A very good friend sent me last weekend a clip from CNBC TV18 and questioned us how can we miss out such a great investment idea.

Well, here is the link of that clip (Click Here).

Before reading further I don’t want you to jump and buy Kalyani investments thinking it is trading at 90% discount to its investments book value. It is worth to investigate further and think rationally before investing in them.

After looking at that clip even I had a question in my mind why is it trading at such low price? I do not track the Kalyani investments so the very first thing I started reading its last year annual reports and searching for the answers.

As it is an investment company, I started looking into their listed investments which reflects almost 62% of their total investments. These investments are as follows:

  1. 1.Hikal Ltd (31% of business) Total market cap Rs 814.19 crore.
  2. 2.BF Utilities (16% of business) Total market cap Rs 2,330.51 crore
  3. 3.Bharat Forge (13.60% of business) Total market cap Rs 10,169.60 crore
  4. 4.BF investment (16% of business) Total market cap Rs 228.83 crore

The total market price for all the four businesses is Rs 13,543.13 crore and Kalyani investments owns worth around Rs 2,000 crore of it.

We know market is irrational and the price what you pay is not always the real estimate value of those businesses. I started looking at Hikal Ltd. And its capital History:

Hikal is in pharmaceutical sector and this business is highly leveraged with very low returns on its equity. This business is giving returns less than what you can fetch from your normal savings account. We valued this business for the year end 2013 to be Rs 74.06 crore (Rs 45.05 per share).

They have performed better in business terms this year compare to last year and we are expecting its estimate business value for the year end 2014 to be Rs 349 crore (Rs 212.50 per share).

We have not seen a consistent profits rising year after year and investing with speculating its 2015 profits will be dangerous. If we assume they will grow their profits by 25% in 2015 than a rough estimate for its 2015 values will be around Rs 480 crore (Rs 291 per share).

BF utilities belongs to the power sector and we rate this business as C4 in its quality and performance or in other words as a bankrupt business. The answer to why it is bankrupt business is in its capital history:

They have not made a single rupee in profits from last five years. Five years back this business was trading at Rs 1400 per share and seven months back it was at Rs 120 per share. A jump of almost 500% in seven months was because of getting approvals from Karnataka High court in regards to their Nandi projects.

The company is getting high valuations on the basis of its three subsidiaries and they are NICE (Nandi Infrastructure Corridor Enterprise), NECE (Nandi Economic Corridor Enterprise) and NHD (Nandi Highway Developer). They are still not generating enough to pull out this business from losses. Future prospects might be looking great but not that great to value this business today for Rs 2,300 crore.

Bharat Forge is in the business of casting and forge and is also the flagship business of Kalyani. We rate this business as B3 in regards to its quality and performance. Let’s look at the capital history of this business:

Bharat Forge is also a very highly leverage company. The only positive we know is that it generates more cash flow than its reported profits. We expect its business intrinsic value for the year end 2014 to be Rs 145 per share and for 2015 in the range of Rs 175 – 225 per share. If it keeps going strong in future than our 2016 valuations will be in range of Rs 210 – 275 per share.

The recent rally in Bharat Forge was also because of the merger news with Kalyani Alstom power.

BF investments is another business within finance and investments similar to Kalyani investments. As of March 2013 the shareholders have contributed Rs 644.51 crore and it reported profits of Rs 26.37 crore.

Today this whole business is valued only Rs 228 crore which is almost one third of its book value.

Looking at the above all those businesses on a very conservative note I would value all of the business in total value of Rs 5,500 crore. I have taken Rs 0 value for the BF Utilities as it is still a loss making business and it looks it will still report losses for the year end 2015. If you want to add value to that business of around Rs 1500 crore, still the total intrinsic value comes to Rs 7,000 crore.

Kalyani investments own 15% of this entire value, so its listed assets are valued in range of Rs 800 – 875 crore. This represents the 62% of total investments.

Purely on the above assets bases we will be valuing this business for Rs 1,950 per share.

Looking at the quality of the businesses they are holding I think that the best value they are only creating for the promoters of Kalyani rather than for the retail investors. You will be arguing that though they are not generating any great returns but values of those assets are increasing (virtual profits or capital gains on their holdings).

We like to invest only in the quality grade businesses, if your portfolio is full of highly leveraged and low quality businesses than in the long run (3 – 5 years) you won’t be happy with the returns they generate. A big spike in its short term performance is very attractive for investors to bet on this stock but we will stay away from it and happy to let go this opportunity. For us the first priority is to preserve every rupee of our investors in the fund.

Your comments are most welcomed.