Diversified businesses

Kothari Products (KP), the flagship company of Kothari group, is best known for its pan masala which is sold under the brand name of Pan Parag, and has over a period of time become a generic name for pan masala. The company was also involved in the business of packaged drinking water under the "yes" brand. In Nov. 2008, the company hived off the activities of manufacturing of pan masala, beverages divisions into a separate legal entity in the name of “Pan Parag India Limited” Redeemable preference shares were issued for this company to the shareholders of KP. These have since been redeemed.

Consequent upon the demerger, KP has focused on business opportunities in the what they consider to be the most buoyant and vibrant sectors of the economy such as real estate, investments and international trading of Exports & Imports. The core concentration of KP is now on these businesses. So in that sense, it is more of a quasi-holding company which not only has its operations in the above businesses, but also holds stake in other businesses of the group.

 Real Estate - The company itself and through its associates and other promoter group companies has substantial investment in the real estate sector in the Commercial, residential, retail, hospitality segments, land and development thereof. The company has a strategic partner in the Sattva (Salarpuria) group. Sattva is one of the leading real estate development group based in Bangalore, which is well known for its “IT Techno Parks” and beautiful residential buildings. The Salarpuria Group has its offices in Bangalore, Delhi, Pune, Jaipur, Hyderabad, Vizag and Kolkatta. Under the joint development with Salarpurias, KP has embarked upon development of mega residential projects in Bangalore and Pune. 

International Trade – KP has ventured into the import-export trade of various products/commodities including agro-based commodities, minerals, metals and petroleum products. Recently the company has also incorporated its foreign subsidiary in Singapore for “General Whole sale Trade (including General Imports & Exports)” in addition to a domestic subsidiary to pursue the business of international trade vigorously and profitably.

The company’s trading items are being exported directly or through merchant exporters to China & Thailand. The company has exported iron ore and is also in the process of exporting of aluminium ingots to Thailand and also planning export of Literite to Bahrain. The company is also planning various minerals and metal products for export. New developments under process are Soya DOC.

FMCG business – This was the core business of KP before the diversification as mentioned above. This business is now housed in its wholly owned subsidiary Pan Parag India Ltd. which is also involved in the business of packaged drinking water under the "yes" brand.

As has been seen in the past, the hullabaloo regarding pan masala ban, due to the recent Maharashtra government ruling, will soon die down. The gutkha and pan masala manufacturers will move court and get this rolled back as they have done twice in the past. After all, cigarettes also fall in a similar category and the courts couldn’t stop their production.

This company has a tiny equity capital of about Rs 6.63 crore. Promoters hold roughly 75% of the equity capital.  As of March ’11 (current years’ results awaited), this company had a cash and bank balance of Rs 36 crore and loans & advances of close to Rs 322 crore. This makes the total liquid assets available with the company at more than Rs 350 crore. Against the liquid assets of Rs 350 crore, this company has a total debt of only 90 crores. This is besides the other investments the company holds in its subsidiaries at book value which in real terms will be worth many times over.

For the year ending March ’12, the company has an EPS of more than 90. This company has been a regular dividend payer, for the last many years it has consistently paid dividends of more than 100% going even up to 160% in some years (this year it was 150% or 15/share). So here we have a company, which has very little debt, a small equity and a very high promoter stake. It is creating huge value for the shareholders, year after year whereas the market price is not going up in the same proportion.

With a book value of nearly 980 crores, it is quoting at a P/BV of less than 0.5 and a P/E of 5.4. It should not be looked at as a pure holding company since it has some operations of its own, and hence should be looked at in that light. So merely applying a discount to BV to arrive at a fair price may not be the correct way since its operational business is not being considered. And real estate as well as trading operations, if managed correctly, have been known to be good money spinners.

Such companies producing tobacco-related products have a market cap which is more than its sales revenues many times over - ITC (8), Godfrey Phillps (nearly 2), VST (nearly 3), KP commands a Market Cap to Sales of just 0.1. The company thus appears grossly undervalued compared to its peers and carries potential to reduce the huge valuation gap which exists currently. At the current price of about Rs 408, this stock is a pure value play. Also, considering its huge reserves vis-à-vis the equity, a bonus could be distinct possibility. However, considering the diverse nature of its businesses most of which are not doing so well (for e.g. real estate and trading due to general consumer environment and volatile exchange rate), it may not soar too much in the current environment. However, under benign conditions, the returns should be good (last July ’11 it was quoting as much as 670).