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Cash Buffer May Not Make the Stock a Value Buy
Feb 11, 2017

Readers know that we are not big fans of companies keen to hold tons of cash in their balance sheet for no tangible reason. Yes, we have been skeptics of excessive surplus cash well before the Satyam blowup. But companies that regularly use the cash to invest prudently or pay dividends score well with us.

That said, not every company that has a high proportion of cash as a share of market cap is a value buy according to us.

The recent BSE IPO brought us face to face with this dilemma. The offer was priced at Rs 806 per share. On earnings alone, it was valued at a steep 36x its latest annualised earnings.

There was a twist in the tale though. Big enough to give it an entirely different ending.

The company had a massive Rs 38.6 billion in cash and investments on its balance sheet. On a per share basis, that's Rs 708 per share, almost 90% of the offer price.

We still gave the IPO a pass. There was no clarity on what the company would do with this huge cash hoard. It could well remain on the balance sheet, losing its value with each passing year.

Investors will value the Rs 38.6 billion differently depending on when they expect this hoard to be realised.

We, wanting to be conservative, assumed it would never be realised. In our analysis, we only considered BSE's other income arising out of these holdings and left the cash holdings out of the equation entirely.

The danger of giving bloated valuations just because a stock has cash or valuable real estate on its balance sheet is not lost on us.

This trend reaches a frenzy in a bull market as analysts try every trick in the book to justify exorbitant valuations.

Data Source:Equitymaster, Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Low Hanging Fruit? The Story of Infosys and Cash-Rich Underperformers

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