NTC Industries Ltd,CMP Rs 37: Potential of HUGE appreciation

Listed at Bse, Kolkatta based NTC Industries Ltd is engaged in manufacture and exports of cigarattes. In fact, incorporated in 1931 and earlier known as National Tobacco Industries Ltd, NTC had pioneered manufacture of 85mm Filter cigarettes in India and also 1st company to introduce Mentholated cigarettes.  Main brands of NTC are;Regent,COOL,No 10,National Gold Flake,FineCut,MayPole,Jaipur,General. Its licensed capacity is 2250 million sticks per annum.

However, financial performance of NTC is small.  Cigaratte industry in India and globally is dominated by Global Giants with ultra-strong brand presence in all countries. In such a scenario, NTC did not and does not have financial muscle to spend huge amounts to create brand awareness of its brands. Therefore, company is utilizing miniscule portion of its licensed capacity as company is able to sell its cigarettes in North Eastern states and also do exports to Middle East S America, Africa also (but here again margins are not good in these markets).

FINANCIAL PERFORMANCE:

                               2014-15

                                Rs/Cr

Sales                           25

PAT                            2.32

Equity                         10.75

EPS Rs                       2.16

For FY15, NTC's sales declined stood 25 crores. NTC has achieved Sales of 44crores in FY13.  Main reason

for decline in sales is  stoppage of Leaf Tobacco exports (trading) as it had become unprofitable. Company's cigaratte sales were also affected due to steep rise in excise duty.

RATIONALE FOR RECOMMENDATION: 

 NTC is not being recommended for investment from its current (or near future) financial performance. But scrip is being recommended as it has HUGE HUGE INTRINSIC value which has potential to be unlocked in future. It may be clarified that unlocking of this intrinsic value may not take place in near future and in fact, can take few years. But current market cap is MINISCULE compared to potential of the company:

1. NTC has 20 acres of land in Calcutta. Its cigarette factory occupies only small portion of this entire land.  MARKET VALUE OF THIS LAND SHOULD BE OVER Rs 300 crores. At present, NTC do not have plans to sell the surplus portion of land. Instead, company is gradually building/constructing (from internal accruals) offices/warehouses which are being leased to ensure annuity type of income every quarter/year. If NTC succeeds in building/constructing warehouse/office complex on ENTIRE SURPLUS Land of its factory in next 4-5 years, NTC MAY GET MORE THAN Rs 15 CRORE AS ANNUAL RENTAL INCOME. NTC is not resorting to borrowings to expedite the construction on surplus land. Company is following conservative path of internal accruals.

2. CIGARETTES DIVISION:  This division may literally prove to be Goldmine for NTC. Investors may be aware that in India, issuance of new license for cigarette manufacturing has been banned and even capacity expansion to existing companies is banned. In nutshell, due to pollution and health hazards when govt is trying to discourage consumption of tobacco/based products, there CAN NOT be new players in cigarette industry and there CAN NOT be new capacity additions.

Conservatively, CIGARETTE LICENSE/CAPACITY OF NTC IS VALUED AT OVER Rs 500 CRORES. Management still has not crystallized any plans whether any branded foreign cigarette company can be roped in as JV partner for producing/selling  cigarettes as NTC has inhouse manufacturing facility and adequate capacity license. Or, will company be able to find a buyer whom it can sell its Cigarette division.

Thus, market value of its Land in Calcutta and its cigarette license/division can be over Rs 800 crores. However, current market cap of NTC is just Rs 40 crores.

Investors who have patience of 2-5 years can buy NTC in BIG quantity. Investors looking for gains in short term may make nominal gains as no possibility of value unlocking in near future. However, if investors hold the scrip for 2-5 years, appreciation (depending on when value unlocking takes place) can be anywhere between 300% to 800%.

Earlier, all-time price of NTC was Rs 327 when negotiations had started for selling its cigarette license (which did not materialise). Current market cap is just 5% of its estimated intrinsic value. Even if sale of cigarette license is ignored and NTC develops entire surplus land for Commercial/Industrial Park etc, lease rental alone, after few years, can translate into PBT of more than 15 crores. Worst scenario is that investors may LOSE upto 10-20% or GAIN from 300% to 800% in 2-5 years. Hence, Low Risk High High Reward Investment opportunity. Good investment opportunity for genuine investors as NTC should provide OUTPERFORMER appreciation. 52 Week  High is Rs 85.60. Hence,appears a good case for bottom-fishing.

Promoter holding is 67.43% and finally, Debt-free