Our last post got a lot of fellow Happionaires sending e-mails and trying to figure out which company I was speaking about that has assets worth Rs. 10,000 crores but is selling for around Rs.800 crores. Most people suggested names of existing real estate companies or infrastructure companies. I even had the fund manager of a relatively smaller Mutual Fund e-mailing me and asking me which company I was speaking about.
Now the thing about looking for hidden land banks in real estate companies is like looking for hidden stocks of soap in a soap factory. They wouldn’t be hidden and would be all out in the open. Whenever an analyst or investor looks at investing in a real estate company, one of the main things he checks is the land bank. This reduces the possibility of a value based investor discovering any hidden assets.
But would they do the same if they wanted to invest in a Bank or in a Pharma company? The first thing most investors will research is the way the core business is doing. If someone was to invest in a Pharma company they will check the sales of drugs, any new innovations, profitability, medical opportunity, etc. thus overlooking any hidden assets These are the basics, but most of the fun lies is going beyond just the basics.
Imagine a company that has been around for over fifty years(and are not in the real estate space). Let us say they purchased/got land 50 years ago. There balance sheet will continue to reflect the price of the asset purchased in those days. We very well know the type of price appreciation that must have happened over the years. Something that might be costing Rs. 1 on the balance sheet, today could be worth several hundred or even thousand crores. These are the types of hidden assets, I love to hunt for.
Almost all public sector companies have such assets, I remember sitting at the SBI Building, when I was told by a good friend there that the entire building is priced for only Rs. 1 on the balance sheet. I still wonder how strange it is that the entire building is priced at Rs. 1. Wouldn’t we all love to buy such buildings? Maybe in the public sector it might not be so easy to sell these assets immediately. These will be long term stories of around ten years, but a lot of private sector companies today are looking at developing their land banks. I must confess, many times I have thing easy, since I meet so many people from different areas of life. and they reveal a lot.
I’m sure investors must be remembering the type of extraordinary returns defunct and dead mills in the Mumbai region gave to investors, as this property was developed into prime retail, commercial and residential real estate.
Investing for me has never been about balance sheets, but going beyond them. A large part of it is about trying to observe and learn from our surroundings, the people we meet, interact, socialize and do business with. For a few this might seem like hard work and time, consuming, I don’t see it as hard work because I love what I do and am extremely passionate about it.
That way everybody puts in hard work and effort in what they do. An engineer has to pass entrance exams, study hard at college and work as a trainee. A doctor has to spend several years in medical school and as an intern before he can achieve something. A pilot has to spend several hours practicing to fly a plane and make sure he is physically fit. An actor, dancer, sportsperson, business man – even a small child learning the alphabet or numbers puts in effort and hard work. I remember as a kid, I found it extremely difficult learning the alphabets in order. I could read and writer, but till a very late age didn’t know the exact order in which alphabets came.
To become a good engineer, doctor, artist, marketer, pilot or businessman – it took you some time, didn’t it? Investing too is like life. If we dedicate a bit of time, love, work and passion things do work out wonderfully in the long run.
To find the company I am talking about, start by short listing all those companies which have a market cap of between Rs.700-Rs. 900 crores and then figure out which one of them is quite old and might have purchased land for the purpose of its business. Study the various businesses you find, speak to their managements, make calls and if needed visit them personally. There is no fixed formula and we all learn along the way. In your journey for knowledge you will surely discover a lot. Take action now, because you don't want to look back ten years from now and grumble about how you missed out opportunities. This is going to be a really special decade for India.
Best of luck and happy investing!