9. “It always seemed, and still
seems, ridiculously simple
to say that if one can
acquire a diversified group
of common stocks at a
price less than the
applicable net current
assets alone — after
deducting all prior claims,
and counting as zero the
fixed and other assets —
the results should be quite
satisfactory.” - Graham
29. Part of the fixed assets are income
producing
Earning stream is of very high quality
Growing stream
Highly Predictable
How to value this income stream?
30. Part of fixed assets are not producing any
income.
Not NPAs
They are valuable, but idle assets.
31. Capital WIP is an ongoing project which
will complete within an year or so.
At the moment it is not producing any
income.
32. Fixed assets are traded in a market of
their own and their value can be
independently verified.
33. Nehru Place Property
Total built-up area: 51,810.07 square feet.
The building is let out to various
multinational companies like Microsoft,
Cisco, Heinz, and Royal & SunAlliance.
The property managed by Gesco Corp.
The tenants pay Gesco Corp. a composite
sum which includes rent and maintenance
charges.
34. Nehru Place Property
Building has been constructed to
international quality standards, and has
been rated as one of the best commercial
buildings in New Delhi by an international
property consulting firm and has been
rated as class "A".
35.
36.
37.
38. Bhikaji Cama Place Property
Total built-up area: 54,973.35 square feet.
Most of the floors are let out to Erricson at
Rs 150 per square feet per month.
The lease deed also provided for an escalation
of 25% on the rent on every extension of three
years.
39. Bhikaji Cama Place Property
The property is managed by Knight Frank, a
company in which Gesco Corp. had a 16% stake
This building too has been ranked as one of the
best commercial complexes in Delhi by Richard
Ellis.
40. Valuation of two properties
We now knew the rents being paid by tenants
of both the Delhi properties to Gesco.
In case of the Bhikaji Cama Place property, this
was Rs 125 per square feet per month, and in
case of Nehru Place property, this was Rs 95
per square feet per month.
The annual rental revenue from the Bhikaji
Cama Place property came to Rs 8.24 cr.
The annual rental revenue from Nehru Place
property came to Rs 5.90 cr.
The total rental income came to Rs 14.14 cr.
41. Valuation of two properties
This tallies with the income statement of the
company according to which the total income from
operation of commercial complexes was Rs 14.09 cr.
and the business centre revenues were Rs 0.68 cr.)
We were have also informed through market
sources, that both the properties were fully
leased and the typical lease term is either 6+3
years or 3+3 years, with escalation clauses of
25% after every three years which translates
into an annual increase in rents of 7.8%.
42. Valuation of two properties
If we ignore the escalation clauses built into
the lease agreements for the above two
properties, and further assume that the quality
of tenants will remain unchanged, then the
annual rental income of Rupees 14.14 cr from
these properties would resemble coupon
payments on a high-grade, perpetual
corporate bond.
At that time, such a bond would produce a
yield-to-maturity of 12% per annum (implying
a multiple of 8.33).
43. Valuation of two properties
Using this capitalisation factor of 8.33, which we
felt was extremely conservative, given the
location and the quality of these properties, the
value of these properties came to Rs 117.78 cr.
Notice, however, that this valuation ignores:
The increase in value due to rent escalation clauses. If
we assume a perpetual growth of only 3% p.a. in
rents, then the value of these two properties becomes
Rs 157 cr.
44. Valuation of two properties
The reduction in value due to a clause in agreement
with DDA which requires that 50% of unearned
increase is to be surrendered to DDA.
The presence of this clause will have an impact
on the resale value of the property but will have
no impact on the earning power value because
the earning power value is based on rents which
are unaffected by the presence of this clause.
45. Valuation of two properties
If both the above points are taken into account, it
is, in our opinion, safe to assume a minimum
earning-power value of Rupees 100 crore for
these properties. This valuation of Rupees 100
crore for both properties translates into Rupees
9,364 per square feet.
Now we can compare this earning-power
valuation figure of Rupees 9,364 per square
feet with that of the prices fetched by other
commercial properties in Delhi.
46. Valuation of two properties
According to Knight Frank, the outright
prices for non-prime commercial properties
in various commercial business districts of
Delhi were as under:
Connaught Place: Rs. 7,000-9,000 per sq. ft.
Bhikaji Cama Place: Rs. 3,500-4,000 per sq. ft.
Nehru Place: Rs. 3,500-4,000 per sq. ft.
Rajendra Place: Rs. 3,000-3,200 per sq. ft.
South Extension: Rs. 4,500-5,000 per sq. ft.
Gurgaon: Rs. 2,500-3,500 per sq. ft.
47. Valuation of two properties
According to Knight Frank, "A" grade
buildings in these areas having power back
up, air-conditioning, latest fire fighting
equipment etc., were quoted at significantly
higher rates than the above rates.
48. Valuation of two properties
In fact, on our enquiries from market sources,
class "A" retail trade buildings in Delhi were
commanding outright sale prices as high as
Rupees 15,000 per square feet (in Ansal Plaza,
for instance).
The price range for class "A" properties in
commercial centres of New Delhi (such as
Connaught Place, Nehru Place, and Bhikaji
Cama Place), according to market sources
range from anywhere between Rupees 9,500 to
Rupees 10,000 per square feet.
49. Valuation of two properties
Therefore, our earning-power estimate of
Rupees 9,364 per square feet appeared to be
reasonable, considering the prevailing market
rates of such properties in New Delhi.
Indeed, in our discussions with various property
brokers in Delhi, it has emerged that the sale value
of both the Gesco properties is in the region of Rs
12,000 to Rs 15,000 per square feet. However, we
stuck to our conservative valuation of Rs 9,364 per
square feet.
50. Valuation of two properties
Summary of valuations of both the Gesco Corp.
Properties:
Great Eastern Center, Nehru Place, New Delhi:
Rupees 49 cr.
Great Eastern Center, Bhikaji Cama Place, New
Delhi: Rupees 51 cr.
51. Valuation of Capital WIP
Gesco Corp. took over capital work-
in-progress valued at Rupees 22.9
crore from Great Eastern Shipping.
A very substantial part of this capital
work-in-progress was attributable to
Great Eastern Plaza, Pune, one of the
premium commercial complexes.
52. Valuation of Capital WIP
Located on the main airport road, this
building boasts of the following: (1) Granite
and glass facade; (2) Full air-conditioning; (3)
Full power back-up; (4) Infrastructure for
satellite connectivity; (5) Two tier car parking
space; (6) Total area of 140,000 square feet in
two phases- Phase one of 70,000 square feet
is complete; (7) Constructed by Singapore
Infrastructure Technologies.
53. Valuation of Capital WIP
The scheme of arrangement between Gesco and
Great Eastern Shipping mentions that the total
area of the property owned by Gesco is 8,499.32
square meters. Elsewhere, it has been mentioned
that the total area of 140,000 square feet was to be
built in two phases of 70,000 square feet each, out
of which phase one of 70,000 square feet is now
complete.
EIH Ltd has built a Trident Hotel in the same complex.
54. Valuation of Capital WIP
As on 31 March 2,000, Gesco Corp's total capital
work-in-progress was valued at Rupees 30.47
crore.
The components of this capital work-in-progress,
apart from GE Plaza, Pune were not known. What
was known, however, is that phase one of GE plaza
consisting of 70,000 square feet of prime commercial
property is now complete.
55. Valuation of Capital WIP
According to Knight Frank, the current outright sale
value of prime commercial property in Pune was
approximately Rupees 4,000 per square feet.
Although, given the quality and location of GE
Plaza, its outright sale value ought to be somewhat
higher than Rupees 4,000 per square feet, we were
conservative and taken the value quoted by Knight
Frank.
56. Valuation of Capital WIP
On that basis, the value of phase one of GE Plaza comes to Rupees
28 crore. Further, if we assume that the remaining components of
Gesco Corp's capital work-in-progress have a value of at least
Rupees 2.47 crore, the whole of the capital work-in-progress on the
balance sheet of Gesco Corp. as on 31 March 2000 would be valued
at cost of Rupees 30.47 crore.
This Rupees 30.47 crore value appears to be conservative
because: (1) it assumes a zero return on funds invested by the
company in capital work-in-progress; and (2) it assumes zero
value for the remaining portion of the premises of GE Plaza
where phase two comprising of 70,000 square feet of prime
commercial property is to be built.
57. Valuation of Bangalore Property
The property comprises of 9,223 square feet of
leased commercial property called Great
Eastern Plaza in Bangalore.
According to Knight Frank, the current
outright sale value of prime commercial
property in Bangalore was approximately
Rupees 4,000 per square feet.
On this basis, the value of GE Plaza, Bangalore
came to Rupees 3.68 cr.
58. Valuation of Residential Properties
Since there was no rental income from residential
properties none of these properties are
contributing to the operating earnings of the
company.
This does not mean that the properties are vacant.
In fact, the document on scheme of demerger mentions
that the five flats in Belvedere are occupied by
employees (of, presumably, Great Eastern Shipping).ere
Court is reputed to be one of most beautiful residential
buildings in Mumbai.
59. Valuation of Residential Properties
According to Knight Frank, one flat in Belvedere Court
was recently sold for Rupees 2.15 cr. at a rate of Rupees
10,250 per square feet.
To be on the conservative side, we assumed a value of
only Rupees 1.75 cr. for each of the five flats owned by
Gesco Corp. in Belvedere Court.
Total value of these five flats, therefore, came to Rs 8.75
cr.
60. Belvedere
Court
• India’s tallest residential
apartment complex
• A bow-shaped, 40-storey,
international style
skyscraper, comprising of 3
and 4 bedroom luxury
duplex apartments.
• Situated at Mahalaxmi in
Central Mumbai
• Gesco build this property
and owned 5 flats.
62. Valuation of Residential Properties
Gesco Corp. also owns five more flats in
Mumbai, each of which have been
conservatively valued at Rupees 50 lacs.
Finally, the company owns one flat in
Bangalore, which we are valuing at Rupees 25
lacs.
The total value of the residential properties,
which were taken over by Gesco from Great
Eastern Shipping comes to Rupees 11.50 cr.
63. Valuation of Residential Properties
In addition, the company has spent Rupees
9.09 cr. to its residential property portfolio
subsequent to the acquisition of properties
from Great Eastern Shipping under the
scheme of demerger.
Assuming the value of newly added
properties to be at least equal to 100% of the
cost of creating them, the minimum value of
residential properties of Gesco Corp. comes to
Rupees 20.59 cr.
64. Valuation of Administrative
Offices
The corporate headquarters of Gesco Corp. is
located in the World Trade Center, Cuffe Parade,
Mumbai.
The company owns the premises.
We took an arbitrary value of Rupees 5 cr. for this office.
The company also owned three offices in Pune and
one office in Banglore. Each was assigned an
arbitrary value of Rs 25 lacs.
Therefore, the total value of the administrative
offices of Gesco Corp. comes to Rupees 5.75 cr.
65. Property Valuation Summary
Great Eastern Center, Nehru Place, New Delhi: Rs.
49.00 cr.
Great Eastern Plaza, Bhikaji Cama Place, New
Delhi: Rs. 51.00 cr.
Capital Work-in-Progress including Great Eastern
Plaza, Pune: Rs 30.47 cr.
Great Eastern Plaza, Banglore: Rs. 3.68 cr.
Residential Properties: Rs 20.59 cr.
Administrative Offices: Rs. 5.75 cr.
TOTAL VALUE = Rs 160.49 cr. (Book value 118 cr.)
66. Valued at Rs 160 cr.
Valued at Rs 37 cr.
Valued at Rs -7 cr.
Rs 160 cr. + Rs 37 cr. – Rs 7 cr. = Rs 190 cr.
The company has 2.87 cr. Shares. Value/ share = Rs 66 per share.
Conservative [MARGIN OF SAFETY]
67. Let us now introduce an additional element of
MARGIN OF SAFETY.
At what price per share would you call this
hypothetical company’s stock a “screaming
bargain”?
68.
69. What is the cash per share?
Rs 37 cr./2.87 cr. = Rs 12.89 per share?
What would you do if this stock became
available at Rs 9 per share?
What if the “Efficient” Market valued
this entire company for Rs 26 cr.?
What would you do?
Don’t answer yet before you get the next
bit of information!
70. What if, in this company, the promoters
were holding a stake of 11% and the rest
of the shares were out in the market?
Now, what would you do?
