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Dhir India Investments (DHIR:LN)

  • Mkt Price:  GBP 16p
  • Mkt Cap:  GBP 2.67 mio
  • P/C:  0.36  (adjusted)
  • P/B:  0.12

Just because I’m a value investor, doesn’t mean I won’t make speculative bets, it just means I like to use value investing to determine that bet..! Here’s one I’ve finally jumped into:

Dhir India’s the only UK-listed investment vehicle offering fund managers/investors exposure to distressed assets and companies in India. The fund invests in 4 types of transactions: Turnaround of companies, re-sale of companies/assets, break-up and sale of assets and bridge financing. Charlie Hambro is the Chairman, while the Investment Manager Shiva is headed by Alok Dhir. Dhir’s been practicing insolvency law for over 20 years, and is a successful investor in Indian non-performing assets. The company was launched in mid-2007, and promptly completed 6 investment projects (1 listed) by year-end.

Adjusted NAV is the metric to focus on here. This excludes Deferred Taxation, which the directors anticipate will not be payable. The latest Adjusted NAV is GBP 134p, virtually unchanged from the maiden GBP 139p NAV. Projects essentially remain at cost, while INR currency strength has fortunately offset the cumulative impact of a 4.1% annual expense ratio. Despite this ratio, the Board’s actually boasted about its recent cost control efforts..! So we have a current 0.12 P/B. Adjusted P/C ratio looks equally absurd at 0.36. Note I’ve adjusted Cash to reflect some subsequent events:

GBP 5.181 mio Cash + 2.150 Cygnet Assets Sale + 0.620 Cygnet Auction Deposit – 0.575 Expenses YTD = GBP 7.376 mio Adjusted Cash

These ratios wave a red flag, so we need to drill down… I’m going to attempt to include my first file(s) here. Here’s some explanation: To facilitate adjustments, I’ve broken out the projects from the Parent Company. I’ve ignored Deferred Tax, also Minorities as I’m calculating sub. values directly. Let me walk you through the columns:

PDF:  Dhir India Investments (Nov 2011)

Excel:  Dhir India Investments (Nov 2011)

Investment Value:  The first 4 projects are listed at B/S values. Cygnet is also, but I’ve deducted receipts of GBP 2.15 mio from sale of plant & machinery and a GBP 0.62 mio auction deposit. LCAL (LCA:IN) is listed, so I simply use the current market value.

Discounted Value:  I apply a 50% haircut to 5 of the projects, based on their unlisted status and the general lack of resolution to date in realizing value from these companies/assets.

Cash:  I take Parent Company Cash of GBP 0.718 mio from the Parent Company B/S, but to be conservative I deduct GBP 0.862 mio of annual expenses. I allocate the other GBP 4.463 mio of Consolidated Cash across the 5 unlisted projects.

Net Receivables/Payables:  A similar exercise to Cash.

FX Adjustment:  I apply a discount to the 5 unlisted projects reflecting the (negative) GBP/INR rate movement since Mar 2011. No adjustment to LCAL’s market value, while I assume the Parent Company operates in GBP.

Ownership:  I reflect DHIR’s ownership stake in each project. Don’t be confused by 100% for LCAL, this just reflects the fact I’m already using the market value of DHIR’s stake (6.0% of LCAL).

Adjusted Value:  Finally, after applying haircuts/adjustments, I arrive at a Total Value of GBP 11.592 mio. Based on Outstanding Shares, this equates to an Adjusted NAV of GBP 69.6p per share.

So, why’s the price so cheap? If you scan the message boards, they’re full of mutterings about institutions selling and market makers abusing PIs (sounds exciting, then I realized it meant private investors). Sigh, why do I troll these boards? Then again, UK boards are a pleasure vs. those in the US. Jesus wept, have you ever read a Yahoo Finance message board?! I have, on occasion…quickly followed by my second shower of the day. But it doesn’t add up: Over 80% of DHIR’s in institutional hands, with YTD volume at about 29% of Outstanding Shares. So where are the new Holdings disclosures from the institutions? With the relentless decline from GBP 95p this year, I think we’re mostly just seeing the cascading impact of PIs entering and painfully exiting the stock.

What about market-markers? Those damn sons of Satan..! Their nefarious dealings & conspiracies are commented on ad nauseam, but the reality is they’re invariably agnostic on most stocks. Their only interest is to set prices and spreads in response to actual investor trades and to clear out their positions asap. Boards talk about MMs ‘marching’ prices up and down, but of course it’s usually just caused by investors’ greed & fear. The MMs are just along for the ride, and the spread. Ah, the spread…OK, I hate them too!

Other more obvious reasons are the exorbitant expense ratio, the painfully slow and opaque realization process, and the deteriorating relationship between Alok Dhir and the Board. This has now culminated in a termination notice, so Shiva will cease being Manager in May 2012. The majority of Cash is no longer at the Parent Company level, and is actually committed to further investment in the projects. Even worse, the GBP 2.8 mio of Cash recently received by Cygnet is subject to possible Court appropriation. So, the availability of the B/S Cash is not all that at clear. Finally, adding insult to injury, the Board basically owns no shares even at this paltry price level. God, this has plenty of fleas, but I’m reminded of Aurora Russia (AURR:LN) which collapsed 90% some years back, but has since tripled from its lows with more positive newsflow. There’s plenty of things to like about DHIR also:

The investment exposure is attractive. In the current environment, I don’t want to exit the market (am I horribly wrong?!), I just want to dive deeper into emerging/frontier markets & currencies. I like the event-driven nature of this fund, and its (ultimate) lack of market correlation. There’s a good Margin of Safety due to current Cash and lack of over-commitment, and of course due to the discount vs. Cash/Book Values. The discount to Cash is heartening , despite my earlier comments. It now looks like the full project commitments will not be required – worst case, the Board could refuse to follow through on further investment. This would likely dilute or eliminate value in the project stakes, but allow the Board to access/return Cash far in excess of the current Mkt Cap.

The share register’s also dominated by institutions, including Jabre Capital (28%), Mackenzie Cundill (10%), Fidelity (10%) and GLG Partners (4.6%), amongst others. Clearly these shareholders can control and direct future corporate strategy, if they so wish. I haven’t heard activist rumblings to date, but I’m sure discussions are going on behind the scenes. This is evidenced by the Shiva termination, and the Board’s recent statement that they “…seek to accelerate the process of returning value to shareholders through a review of the investment and realisation strategy and over the next twelve months steps will be taken to try and achieve this aim”. They’re not quite ready to admit it yet, but how on earth can they propose reinvesting any realization proceeds now? I suspect a formal wind-down strategy will be announced fairly shortly.

Balancing all the positive/negative factors, I’m comfortable further haircuts aren’t required. Therefore, I propose a Fair Value equal to the Adjusted NAV of GBP 69.6p per share, as detailed above. This offers a 335% Upside Potential, with annualized returns also v attractive even if a wind-down takes a few years. I’ve added a 1.6% stake to my portfolio at this point, and may add further based on price and/or newsflow developments.

btw You may debate my project haircuts, and/or question why I didn’t discount the recent Cygnet Cash proceeds (considering the legal risk attached). However, I think the legal risk’s offset by a Court award of GBP 2.43 mio to the Destination India project. Cash has not yet been received, and I haven’t included it in my valuation. More importantly, the Cygnet land and buildings were sold at auction for GBP 12.42 mio, of which the GBP 0.62 mio deposit has been received. I’m ignoring this third party confirmation for the moment, but it suggests my discounted valuation may well prove conservative. Of course, if the Cygnet Auction proceeds are actually received, I’d have to radically revise my current Fair Value calculation!

  • Tgt Adjusted P/C:  1.6
  • Tgt P/B:  0.52
  • Tgt Adjusted P/B:  1.0
  • Fair Value:  GBP 69.6p
  • Upside Potential:  335%