Why Compact Disc will Not be a Multi bagger...?

Couple of days back I came across a brilliant company. Its one of th biggest animations players in South Asia (claims to be).

Here are some of the key factors which at the face gave me an impression that I have come across yet another multibagger:

• A compounding growth rate in profit of over 75% in the last 3 years and that of over 60% in sales
• Part of a very fast growing animation content outsourcing segment in India
• ROE of whopping 52% and ROCE of around 43%
• Almost debt free (D/E of 0.22)
• Operating margins have been continuously expanding
• Couple of movies lined up to be releases in the next one year one "Eternal Love" based on the story of Taj Mahal and other a foot ball based movie based on Pele, this would further expand the margins and gives revenue visibility
• Part of 200 companies list that the FORBES magazine recently came up with, best under a billion dollar companies in Asia and growing further

Over and above all this, available at a throw away valuations. A trailing P/E of only around 1.3 and a Dividend yield of around 3.1%.

This, kind of story is a dream for any fundamental value stock picker, even the likes of Peter Lynch and Buffets of the world would want to look into this kind of company at this cheap a valuations.

However, as an analyst what I have learned over the years from my experience and reading these veterans that whenever something like this sounds too good to be true, there has to some catch (on 8 out of 10 occasions and on remaining 2 you actually find a MULTI BAGGER). So, the catch with this company is its management.

The actions of management is highly susceptible and that is why market is not rewarding the stock.

• Over the years despite the company showing such a record growth, the management shareholding has fallen from around 40-45% to around 20%
• The shareholding pattern of the company (for June 2010) shows 75% of the shares as being held by the public. My guess is that a large chunk of these are ‘benami’ holdings of insiders who offload shares once the price takes off
• That is why the company every now and then comes up with big ticket rumors like acquiring some company in UK, new movie tie ups and later no such action actually takes place
• The biggest problem is that the company is promoted by the infamous Seengal group and its one of the Directors Rashmee Seengal also belongs to the same group.
• The Seengal group in the past has faced SEBI and also CBI probes for floating several bogus companies and raising money via IPO and announced various projects which never happened to see the light of day. These included an LPG-related business, a hotel company and at least three more ventures.

Thus,the market which now is smart enough to see and realize these things are not giving any premium to the company which at the face of it looks exceedingly brilliant and even though valuations are cheap and business is great. It wold be difficult for the stock to generate any returns.

Happy Investing...!!!