“It always seemed, and still seems, ridiculously simple to say that if one canacquire a diversiﬁed group of common stocks at a price less than the applicable net current assets alone — after deducting all prior claims, and counting as zero the ﬁxed and other assets —the results should be quite satisfactory.” - Graham
Nifty (Large Cap)200 3 Year Forward Total Returns (%) Vs Current PE150100 152 12150 84 51 21 0 -15 -33 -36 -40-50 < 14 14 - 16 16 - 18 18 - 20 20 - 22 22 - 24 24 - 26 26 -28 28 - 30 Data Source: nseindia.com
Part of the ﬁxed assets are income producingEarning stream is of very high quality Growing stream Highly Predictable How to value this income stream?
Part of ﬁxed assets are not producing any income. Not NPAs They are valuable, but idle assets.
Capital WIP is an ongoing project which will complete within an year or so.At the moment it is not producing any income.
Fixed assets are traded in a market of their own and their value can be independently veriﬁed.
Nehru Place PropertyTotal built-up area: 51,810.07 square feet. The building is let out to variousmultinational companies like Microsoft, Cisco, Heinz, and Royal & SunAlliance. The property managed by Gesco Corp. The tenants pay Gesco Corp. a compositesum which includes rent and maintenance charges.
Nehru Place Property Building has been constructed to international quality standards, and has been rated as one of the best commercialbuildings in New Delhi by an international property consulting ﬁrm and has been rated as class "A".
Bhikaji Cama Place PropertyTotal built-up area: 54,973.35 square feet.Most of the ﬂoors are let out to Erricson at Rs 150 per square feet per month.The lease deed also provided for an escalationof 25% on the rent on every extension of three years.
Bhikaji Cama Place Property The property is managed by Knight Frank, acompany in which Gesco Corp. had a 16% stakeThis building too has been ranked as one of thebest commercial complexes in Delhi by Richard Ellis.
Valuation of two properties We now knew the rents being paid by tenants of both the Delhi properties to Gesco.In case of the Bhikaji Cama Place property, this was Rs 125 per square feet per month, and in case of Nehru Place property, this was Rs 95 per square feet per month. The annual rental revenue from the Bhikaji Cama Place property came to Rs 8.24 cr. The annual rental revenue from Nehru Place property came to Rs 5.90 cr. The total rental income came to Rs 14.14 cr.
Valuation of two properties This tallies with the income statement of thecompany according to which the total income fromoperation of commercial complexes was Rs 14.09 cr. and the business centre revenues were Rs 0.68 cr.)We were have also informed through market sources, that both the properties were fullyleased and the typical lease term is either 6+3years or 3+3 years, with escalation clauses of 25% after every three years which translates into an annual increase in rents of 7.8%.
Valuation of two properties If we ignore the escalation clauses built into the lease agreements for the above twoproperties, and further assume that the quality of tenants will remain unchanged, then the annual rental income of Rupees 14.14 cr from these properties would resemble coupon payments on a high-grade, perpetual corporate bond. At that time, such a bond would produce ayield-to-maturity of 12% per annum (implying a multiple of 8.33).
Valuation of two propertiesUsing this capitalisation factor of 8.33, which we felt was extremely conservative, given thelocation and the quality of these properties, the value of these properties came to Rs 117.78 cr. Notice, however, that this valuation ignores:The increase in value due to rent escalation clauses. If we assume a perpetual growth of only 3% p.a. inrents, then the value of these two properties becomes Rs 157 cr.
Valuation of two propertiesThe reduction in value due to a clause in agreement with DDA which requires that 50% of unearned increase is to be surrendered to DDA. The presence of this clause will have an impacton the resale value of the property but will have no impact on the earning power value becausethe earning power value is based on rents which are unaffected by the presence of this clause.
Valuation of two propertiesIf both the above points are taken into account, it is, in our opinion, safe to assume a minimum earning-power value of Rupees 100 crore for these properties. This valuation of Rupees 100 crore for both properties translates into Rupees 9,364 per square feet. Now we can compare this earning-power valuation ﬁgure of Rupees 9,364 per square feet with that of the prices fetched by other commercial properties in Delhi.
Valuation of two properties According to Knight Frank, the outrightprices for non-prime commercial propertiesin various commercial business districts of Delhi were as under: Connaught Place: Rs. 7,000-9,000 per sq. ft. Bhikaji Cama Place: Rs. 3,500-4,000 per sq. ft. Nehru Place: Rs. 3,500-4,000 per sq. ft. Rajendra Place: Rs. 3,000-3,200 per sq. ft. South Extension: Rs. 4,500-5,000 per sq. ft. Gurgaon: Rs. 2,500-3,500 per sq. ft.
Valuation of two properties According to Knight Frank, "A" gradebuildings in these areas having power back up, air-conditioning, latest ﬁre ﬁghtingequipment etc., were quoted at signiﬁcantly higher rates than the above rates.
Valuation of two properties In fact, on our enquiries from market sources, class "A" retail trade buildings in Delhi were commanding outright sale prices as high as Rupees 15,000 per square feet (in Ansal Plaza, for instance). The price range for class "A" properties in commercial centres of New Delhi (such as Connaught Place, Nehru Place, and Bhikaji Cama Place), according to market sourcesrange from anywhere between Rupees 9,500 to Rupees 10,000 per square feet.
Valuation of two properties Therefore, our earning-power estimate of Rupees 9,364 per square feet appeared to be reasonable, considering the prevailing market rates of such properties in New Delhi. Indeed, in our discussions with various propertybrokers in Delhi, it has emerged that the sale value of both the Gesco properties is in the region of Rs 12,000 to Rs 15,000 per square feet. However, westuck to our conservative valuation of Rs 9,364 per square feet.
Valuation of two propertiesSummary of valuations of both the Gesco Corp. Properties: Great Eastern Center, Nehru Place, New Delhi: Rupees 49 cr. Great Eastern Center, Bhikaji Cama Place, New Delhi: Rupees 51 cr.
Valuation of Capital WIPGesco Corp. took over capital work- in-progress valued at Rupees 22.9 crore from Great Eastern Shipping.A very substantial part of this capitalwork-in-progress was attributable toGreat Eastern Plaza, Pune, one of the premium commercial complexes.
Valuation of Capital WIP Located on the main airport road, this building boasts of the following: (1) Graniteand glass facade; (2) Full air-conditioning; (3) Full power back-up; (4) Infrastructure forsatellite connectivity; (5) Two tier car parking space; (6) Total area of 140,000 square feet in two phases- Phase one of 70,000 square feet is complete; (7) Constructed by Singapore Infrastructure Technologies.
Valuation of Capital WIP The scheme of arrangement between Gesco and Great Eastern Shipping mentions that the total area of the property owned by Gesco is 8,499.32 square meters. Elsewhere, it has been mentionedthat the total area of 140,000 square feet was to bebuilt in two phases of 70,000 square feet each, out of which phase one of 70,000 square feet is now complete.EIH Ltd has built a Trident Hotel in the same complex.
Valuation of Capital WIP As on 31 March 2,000, Gesco Corps total capital work-in-progress was valued at Rupees 30.47 crore. The components of this capital work-in-progress, apart from GE Plaza, Pune were not known. Whatwas known, however, is that phase one of GE plazaconsisting of 70,000 square feet of prime commercial property is now complete.
Valuation of Capital WIPAccording to Knight Frank, the current outright sale value of prime commercial property in Pune was approximately Rupees 4,000 per square feet. Although, given the quality and location of GEPlaza, its outright sale value ought to be somewhat higher than Rupees 4,000 per square feet, we wereconservative and taken the value quoted by Knight Frank.
Valuation of Capital WIPOn that basis, the value of phase one of GE Plaza comes to Rupees 28 crore. Further, if we assume that the remaining components of Gesco Corps capital work-in-progress have a value of at leastRupees 2.47 crore, the whole of the capital work-in-progress on thebalance sheet of Gesco Corp. as on 31 March 2000 would be valued at cost of Rupees 30.47 crore. This Rupees 30.47 crore value appears to be conservativebecause: (1) it assumes a zero return on funds invested by thecompany in capital work-in-progress; and (2) it assumes zero value for the remaining portion of the premises of GE Plaza where phase two comprising of 70,000 square feet of prime commercial property is to be built.
Valuation of Bangalore PropertyThe property comprises of 9,223 square feet of leased commercial property called Great Eastern Plaza in Bangalore. According to Knight Frank, the current outright sale value of prime commercial property in Bangalore was approximately Rupees 4,000 per square feet.On this basis, the value of GE Plaza, Bangalore came to Rupees 3.68 cr.
Valuation of Residential PropertiesSince there was no rental income from residential properties none of these properties are contributing to the operating earnings of the company.This does not mean that the properties are vacant.In fact, the document on scheme of demerger mentions that the ﬁve ﬂats in Belvedere are occupied byemployees (of, presumably, Great Eastern Shipping).ereCourt is reputed to be one of most beautiful residential buildings in Mumbai.
Valuation of Residential PropertiesAccording to Knight Frank, one ﬂat in Belvedere Courtwas recently sold for Rupees 2.15 cr. at a rate of Rupees 10,250 per square feet.To be on the conservative side, we assumed a value ofonly Rupees 1.75 cr. for each of the ﬁve ﬂats owned by Gesco Corp. in Belvedere Court.Total value of these ﬁve ﬂats, therefore, came to Rs 8.75 cr.
Belvedere Court• India’s tallest residential apartment complex• A bow-shaped, 40-storey, international style skyscraper, comprising of 3 and 4 bedroom luxury duplex apartments.• Situated at Mahalaxmi in Central Mumbai• Gesco build this property and owned 5 ﬂats.
Valuation of Residential Properties Gesco Corp. also owns ﬁve more ﬂats in Mumbai, each of which have been conservatively valued at Rupees 50 lacs. Finally, the company owns one ﬂat inBangalore, which we are valuing at Rupees 25 lacs. The total value of the residential properties, which were taken over by Gesco from Great Eastern Shipping comes to Rupees 11.50 cr.
Valuation of Residential Properties In addition, the company has spent Rupees 9.09 cr. to its residential property portfolio subsequent to the acquisition of properties from Great Eastern Shipping under the scheme of demerger. Assuming the value of newly added properties to be at least equal to 100% of the cost of creating them, the minimum value ofresidential properties of Gesco Corp. comes to Rupees 20.59 cr.
Valuation of Administrative Offices The corporate headquarters of Gesco Corp. is located in the World Trade Center, Cuffe Parade, Mumbai. The company owns the premises. We took an arbitrary value of Rupees 5 cr. for this ofﬁce.The company also owned three ofﬁces in Pune and one ofﬁce in Banglore. Each was assigned an arbitrary value of Rs 25 lacs. Therefore, the total value of the administrative ofﬁces of Gesco Corp. comes to Rupees 5.75 cr.
Property Valuation SummaryGreat Eastern Center, Nehru Place, New Delhi: Rs. 49.00 cr. Great Eastern Plaza, Bhikaji Cama Place, New Delhi: Rs. 51.00 cr.Capital Work-in-Progress including Great Eastern Plaza, Pune: Rs 30.47 cr. Great Eastern Plaza, Banglore: Rs. 3.68 cr. Residential Properties: Rs 20.59 cr. Administrative Ofﬁces: Rs. 5.75 cr.TOTAL VALUE = Rs 160.49 cr. (Book value 118 cr.)
Valued at Rs 160 cr. Valued at Rs 37 cr. Valued at Rs -7 cr. Rs 160 cr. + Rs 37 cr. – Rs 7 cr. = Rs 190 cr.The company has 2.87 cr. Shares. Value/ share = Rs 66 per share. Conservative [MARGIN OF SAFETY]
Let us now introduce an additional element of MARGIN OF SAFETY. At what price per share would you call this hypothetical company’s stock a “screaming bargain”?
What is the cash per share? Rs 37 cr./2.87 cr. = Rs 12.89 per share?What would you do if this stock became available at Rs 9 per share? What if the “Efﬁcient” Market valued this entire company for Rs 26 cr.? What would you do?Don’t answer yet before you get the next bit of information!
What if, in this company, the promoterswere holding a stake of 11% and the rest of the shares were out in the market? Now, what would you do?