In case you have not heard of the news here it is: Several marquee investors are taking preferential allotment of shares (and some warrants) in CSL Finance Limited at a price of Rs. 390 per share (subject to shareholder approval). Refer below:
|Name of Proposed Allottee||No. of equity shares|
|Aadi Financial Advisors LLP||3,85,000|
|Pankaj J Mehta Investment Pvt. Ltd||13,000|
|Geecee Investments Ltd||35,000|
|Raj Vinay Ajmera||10,000|
|Subodh Narain Agarwal||5,000|
I am sure you must be aware about most of the above names. Before we get further, lets look at what the company does. The company operates in two segments- secured lending and investing in capital markets (special situations like mergers, de-mergers, buybacks and open offers). Their overall revenues historically have been volatile mainly because of the investment business. Going forward they plan to substantially scale down their operations in the capital markets and will increasingly focus on scaling up the lending operations. This is where the interest of the said investors lie. The company had not been very good at investment business in terms of their capital allocation and they plan to correct the mistake by focusing on just the lending business going forward.
The stock has already risen to the current market price of approx. Rs. 590. Okay! So, what is still interesting about the situation? Well, for starters, their margins have improved considerably since they have started to focus on the lending business. Second, the capital inflow from the preferential allotment will provide the necessary boost to the lending business. They are raising around Rs. 54 Cr from the allotment of shares and warrants. Their current loan book is just around Rs. 106 Cr! Third, they are still virtually debt free. Imagine the kick to revenues and earnings once leverage comes into the picture! Forget about the valuation (well, not really), the pace at which this business can grow, owing to its small size (current market cap is just around Rs. 295 Cr), Price to Book of around 2.6 is meagre. I understand it may not be the best valuation measure of the business currently but it gives us a broad idea. Price to Earning is late teens is again for a general idea.
While the future plans of the company are still not very clear, I am starting with a small position in the stock. I believe, this is one such case where you need to dive to test the waters. But yes, I will stay at the sides and will dive deep only when comfortable- I am happy averaging up as things get clearer.
Note: This is not stock advice but a note for general discussion (if you find it worthwhile). I am not a SEBI registered investment advisor. Please read the detailed disclaimer.