GTC Industries - Excellent Bet with Virtually No Downward Risk

Posted by admin

July 12, 2008

GTC Industries is engaged in manufacturing of cigarettes at Vadodara and Mumbai with an installed capacity of 17,322 million cigarettes with annual production of 8,000 million cigarettes.

For FY 08, the company achieved a total income of Rs.165 crores, profit before tax of Rs.17.21 crores and profit after tax at
Rs.12.88 crores resulting in an EPS of Rs.7.32 on equity of Rs.17.60 crores.

Paid-up equity of the company is at Rs.17.60 crores with face-value of Rs.10. Of this, promoters stake is at 45.42%, FIIs are holding 11.23% while 43.35% is held by the public.

Share had its 52 week high low of Rs.750 and Rs.126 and is now ruling at Rs.140, virtually at its low. This translates into a market capitalization of just Rs.250 crores.

The company is debt free and net worth of the company recently came in positive which implies a total enterprise value of the company at Rs.250 crores only.

The Board of the company in March 08 has proposed to de-merge Tobacco and Real Estate Business in two separate entities and list them separately.

Realty division of the company is having properties at Delhi, Vadodara, Hyderabad and Mumbai. In Najafgarh, Delhi, the company, in Joint Venture is developing 1.80 lakh sq. feet into residential office, commercial and shopping and would get 60% of the built-up-area on an investment of Rs.20 crores. Value of this property, post development, would be close to Rs.100 crores, which can give an annual rental income of Rs.10 crores.

In Hyderabad, the company is developing its 2.75 acre plot into retail mall with 4 screen multiplex in joint development, with total developable area of 2.20 lakh sq. ft. The cost of development shall be entirely borne by the Developer while the company would be entitled for 50% of built-up-area, as its share, value of which would be close to Rs.100 crores.

The real value in realty division lies in the company’s property in Mumbai at Vile Parle where developmental area of about 15 lakh sq. ft. is available. This plot is located in Western Suburb at Vile Parle on S. V. Road, which is an ideal plot for commercial and shopping with present value of close to Rs.2,000 crores. Though the company has no immediate plans of development for this property, this maybe taken up after demerger process is complete. The company should be able to develop this property in JV, with its share of 75% into developed area with nil investment.

The property at Vadodara is also valued at around Rs.100 crores and the same can be retained for manufacturing operations..

There has been renewed interest by overseas companies in cigarette business in India and there are only four listed players with the company being the smallest amongst four. Hence, the promoters of the company may even think of exiting from its core business if they get a good valuation. Such companies can easily get a valuation of 2x of its topline looking to the brands it carries. Hence, its cigarette business can get valued close to Rs.400 crore plus considering topline at Rs.200 crores for FY 09. The running business along with Vadodara plant can realize close to Rs.500 crores.

As stated, the present market capitalization of the company is just Rs.250 crores which is just half of expected valuation of Tobacco business. The realty division can easily get a net present valuation of over Rs.2,000 crores, excluding its Vadodara property. The best part about its realty division is no obligation of any development and fund requirement for the same. Mumbai property has many prospective developers on the terms favorable for the company, due to strategic location of the property.

The de-merger process may get completed by March 09. Though, management of the company is slow and are passive, but this move would get expedited by them as it is ultimate value unlocking for the company and its promoters.

Hence, share at Rs.140 is an excellent bet with virtually no downward risk. Though we have recommended the stock in the past at Rs.270 and it moved up from there but now, having corrected to Rs.140 gives a good opportunity to buy at such a cheap rate. Those holding it are advised to remain invested with at least 12 months view to reap rich harvest.

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