Elnet tech one of the few stock with negative enterprise value!

Elnet tech IT park

Article published as on Tuesday, 11^th April, 2020 at 7:48 p.m.   

Have you ever come across any stock with negative enterprise value?

What do we mean by Enterprise Value (EV)?

Enterprise value is the value used to acquire whole company considering you have to pay off debts and get cash on its books.

This is sometimes more preferred as it takes into account both cash and debt component of the company and gives a holistic view.

Formula 

EV = Market cap + Debt - Cash equivalents.

In other words when Cash equivalents are greater than the Debt Component and the Market Cap of any Company it is known to be Negative Enterprise Value, means you have more than what you value or pay for.

Considering these conditions and parameters can you guess or name any such company which has a Negative Enterprise Value?

Friends here is one, Elnet tech! (listed only on BSE)

Q) What does it do?

A) It is in the business of renting out Office spaces through its owned Building in Chennai, It is set up by Tamil Nadu Government, known as IT park (similar to Nesco), which was built in 2000's to promote IT development in the state.

Its primary source of earning is rental income and expenditure is maintenance of building the balance left is net profit!

Revenue - 21.04 crores (FY18-19 figures) 

Net profit -8.41 crores (FY18-19 figures) 

Now as per a financials

Let’s calculate our components of the formula.

Year 2018-19 figures are (figures in lakh INR)

.

financials of Elnet tech

   (1) Cash and cash equivalents (liquid assets)

Non-current investments
Financial assets
investments	803.14
Other financial investments	1039.50

     

    (These are liquid investments in shares and mutual funds respectively, just classified under non-current assets.)

   

Current assets
Cash and cash equivalents	155.33
Bank account	4218.13
Other financial asset	100.20

       

    (2)Debt -                   

                                                      

Debt

1096.20

    (3)Now market cap as on 8-April-2020

     Equity Capital: INR 4 Crore (40,00,007 Eq. Shares of Rs.10/- Face Value)

     Share price – INR 90.

     Market cap INR 36 Crores.

     Let’s find Enterprise value now 

     EV = Market cap + Debt - Cash equivalents.

     EV =      3600      +1096.20 - 6316.30

     EV = -1620.1 (lakhs INR)

    (One can get slightly different values based on minor inclusions and exclusions)

     There you have it!! Isn’t it amazing!?

     Let’s understand this situation with an example.

     Suppose you go for shopping and see a jeans for INR 200.

     And you know there is 200 INR, in its pocket?

     Wouldn’t you be amazed at such a deal? 

You get jeans with Rs.200 of cash in its pocket, just for INR.200!?  

INR200 in a Jeans.

Some quick FAQ's!

Q) Why is there debt of 10.96 crores if it has so much of cash?

A) If you know system of rental business, the landlord takes security deposit, same in this case also Elnet tech is just taking security deposit as a precaution, its common practice so nothing to worry about.

Q) How could it be possible? Maybe it’s just a paper company or its accounts are cooked?

A) Well it is a kind of a Semi-PSU, since 26% stake in it is owned by Tamil Nadu Government through its holding Company ELCOT, so it’s a real company with real assets, only thing is people are not aware about this company.

(click here for google map)

Q) If this company has so much assets and its cash rich why isn’t share price not increasing?

A) There are many reasons, few of them are:

 1) People are unaware of this company.

 2) There is limited scope of value unlocking.

Q) Is value unlocking possible in future?

A) Value unlocking has not happened till now, maybe with the help of activism it would be possible in the future!

Yes! It is amazing but as you have read these FAQ's you would know that following factors contribute towards negative enterprise value. 

·        It has passive business of just rental collection.

·       Value unlocking is difficult.

·        Lack of awareness is what is causing depressed share price.

Few big positives are, they are generating massive operating cash flow.

It has lease hold land for 90 years starting from 14-January-1999. For which prepayment of 90 years is made in advance.

Plus as mentioned they have massive cash reserves only on a market cap of 36 crores.

Well let’s see if any value unlocking takes place in the future.

(Disclaimer-this are my views based on my research and study, and not necessarily a recommendation)