The Curious Case of Sintex and its Completely Deflated Book Value

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Last week, one of our valued members wrote in to us, requesting an explanation on the whole Sintex Industries saga.

The Sintex issue came to my attention when Zerodha's founder and CEO Nithin Kamath, warned investors not to buy the company's shares.

These were Kamath's exact words.

• Equity shares of Sintex Industries will be delisted, and the equity will be reduced to zero as part of the insolvency resolution process. You will lose your entire capital if you invest.

Kamath was right.

As per the company's exchange filing, its insolvency resolution plan has been approved by the lenders.

Based on the plan, the share capital of the company shall be reduced to zero and the company will be delisted from the stock exchanges.

Needless to say, this development has come as a shocker for Sintex investors. If the plan goes through, their entire investment in the company will have to be written off.

This investment write off wasn't even remotely playing on the mind of the valued member who wrote in to us.

After all, how can one lose money if one is buying the stock at a huge 70% discount to its book value?

Yes, you read that right.

At the current price of Rs 8 per share, the stock is trading at a huge discount to its book value of Rs 25.

Thus, theoretically at least, an investor stands to make a cool 200% returns on his investment in case of liquidation.

He is investing Rs 8 whereas the shareholder equity or the net worth of the company i.e. the part that belongs to the shareholders, is valued at Rs 25 per share.

So, if they're meant to earn Rs 25 for every share they hold in the company, how on earth has their investment been totally wiped off?

Forget making 3x, they are not even getting their invested capital back.

Well, I still remember quite clearly what Warren Buffett once wrote about investing based on price to book value.

You see, back in early 1985, Warren Buffett decided to hold an auction to sell some textile machinery.

The equipment to be auctioned took up space that was equal in size to a giant football field.

It had originally cost Buffett US$ 13 m and was eminently usable. At the time of auction, it had a book value of almost US$ 0.9 m.

Well, here's the shocker. Gross proceeds from the sale of this equipment came to just US$ 0.2 m, a huge markdown of almost 80%.

Put differently, Buffett received just 20% of the value that the equipment was valued at in the company's books.

In fact, after accounting for pre and post-sale expenses, Buffett took home a sum total of zero. Relatively modern looms that he bought for US$ 5,000 apiece in 1981 found no takers at US$ 50.

He finally sold them for scrap at US$ 26 each, a sum less than removal costs.

The key takeaway from this case study is as clear as day. As a measure of value, the book value of the company can at times be completely misleading.

What you think can fetch you Rs 100 in case of liquidation, can be marked down by as much as 80%-90%, leaving you with nothing but crumbs.

And this is what seems to have happened with Sintex Industries. The book value of the company is Rs 25 per share as per the book of accounts. But its real liquidation value could be far less.

This is why, all the parties involved have decided to mark it down to zero perhaps.

Well, this then begs the question of whether price to book value is a reliable method for valuing the company at all. Aren't investors taking a huge risk by pouring a significant part of their hard earned money into stocks based on this valuation indicator?

As someone who's been running a successful service based on the same indicator for more than 8 years now, my answer would be a huge 'no'.

Price to book value is still a useful metric in my view provided certain conditions are adhered to.

You see, Sintex is a loss making company for more than two years now. It always had debt that was in excess of its equity.

Investing in such stocks, no matter how cheap they are, is a recipe for disaster in my view.

In addition to a stock being attractive in terms of valuations, it also has to be of a certain minimum standard in terms of quality. But Sintex does not really score well on this second parameter.

Also, when you are investing in stocks based on price to book, I will never recommend you to bet the farm on any single stock.

You need to keep your portfolio well diversified and no single stock should form more than 4%-5% of your entire equity allocation to such kind of stocks.

This way, even if there are a few bad apples like Sintex, your overall loss is not very large and you can always recoup it later on.

And last but not the least, buying with a huge margin of safety doesn't mean there won't be any losses. No investment strategy can promise a 100% track record.

However, if you buy a large number of stocks of reasonable quality with a sufficient margin of safety, the aggregate of profits will most likely exceed the aggregate of losses over the long term.

And this is precisely how any investment strategy should be.

So yes, what has happened with Sintex is disappointing. However, this in no way sounds the death knell of price to book value investing.

This strategy is based on the timeless principles of fear and greed and will continue to work as long as you follow these three rules.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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