January - March 2006

April 29, 2006

I would hasten to add that not much credence should be given to one quarter or even one year's numbers. For instance, so far this month, two shares which constitute a significant part of your portfolio performed as follows: 

Market Price as on 31.03.06Current Price as on 29.04.06
Binani Industries107.25233.20
Madras Aluminum Company Limtied 264.50617.00

Rerating, like the desert storms, takes place in short bursts and swiftly. Whilst one can reasonably predict the events, timing is a futile exercise.Albert Einstein wrote that "The important thing is not to stop questioning." An investor should always question the prices in relation to value.

Lets take Binani Industries which is now a large part of your portfolio. Since it has gone up almost 200%, is it now fairly valued? 

These are the calculations of my estimate of Binani's intrinsic worth:

Current equity  : Rs.29.6 cr.

Equity after Swap : Rs.14.8 cr.

Binani Industries will hold 55% in Binani Cement Limited (BCL). In 07-08, Binani Cement Limited will have 5.2 m t p a spent capacity and will make a net profit of Rs.140 cr. The value of BCL will be anything between Rs.80-Rs.200/share of BCL.  

Binani Industries will hold approximate 70% in Binani Zinc Limited (BZL). Binani Zinc Limited is finding a strategic financial investor and will be investing in mines and power which will dramatically increase its profitability. At $2700/tonne of zinc, the pre-tax profit would be Rs.100 cr. At $4500/tonne, it will be a lot higher. Currently zinc prices are galloping and are at $3300/tonne. Zinc supplies are in the tightest position for generations. In fact, today better than owning a gold mine is owning a zinc mine. BZL should have a market capitalization of Rs.1000cr. I estimate that with a very conservative holding company discount, Binani Industries is worth between Rs.400-Rs.600/-share at current zinc prices. I see room for a doubling to trebling of the money invested in Binani Industries. 

We are currently investing in a special situation and I see room for significant upsides there. There are visible catalysts in place for price to quickly catch up with value. 

In investing it pays to follow Aristotle's advice: "All persons ought to endeavor to follow what is right, and not what is established." I do not mind investing unconventionally, if I can maximize your risk adjusted returns. 

The market's movement has been confined to a few leading scrips which to my mind are very expensive, whilst a lot of the smaller companies have been neglected and may offer value. However any sharp sell off in the market can lead to a temporary market-to-market loss in the value of the holdings. I make no claims to predicting where the Sensex is going to go, except to state that it is expensive. But I do not believe that the Sensex is representative of "the market." 

Should there be any questions, please do not hesitate to call me. 

Thanking you, 

Warm Regards, 

Chetan Parikh