Mudar Patherya bets on Diana Tea, Megasoft for good returns

Below is the verbatim transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: Let’s start off with Diana Tea.

A: Very interesting company. When these people are looking at an extended bull period for tea partly because there is an intrinsic consumption boom happening in rural India. As a result the entire mechanics of the global tea industry is going to change for the next couple of decades - maybe next decade.

Diana is very interesting for two or three very good reasons. Extensive under valuation, if you take an average of Rs 400 per kilogram as your valuation parameter - this company produces about 50 lakh kilograms a year. So I would recon that this company can be potentially appraised for its assets at about Rs 200 crore.

Let us assume that I am wrong significantly. So I am going to de-scale my estimate by 50% which means - let’s value this company at Rs 100 crore. Interestingly, the stock market is only pricing this company at about Rs 24-25 crore.

Now there is another angle to this and the other angle is that of this Rs 24 crore the company is already sitting on Rs 15 crore of cash. So net market capitalization is Rs 9 crore . It already earned Rs 8 crore post tax last year .

I would expect even after they make a deduction for the labour wage agreement this year - you can look at about Rs 12-13 crore post tax this year. This means that actually selling for a net PE or less than one. I think this is compelling.

Whatever goes wrong with the industry or the company - this is an interesting valuation and more so because there is going to be a huge balance sheet transition happening. The company is sitting on extensive plantation assets.

If it’s North Bengal - sooner or later I would expect the company to move into eco-tourism project. Which is where it will not only be plantations at one side, it will also be hospitality infrastructure on another.

This means that the hospitality infrastructure business will actually generate sustainable revenues and income. So, if you are looking at a net market cap of just about Rs 9 crore - it’s a no brainer. You don’t even have to think before you buy this kind of stock.

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Q: It’s such micrograph because when people see Rs 17-18 stock price - they tend to shy away sometimes unless they are traders. Are the promoters good? Any risks associated with this not from a financial perspective or a fundamental earnings perspective but otherwise?

A: I will look into the integrity of the management. One of things that I noticed in the last 25 to 30 years what they have done. After they bought over this garden in the mid 70’s they spent the first five years just uprooting the garden which means cleaning the place out and replanting.

Most people with a short term perspective would have tried to flog as much out of the garden from that point onwards to be able to justify the investments that they make in it.

They didn’t care hoot for that immediate payback and they actually removed the bushes and replanted. So the first crop that they effectively got was in 1980.

My first question was - why did they do this? They said they wanted to establish premium tea quality for which now in the last five years they have actually become a benchmark in North Bengal.

I would say from this I can get a very good insight into the quality of the management. If I am buying into the quality of the management whatever the price given - I quite agree with you that it’s extremely low cap.

But the other perspective is that this midcap or micro-cap will one day become a fairly growing cap. I am saying this is my insurance. So maybe I am not going to be able to accumulate all that I need in the next two hours.

It may take me two weeks or could take two months. But, this is a company that I am always going to keep on my watch. If it ever declines because people have lost interest - that will be excellent news for somebody like me.

Q: Any disclosures on this stock?

A: Yes, I own this stock absolutely. Very credibly I own this stock.