Value (Reserves & Surplus + Capital / Total Shares) = Rs. 501 (1605 / 3.2)

2) PE Ratio = 1.5 ( 195 / 130)

Note: Removed Exceptional Item (630 Crores from Net Profit) to calculate the EPS.

3) Debt Equity Ratio = 0.48 (771 / 1605)

4) Continuous dividend from 1997. Rs. 14 in 2010 and Rs. 7 (As of now) in 2011.

So, Polyplex satisfies all the usual Graham stuff and in fact trading more than 60% discount to the Book Value. Lets take this further and calculate the "Net Current Asset" value in Graham Method.

1) Inventory = Rs. 218 Crores ( 436 * 0.50)

2) Receivables = Rs. 265 Crores (332 * 0.80)

3) Cash and Bank Balance = Rs. 860 Crores

4) Loans and Advances = Rs.171 Crores

Adding all this we get Rs. 1514 Crores. From the balance sheet we understand that the current liabilities are about Rs. 364 Crores.

Net Current Assets = 1514 - 364 = Rs. 1150 Crores.

Net Current Asset Value per Share = 1150 / 3.2 = Rs. 359

Current Market Price of Rs. 194 is 46% discount to the "Net Current Asset" value per share.

If you look at closely, you are in for a more shock. Cash and Bank Balance itself is Rs.860 Crores and that translates into Rs. 269 per share. So the current market price is 28% discount to the Cash and Bank balance per share alone. Even if we were to assume that they have decided to pay all the debt (Rs. 771 Crores), still we are left with Rs. 379 Crores of Net Current Assets apart from Rs.1500 Crore Fixed Asset Value.

So, from my point of view, this stock has no business trading at this price and (Market Cap of Rs. 620 Crores when the Cash in Book itself Rs.860 Crores) is "Undervalued". Considering the fact that they generated Rs. 2433 Crore revenue last year makes this stock all the more interesting. Only negative thing I see in this stock is, it is "Cyclical". But that does not warrant this huge discount and my belief is that market will recognize this sooner than later.

Kumaran Seenivasan


Shabu's July 16, 2011 at 12:11 AM  

Dear Kumaran,

Superb again..and a certain gem pick meeting the Graham Criteria..

Mohan R,  July 16, 2011 at 2:39 AM  

Very Good Analysis, please do the same for Graphite India and SRF Ltd.

i learned some interesting things but i have to learn some more on Accounting to understand better.

Mohan R

Mahesh July 17, 2011 at 12:25 AM  

Kumaran Sir,

Very Impressive. Clean and Elegant. I think this will become frame work for beginners.

I have one question. How much contingent liability is harmful.

Because Shree Ganesh Jewellery CL = 922.75 FY10. it was increasing YoY...and the stock is quoting very very low p/e.

I would be great if you could explain this tricky term :-).


Kumaran July 17, 2011 at 8:56 AM  


Contingent liability is an amount thats is at stake based on the outcome of a future event. For example, companies make Contingent Liability provisions against law suits. If the court passes the order in favour of plaintiff, then the company has to pay this amount to the plaintiff else not. In general, chances for paying this "Contingent Liability" is very minimal. With regards to Shree Ganesh, I assume it you mentioned the number in Lakhs which means Contingent Liability of about Rs. 10 Crore is not going to impact the company.


Mahesh July 17, 2011 at 10:49 AM  

They are in terms of crore's not lakhs.

Its in AR Schedule 21.

Thanks sir for reply.


Anonymous,  July 18, 2011 at 11:49 PM  

Dear Kumaran,

I saw that the Tax Rate for Polyplex is very low. Do have any reason why they are paying so low Taxes? It is leass than 10% of PAT.


fundainvest August 8, 2011 at 11:52 PM  

Dear sirji

fantastic is all i can say,learned a lot keep up the good work,now lets see its performance in reality and analyse it after a year or so.

Anand,  August 9, 2011 at 3:21 AM  

Very good analysis, I think you applied the theory very nicely. Polyplex seems to be weathering the July 2011 storm quite nicely.

roshan August 10, 2011 at 7:03 AM  

Superb one again Kumaran. Keep up the good work

Soham Das August 15, 2011 at 4:05 AM  

You havent taken note of Loan funds of 732 or so crores, edoesnt make it an NCAV bargain. Graham when he mentioned total liabilities(and not current liabilities) he meant all outstanding liabilities ahead of common equity!

However with an OPM of 33 odd pc and a return on capital of 27 odd pc, the business dynamics of the company I must say is interesting

siva August 16, 2011 at 2:09 AM  

Dear Mr.Kumaran,
Very good analysis.
However, net current value may not be a correct indicator of intrinsic value of stock. The lesser it is, the more better for the company as it would realise its current assets faster. The more it is, the conversion to liquid cash is longer, however, intrinsic value of the share may be more if NCV is higher. For this reason, it is deceptive.

Abhishek August 22, 2011 at 1:44 PM  

Your every post is very informative and it is unique as well.
Can u please analyse the tatasteel, as i heard that it could go up to 600 level..
Thanks and regards,

karuppiah September 12, 2011 at 5:15 AM  

with the current market price of Rs.191, I could see from the P/B is 3.43. So it means Book Value per share is 191/3 = Rs 63. But you have mentioned the book value as Rs 501. Can you pls explain this? I am new to these terms and I may be wrong.

Kumaran September 16, 2011 at 9:12 PM  


What you are talking about is PE Ratio and EPS and not book value. Book value is calculated by dividing the networth by equity.


yayati September 20, 2011 at 11:16 AM  

looking from data at moneycontrol i didnt see revenue for polyplex at 2433 cr last year. same goes for cash and bank balance of 860 cr....

Kumaran November 11, 2011 at 9:26 PM  


Several readers said that they did not find the data in moneycontrol. I don't know why you guys are looking for the data at moneycontrol. Most of the data that moneycontrol has is wrong and even if they have, that would be for standalone and not consolidated figures. I got the data from the Polyplex corporation company website under investor relations. The data is available in the previous quarterly result.


Kumaran November 11, 2011 at 9:28 PM  


The quarterly statement link is available in the article itself. Why you guys are searching for the data somewhere else??? Please read the article completely first before writing something.


David Ritchson November 20, 2011 at 10:30 PM  

A well written analysis made. I'm still eager to know more on statistical reporting and analysis. I hope I can learn more from you.

binary option

Shekhar December 3, 2011 at 9:35 AM  

Hi Kumaran

I would like to highlight another point. Polyplex' Thai subsidiary is listed in Bangkok SE and is currently valued at Rs.2000 crs; Polyplex Corp owns 70% stake (direct+indirect).

JBF Industries is also a similar story. do you feel that since there is no raw material linkage i.e. PTA and MEG for these guys, the market is not giving the required valuation.

Let me know your views.


Anonymous,  June 3, 2012 at 8:19 AM  

Hi Kumaran,

Indian Cos. are notorious for cooking the accounts and books by typically overstating revenues and profits as a result showing higher Current Assets (Inventories, Receivables and even Cash& Bank balances (Satyam Comp)) over the years, by hiding losses but showing superb profits, until and unless SFIO or somebody does raid on their books.

It is not like in USA where there are stringent reporting rules and if caught fudging accounts, the law authorities will immediately take criminal action against Cos and hence Current assets are reliable. But in India, the Current assets are questionable as to how much is really on the ground in reality or just lying only in books of accounts as fudged data.

Market is supreme and would have discounted these things and price a stock. Currently (2.6.12), it is at 145 much below your recommended price.

Cos. like HUL, Colgate etc have very low Book Value, one of the lowest Net Current Assets, but stil quote such high price because of clean management, good corp governance and no cooking up of books of accounts

Anonymous,  September 12, 2012 at 3:15 AM  

Dear Shri Kumaran,

An excellent analysis.On the same parameters Could you do the anaysis for the Maharaja Shree Umaid Cotton Mills?




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