Harrisons Malayalam – Value Unlocking?

huge plantations

At CMP of 140, the co is trading at a Market Cap of about 255 Cr. Now first lets look at the assets of the company:

Harrisons Malayalam Limited (HML) has huge tea and rubber plantations spanning across 23,417 hectares i.e.. approx 57,800 acres. HML is the single largest producer of Rubber in the country with 18,300 acres under cultivation. It is also the largest grower of tea in South India having plantations spread across 15,000 acres. It is also one of the largest farmer of Pineapples in the region. Over the last few years, the company has also been a major processor of other agricultural produce from neighbouring farmlands.

HML through it’s 100% subsidiary – Harrison Financial, holds investments worth more than 225 Cr of group companies like – CES, KEC International, Ceat etc.

HML also has a small projects division. They won a 50 Cr KRCTC contract in January, 2010.

Though in the past the company hasn’t created value and has had a slow growth, but things seem to be changing and major positives are there for the company.

1. All time high Rubber prices:

The rubber prices have risen from about Rs 90/Kg to Rs 180/Kg.

2. Tea prices have been firming over last several months.

3. Management focussing on growth:

There was an article in Business Today magazine on HML, titled – “Entering unchartered waters”. As per the article, the company is doing the following to improve the performance:

a. “Moving away from selling produce as a commodity”. HML is trying to sell branded tea rather than selling it in auctions.

b. Upping land productivity (through re-planting old tea bushes and rubber trees with new high-yielding varieties and inter-cropping pineapples, bananas and other crops with rubber).

c. Upping labour productivity. (Mechanisation has increased to 50% in 2009 from 20% in 2008).

4. Demerger to unlock value:

HML had announced the demerger plans on 29th January, 2010. As per the details, the company is demerging the investment undertaking into Sentil Tea & Exports Ltd (STEL). The shareholder of HML will receive new shares of STEL in the ratio of 1:1.

The investments are worth 225 Cr+ and the equity capital of the new company would be 18.46 Cr. Even if STEL lists at 50% discount to value of investments, the listing price would be Rs 60+.

If one is to consider the replacement value of the huge plantations HML has, the value is unbelievable. Such huge assets can’t be created again. At such low Market Cap, the potential is huge.

Company Website: Harrisons Malayalam

57 thoughts on “Harrisons Malayalam – Value Unlocking?”

  1. Hi, excellent writeup. This is the first time i am writing on your blog, and have only recently started following. Even though the value offered in the company is huge, but the kind of management principals, and anti minority shareholders policy the group follows generally makes their companies and group un-investable. Hence, the lower valuations for the group. Also, i have faced a similar bitter experience in another one of their companies “NRC Ltd”.

    Secondly, isnt' 50% the max value at which most of the holding companies trade?

  2. Yeah, I have considered the listing price of the demerging co after giving it a discounting of 50% to the value of investments it holds.

    Considering the upcoming demerger, high tea and rubber prices, change in management…there are lot of triggers to unlock the hidden value.

  3. Ayush , Few questions. Why have you considered 50% of the value of investments.What does the change in management spell for its valuation at present.What sort of money do you see being made in a particular timeframe and what risks do you see in not getting there.thanks ..

  4. Most of the holding cos trade at about 50% discount to the value of investments they hold. This is because these investments won't be sold in near future.

    My logic here is – the co has lot of value in terms of land assets (plantations) which can't be re-created. If the mgmt talks the walk it has done in the Business Today issue, lot of value unlocking can happen over next 1-2 yrs. If they don't deliver what they are talking…the stock will remain dull. I don't see too much of a downside.

  5. Yes, it does negates the optimism on the possibility of improved performance.

    The asset value and demerger triggers remain intact.

  6. Hi Ayush,

    Can you provide the BV of the company.

    Just so you know, I have been following you since 6 months, and see that everything you suggested has gone up, i have taken a chance on this one for long term.

    Vikrant

  7. Hi! Ayush

    Have you been tracking Rajesh exports Limited by any chance, It is a play on gold.. in case the markets fall again due to the brewing European crisis (believe me it is still brewing! and central banks all over which until 2008 were increasing there holdings of Euro are still decreasing it). Rajesh exports is said to have a high inventory of gold though it is difficult to get information.. more so for people who are not well versed with accountancy.

  8. Harrison Malayalam has some subsidiaries for eg: Harrison Financial Ltd….which in turn holds shares worth 225 Cr of group companies.

    So when one looks at the consolidated accounts of the company, the BV comes out to be 150.

  9. Since it is an RPG company, it may be worthwhile reviewing our discussion and an update on Summit Securities/ CHI Invest. Remember? Several RPG investment holding conpanies (CHI invest, Summit, etc.) were merged into RPG Itochu. Then RPG Itochu was renamed back to Summit Securities, which is yet to be listed.

  10. Management integrity is of utmost importance in a publicly listed enterprise. Harrisons Malayalam has been siphoned out dry ever since the RPG group acquired it. The point I was trying to make was that even if commodity prices have touched all time highs, the company and its shareholders would never make any money when management integrity is lacking.

    In the last couple of years, RPG groups vision for Harrisons Malayalam was to sell off its golden goose (rubber estates) in return for a few pieces of silver. These questionable deals have landed them in serious litigations with the state government. The government’s contention is that the company had been selling lands on which it had no rights; it had only given these estate lands on lease. A few years earlier the Goenkas had tried to buy out the public shareholders for peanuts. The attempt was nipped in the bud when a small time private plantation company in Kerala came out with a counter offer which the mighty Goenkas could not even counter-bid.

    Among the commodities grown in Kerala, rubber, nutmeg, cardamom, tea and coffee are doing well. But, rubber has had the most handsome gains. Correspondingly all the tyre manufacturers posted bleak results. While even rubber planters with tiny holdings are booking Innovas and building bungalows in their estates and buying up flats in Cochin Goenkas have decided that this is the most opportune time to post a loss! Contrarians, my foot!

  11. Mathew,

    Yes, mgmt hasn’t done good things but the same had been with cos like DLF, Ansal etc. And we had bot them several years back when the valuation of the underlying assets were growing like anything yet the Market Cap of those cos were peanuts.

    It is only because of the mgmt the stock is available at dirt cheap valuations.

    Though the unlocking of value may take time and test patience but rewards can be awesome.

    We have shares of some unlisted rubber estate cos and all of them are doing exceptionally well and paying handsome dividends.

    Regards,

  12. I usually look for book value on moneycontrol.com. However, the book value there is the standalone. Where do you find the consolidated book value? your answer would help a lot.

  13. another question : a back of the paper calculation following your post on land holdings of this company say that the standalone book value of the company itself must be 1000+ crore. But then why does the huge amount of land not reflect in the consolidated b/v, which is just 150?

    1. The reason is – that they are stated at cost. Most of the estates would had been acquired years ago…hence the cost in Books will be the original cost of acquisition. The same would be very less in todays terms.

      For eg: Consider a real estate co buying land 10 years back. The BV will reflect the value at which the land was bot 10 years back and not todays market value

  14. Hi Ayush,

    what happened to harrison today? The fall to 99? is it becuase some other shares are being alloted tomorrow?

  15. Ayush,

    52 week low, Do you think we can add on here, Or is there any other reason this is gown so low today?

    Vikrant

  16. Hi,

    The price today is ex-demerger. The demerged companies stock (at ratio 1:1) is expected to list at around Rs.50+. If that happens, then one is at a gain today.

  17. Hi,

    The price today is ex-demerger. The demerged companies stock (at ratio 1:1) is expected to list at around Rs.50+. If that happens, then one is at a gain today.

  18. Hi!
    Thanks for the timely info..
    Do you expect the real value unlocking to happen later..
    I mean the share price was 140 earlier. Even if the demerged company lists at 50 plus this 100 I dont think the land value of harrison has been recognised by the market yet.

    Also what about Matthew’s comment that the state government’s “contention is that the company had been selling lands on which it had no rights; it had only given these estate lands on lease”?

  19. The real value unlocking will take time. By demerger we are expecting that the demerged Harrison will get back to it’s original levels of say 120-130 in medium term and hence the demerged co will be the benefit.

    Regarding the selling of land without right…I’m trying to read more on that. There are disputes on few of their estates but that is there with every other estate company. I have seen other estate cos selling out their lands.

    Regards,

    1. I have not studied this case.. but the the sale of land in such cases is restricted. Otherwise every such company can make a killing just by selling their land!! In most cases this is given out on leases and Usually there is a restriction on the use of land. For example it cannot use the plantation land for real estate etc. There fore if it sells the land it will only be other plantations or approved purposes varying from land to land.
      The specific terms of the sale of earlier land must be looked into and it is not readily available.
      I think the most important way to value this company is the profitability.

      1. Yes, we are not valuing the co, imagining that they will be selling the land. By quoting the previous sale value of their small portion of land, we were trying to value the real value of the land bank for the margin of safety purpose and show the discount to the asset value.

        I think major reforms are ongoing in the agriculture sector and if this co plays its cards right, they can get huge profitability also.

      2. Yes, we are not valuing the co, imagining that they will be selling the land. By quoting the previous sale value of their small portion of land, we were trying to value the real value of the land bank for the margin of safety purpose and show the discount to the asset value.

        I think major reforms are ongoing in the agriculture sector and if this co plays its cards right, they can get huge profitability also.

  20. Had a small doubt, I had this share from past 1 week., if I sell this today(on 2nd sep & the record date for stel share they said is 1sep) will I get stel share or not???

  21. what is a good place to get hold of company’s annual report if you are not already a investor and if the company does not put it on its webpage? Do you have to buy it from somewhere? i am been trying to figure this out for the past one month.

  22. As per 2010 annual report the revalued land cost as of Apr 1st 2009 was 384cr.
    227.3cr revaluation surplus adjusted against:
    1)105.2 cr of excess liabilites taken over in amalgmation of HMFSL, HRPL and HAPL(goodwill??)
    2)107 cr for fairr valuation of investments transferred on de-merger
    hence revaluation has not increased the BV.
    other interesting points from AR:
    — Of the Total Rubber area of 7338 Ha, about 40% of the area is under replanting. Against a normal 3% of the area being taken up for replanting, the Company covered up an area equivalent to 10% last year with high yielding clones like PB 217, RRI1105, RRII414 and RRII430. These clones have also been proven to be disease resistant
    -22 lac tea plants were planted under infilling program
    -lot of plant modernization took place, this clubbed with huge re-plantation should give good results in long term (will it benefit minority shareholders? need to wait and watch)
    -The average price realization for tea in South India during the first six months of 2010 was Rs. 12.28 per kg lower than 2009, while it was down by Rs. 4.60 per kg. on an all India basis.
    –Company’s own production levels would remain flat as currently the Company is going for massive replanting exercise that would start producing results in 2-3 year’s time and would make HML the highest land productivity in the Rubber Plantation Sector.
    some operational risks:
    -scarcity of labour in the times to come and possible increase in wages and unauthorized absenteeism resulting in increased cost pressure
    -with continuous increase in -immature area in both Tea and lubber, our crops continue to go down
    -encroachment is still a Threat (read note 6 on page 41), 11851 hectors of total 13389 hc is under different litigation with state governments

  23. Hi There,

    Was reading a recent news report on how the south Indian tea business are getting better valuations,coming back to this article all the investments in other companies is down by more than 60-70 %, STEL holdings is trading at increasingly lower levels,that brings all the attention to the land bank & its precious output .Is it still a good buy

    1. Hi,

      Yeah, we also read that tea prices are firming up…esp in south india. Reg – Harrison Malayalam, this year might be the last year of the heavy re-planting the co has been doing (as per the annual report) and may improve financial performance going forward.

      STEL Holdings does has value and might be one of the most undervalued holding co. I would recommend you to also look at other new ideas being discussed.

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