Chapter 43 of Security Analysis talks about bargains trading below their liquidation value. One of the stocks that looked interesting in this category was Sunil Hitech Engineers Ltd.
Sunil Hitech is engaged in the niche segment of Fabrication, Erection & Testing and Commissioning of Bunkers, ESPs, Boilers, TG sets in the Power Plants, both in Private & Public sector.
Though the company has a huge debt of around Rs.370 crores, the market capitalization of Rs.131 crores looked interesting. Against this, the company carries net current assets of over 600 crores.
Using the rules of valuation for companies with "speculative capital structure" as prescribed in the Chapter 40 of the book, I valued the company as a whole at around Rs.500 crores 1. The current valuation of the company is Rs.501 crores (370 + 131). Due to the high leveraging, an improvement in the operating margins, or recovery of receivables, or new bulk-orders in can increase the bottom-line significantly.
As I began to dig more into the stock, however, a great example of financial engineering sprang up.
Last year the company passed a resolution to allot 80 lac preferential warrants convertible into shares to the promoters and FIIs. The company currently has a total of 1.2 crore outstanding shares. That is a dilution of over 66% for the minority share holders. Further interesting points about these warrants are that they are priced at Rs.73 per warrant. Of this, only 25% is to be paid at the time of allotment of warrant, and the rest 75% at the time of conversion. The quarterly results published by the company don't show the diluted EPS (probably because the warrants haven't been allotted yet).
After considering the diluted equity, the fair value per shares dropped by half - the stock ceased to looked exciting even from the "speculative" angles.
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The valuation of Rs.500 crores is on the upper side based on the optimism of new government. ↩