1. business and industrial

Rs.419
Target Price: Rs.600
Potential Upside: 43%
Absolute Rating: BUY
Diversified
Bombay Burmah Trading Corp Ltd.
14th May 2015
|
The Bombay Burmah Trading Corporation Limited (BBTC), a 150 year old company, is engaged in business of
plantations, autoelectricals and health care. However, the major valuation for the company comes from its equity
investments in its subsidiary (50.5% stake), Britannia Ltd.
Inclusion in MSCI India Small Cap Index - a big positive
As per the media sources, BBTC is to be added in the MSCI India Small Cap Index for which changes will take
place on May 29, 2015. We believe that the inclusion is likely to lead to fresh buying of the stock by passive funds,
which follow the global benchmark indices . The foreign holding of this stock would rise consequently;
BBTC: Unique Holding Company, available at attractive Discount
In the last 3 months, while BBTC stock price has fallen 18%, the price of its subsidiary Britannia has fallen only by
2%. Consequent to this divergent trend in the stock prices, the valuation discount has expanded to 78% vs. a
70% discount earlier. While the Enterprise Value of BBTC stands at Rs.3,142 crore (marketcap of Rs.2,937 crore +
net debt of Rs.205 crore), the market value of its investments in Britannia is at whopping level of Rs.13,954 crore
(i.e. 50.5% of Britannia’s marketcap of Rs.27,631 crore). This results in BBTC’s Enterprise Value being at about
78% discount to its investment value in Britannia! Many holding companies enjoy discount to enterprise value as
low as 45% to 50%. We firmly believe that BBTC deserves much lower discount to its investment value for the
following reasons:
The predominant portion (almost 95%) of BBTC’s total investment value comes from a single company
i.e. Britannia. For many other holding companies, generally they come from several group companies –
theoretically speaking, unlocking possibility from a single investment is more than what one would think of from
several group companies;
While many holding companies are shell companies on standalone basis, BBTC has diverse businesses on its
own like plantations and automobile components. Further, being a 150-year old company it holds a lot of
surplus land bank;
Most holding companies hold shares of group companies engaged in diverse businesses ranging from
commodities to financial activities. BBTC’s subsidiary Britannia is engaged in FMCG business, which enjoys
much higher premium over commodity businesses and hence, ideally speaking, the discount
for BBTC should be less than what other holding companies enjoy;
1
Equinomics Research & Advisory Private Limited - Investment Adviser
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Stock Data
Market cap
: Rs 2,938cr
52 week high/low
: Rs 550/ 103
Avg. daily vol. (3mth)
: 1,24,290
NSE code
: BBTC
BSE code
: BBTC
Shareholding (%)
Mar-15
Dec-14
Promoters
:
65.91
65.91
FIIs
:
0.04
0.13
DIIs
:
5.00
4.06
Others
:
29.05
29.90
Founder & Managing Director
Mr. G. Chokkalingam
[email protected]
Investment Rationale Cont…
While most holdings companies’ investee companies’ businesses are cyclical in nature, BBTC’s subsidiary is engaged in FMCG business, which is
expected to post consistent growth in profits over the years. So even if the discount percentage doesn’t get narrowed down, BBTC’s
investment valuation, in absolute term, will go up over the years;
Other businesses to increase earnings in future
On standalone basis, it is engaged in the business of plantations and auto electric components. We believe, with economic revival, these businesses would be
able to increase their earnings in future. Also BBTC’s expertise in producing organic teas for over two decades will help BBTC to consolidate its position in the
major organic markets around the globe. Healthcare division to be another revenue driver for the company. Recently, BBTC proposed to market ‘Alginate’, one
of its products, under the Brand “Chromatex” as a leading Chromatic alginate brand in India and to increase the export sales two fold.
Consolidated results of March 2015 quarter could be possibly another short-term trigger for the stock
BBTC publishes consolidated results (incorporating the profits of Britannia) only along with the March quarterly results. In FY2014, BBTC posted 56% yoy
increase in its consolidated net profits. During the first 9 months of FY2015, Britannia has already posted over 80% yoy growth in it net profits. Since Britannia
profit accounts for over 90% of consolidated profits of BBTC, we expect very impressive growth in consolidated net profit of BBTC for the whole of FY2015.
We expect BBTC stock to get some significant trigger on the eve of publication of consolidated results (which are published only once in a year along with
March quarter results).
Outlook & Valuations
If we assume that Britannia grows its profits annually by 15% (most conservative estimate as its current profit growth is over 30%) and hence, its
marketcap grows by 15% per annum, then value of BBTC’s investments in Britannia would have moved up by 75% in the next 4 years to Rs.24,405
crore from the current value of Rs.13,954 crore. Even if we assume the same 70% discount to the value of investments held by BBTC in Britannia
even after 4 years, the fair price works out to about Rs.1,000 per share. Moreover, BBTC, on consolidated earnings, trade at mere 7.4x FY2017E
EPS of Rs.56/. Hence, we suggest our investors to accumulate the stock with a revised target price of Rs.616 which is 11x FY2017E EPS. This revised target
price is highly conservative in our view as at this target price also, BBTC offers a discount of 68% to its investment value of Britannia holding. We continue to
maintain the long term (within 3 to 5 years) target price of Rs.900/ for BBTC.
Financial Summary (Consolidated)
Net Sales
(Rs Cr)
Change
(%)
PAT
(Rs Cr)
Change
(%)
EPS
(Rs)
Change
(%)
P/E
(x)
FY2013
6,519
10.0
133.00
-42.4
19.0
-42.4
22
FY2014
7,271
11.5
207.00
56.3
29.7
56.3
14.1
FY2015E
8,010
10.2
300.00
45.0
43.0
45.0
9.7
FY2016E
8,999
12.3
390.00
30.0
55.9
30.0
7.4
Y/E Mar (Rs Cr)
Source: Company, Equinomics Research & Advisory Private Ltd
2
Equinomics Research & Advisory Private Limited - Investment Adviser
Disclaimer Cont…
Stock Disclosure: Whether Stock Held By:
Bombay Burmah Trading Corp.
G.Chokkalingam & Family
Equinomics
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Equinomics Research & Advisory Private Ltd - Investment Adviser (SEBI REG. NO. INA000001712)
G. Chokkalingam - Founder & Managing Director
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