Stock to watch: Almondz Capital (BSE: 511589)

ACMSL is the holding company of New Delhi based Almondz Global Securities Ltd. (AGSL, BSE Code – 531400). ACMSL holds 85 lac shares and 10 lac warrants being convertible at Rs.80 per share of AGSL of on September 30, 2007. ACMSL is just a holding company for AGSL and is debt free. As on September 30, 2007, the equity base of the company is 1 crs shares.

With the CMP of Rs.91 of AGSL, the value of shares held by ACMSL comes to Rs.77.5 crs, which converts into Rs.77.5 per share as the NAV. So, at its CMP of Rs.48, the stock is trading at almost 40% discount to its NAV. The preferential allotment of 2.6 lac shares made by the promoters of ACMSL to themselves at Rs.61 goes on to prove the confidence of promoters in their own company.

We believe that AGSL, which used to be one of the largest players in the debt syndication market and now is transforming into a merchant banker/investment banker, holds a lot of promises due to some of the following triggers:

1. The company on December 11, 2007, has decided to allot 31 lac shares (14.99% of the equity post this allotment) and 10 lac warrants to a strategic investor at Rs.85 per share/warrant. The new funds infusion of Rs.27 crs will help the company to expand its retail brokerage all over India, the mention of which is there in the following points.
2. The company has already decided to merge with itself its retail brokerage arm called Almondz Capital Markets Pvt. Ltd. The merger has already been approved by the board on September 29, 2007. AGSL will allot 43 lac shares to its brokerage arm on its merger. The retail arm has opened its offices in many cities across India. The high court approval for the merger is expected to come anything in January 2008. With the merger, AGSL’s topline will witness quantum jump. We expect that as soon as the numbers of the brokerage arm becomes public, the stock will be re-rated considering the kind of valuations Indian brokerage companies are attracting.
3. The company in FY06-07 had announced an EPS of Rs.4.03 on equity of 1.59 crs shares. During the first half of 2008, on an expanded equity base of 1.75 crs shares, the EPS has been Rs.3. If first half is any indication, then we should witness an EPS of Rs.7.5-8 in the full year 2008. This kind of a jump in the EPS will re-rate the company on its stand-alone basis.
   

Keeping in mind all the above mentioned points, We expect AGSL to post an EPS of Rs.7.5-8 in the FY07-08, on an expanded equity base of 2.49 (1.75+0.31+0.43) crs shares. Kindly note, that here we have not included the warrants which ACMSL and the strategic investors are holding. On a conservative basis, we can assume the company to attract a PE of 20, which converts into a share price of Rs.150-160.

So at that valuation, the value of holdings of ACMSL into AGSL comes to roughly Rs.144 crs (after conversion of warrants as well). And that converts into an NAV of Rs.144 per share. We believe that the share price of ACMSL is highly undervalued. Our first target is Rs.60 and long-term target is Rs.100, still keeping a 30% discount.