A large difference between the market cap and the enterprise value doesn't always mean a cheap stock
30-Nov-2016 •Ashish Jain
Enterprise value (EV) refers to the total market value of a company for its capital providers (both equity- and debt-holders). To calculate EV, the market capitalisation of equity shares, market value of debt and minority interest are added, and then cash and cash equivalents are subtracted from the sum. To put it in simple terms, EV is what you need to pay to completely own a company: you pay out the entire market cap and the debt; you pay the minority shareholders for their stakes. And you get the cash the company has.
We have shortlisted 11 companies whose EV is at a significant discount to their market capitalisation. Such companies are attractive because EV being at a discount to market cap means presence of significant cash on the balance sheet. However, before you get too excited about the cash, beware. Such companies could also very well be value traps. You must research such companies thoroughly before you take the buy call. Try to figure out especially why the company is sitting on a cash pile. Here is what is happening in the 11 shortlisted companies:
The company has trade payables of Rs 3,165 crore and contingent liabilities of Rs 2,860 crore. These are likely to consume the cash visible on the balance sheet.
Smartlink Network Systems
The company has Rs 471 crore cash from the sale of one of its businesses in 2011-12. It has had a negative cash flow since then. Clearly, it could be a value trap.
63 Moon Tech
The company's market cap is low because the stock has corrected significantly owing to a fraud in the company. The company could require even more cash than what is seen on its balance sheet to settle legal liabilities.
The company's revenues have fallen by 50 per cent and profit by almost 85 per cent in the last one year. The company seems to be accumulating cash for an acquisition to revive its fortunes.
Orissa Mineral Development Company
OMDC is facing contingent liabilities of Rs 6,072 crore under various laws, which justifies the EV-market cap discount.
The company has gradually accumulated its cash over the last ten years through good performance. Government ownership hurts the share-price performance. The company is likely to give big dividends.
After accumulating cash for several years, the company has been hit by weak iron-ore prices. Its cash could be used for an acquisition.
Swelect Energy Systems
The company sold off its UPS business in 2012-13, which led to a significant increase in cash. Now, this cash is essential to repay the outstanding debt as the company's operations have struggled post sale. The cash flow from operations has been negative for three years in a row and the company has just turned in a profit. The excess cash is likely to be used to repay debt or pay dividend if the business improves.
The company is facing contingent liabilities in the form of penalties and taxes.
It has significant trade payables of Rs 10,858 cr, supported by only Rs 4,889 crore receivables. Hence, a very high level of cash, Rs 12062 crore, is maintained to pay upcoming short-term liabilities.
It has been making inter-corporate deposits with the parent, which have become Rs 826 crore. Now this money has been taken back and invested in short-term investments. The company could delist, in which case it is likely to use its cash for a buyback of shares.