Saturday, April 06, 2013

Is Geodesic Ltd the multibagger you have been waiting for?
One stock that is currently in the dumps and is a value investor’s dream is Geodesic Ltd. 
Geodesic is a software products company which makes a range of products in areas like telecommunication,financial products etc. It is a highly profitable company with good margins. In FY12 (15 months), the company reported consolidated revenues of Rs 1320.7 crs, net profit of Rs.260 crs, EPS of Rs 28.9 and a cash balance of Rs 1142.2 crs. The stock is currently trading at a price of Rs 17, which implies a PE multiple of less than 1x! In this post, I will highlight the issues that have caused such absurd valuations.

Using any standard valuation methodology, the Geodesic stock should be trading in the range of Rs 250-Rs 300 per share. There are many reasons for such low valuations. I will discuss each one:

The cash does not exist: There are lots of rumors in the air that the cash on books of the company does not exist and that the promoters have siphoned off the cash. I disagree with such rumors as there are plenty ways in which promoters can steal money from their companies. A company will not pilfer funds by showing Rs 1000 crs + cash in its books! It pilfers funds by doing an acquisition abroad and stating that it has acquired it for say, 10$, gives the seller 1$ and pockets 9$ away in its Swiss account.

The company’s debt consists of FCCB payments of Rs 827 crs, short term borrowings of Rs 270 crs, and long term debt of Rs 15 crs. The FCCBs are nearing maturity and have to be redeemed. As and when Geodesic pays off the FCCBs, the matter will get resolved and the rumors surrounding the cash will die a natural death.

Geodesic has not paid off the FCCBs:
The FCCBs were due on 18 Jan, 2013. Few naive investors expected an announcement of redemption on that day itself. However, the fact is that paying off FCCBs takes time. The company has made an announcement to that effect:

The company is committed in redeeming it’s convertible bonds in full. The company is working with all stakeholders to fasten the redemption process. We will keep all stakeholders updated on the progress.

The best part of this statement is that the management has not opted for restructuring of the FCCBs, it is only stating that they are in discussions with the debt holders to fasten the process, implying that they are redeeming the entire FCCB liability.

Unethical management:
The top management consists of a troika -Kiran Kulkarni (CEO), Prashant Mulekar (CFO) and Pankaj Kumar (Chairman). They are first generation entrepreneurs. The charge that they are unethical arose mainly because of the stock’s low valuations. However, I illustrate two examples which lead me to believe that the management is ethical.
  • All three in the top management, mentioned above, draw a salary of Rs 22.5 lakhs, as per the latest annual report. It is difficult to imagine the CEO/CFO of a Rs 1000 crs+ company raking in such pathetically low salaries. Even fresh MBAs from top tier colleges get better packages!
  • Another indicator of management integrity is that they did not blow up the FCCB proceeds. The FCCB money was raised at a conversion price of Rs 320, in very good times obviously! Other companies who raised money in those times did acquisitions and burned the money. Geodesic chose to keep the money in the bank, which according to me, requires strong ethics ably demonstrated by the management.
Earnings are subdued:
The earnings of this company have showed a deceleration.The reason is that its products are sold globally and hence the ongoing recession has affected its revenues and profitability.

Promoter’s stake has come down:

Geodesic promoters were grilled in the last AGM held in 2012 for not having enough stake, which currently stands at mere 15%. Here is the history of what actually happened: Sometime back, the promoters bought around 20 lakh shares of their own stock in the open market. But guess what, to buy these shares they took a Loan Against Securities (LAS) with their Geodesic shares pledged. As the stock price fell, lenders asked for more margin which the promoters did not have (another testimony to their honesty). The lenders sold off the pledged shares in the open market which resulted in the stock price crashing. So now, the promoters have ended up with less shares than what they started with!

So, now that I covered the reasons for the low valuations, the more pertinent rationale of why the stock price will go up needs to be put forth. In my opinion, the stock price will eventually go up because of the following:
  • FCCBs will get repaid soon
  • The company has declared dividends to shareholders- Rs. 2/share
  • Buyback is scheduled to happen at a maximum buyback price of Rs.75/share
  • The cash transfer schemes of the government will begin and intensify for the 2014 elections.
  • Cidambaram is expected to allocate huge budgets for this scheme, which is to be implemented by the Aadhar system. 
  • Geodesic’s product GeoAmida is a critical component in the Aadhar ecosystem and its sales are expected to pick up significantly.
As the above events unfold, the issues surrounding the Geodesic stock will disappear and as the PE multiple gets re-rated, multibagger returns are sure to follow.