I got the following comment on my previous post on Indo nippon electricals
In the absence of latest annual reports, it is difficult to evaluate this.
What is the catalyst that you have in mind which will unlock the value or force the reevaluation?
Earnings are not growing significantly where they would make the market to take notice. In the absence of takeover attempt, it might be a long time (years!) for market to re-evaluate the price.
Some months ago, I had made a purchase of Kothari products (pan parag fame). Its book value is more than the market cap. Tobacco business is a cash minting machine. That's all the analysis I did at the time of purchase hoping that somehow market will recognise the Graham bargain.
However, later I noticed that the promoters own more than 80% of outstanding shares. There is no incentive for the current owners to reward shareholders. There is no way for a hostile takeover. Ergo, the value trap stays as is. I have moved on in due course - hopefully, wiser.
I decided to post my thoughts on ravi’s comment. I have posted on value traps earlier here
i agree, value trap is always a concern in such situations. i have also invested in kothari products in the past (see post here) with a clear understanding that the underlying business was at best stagnant and the value unlocking would happen if the management did something about the cash. After holding the stock for more than a year (with a small gain), I realised that the management was not interested in any value enhancing measures. On the contrary there was a lot of apathy towards investors. The management had not bothered to update its website with the latest results and there was no way to access their annual report. As a result, I bailed out.
Indo nippon electrical has similar risks. However there are some key differences
1. The underlying business for Indo nippon is healthy and has a small amount of growth
2. The management has been pro-shareholder in the past and has given bonus shares and decent dividends in the past
3. The management has been very rational and efficient user of capital and has kept the return on capital fairly high.
4. They have updated their website with the latest annual and quarterly results
Value unlocking can happen via various actions on part of the management. In case of Indo nippon electricals I expect continued decent performance and passage of time to unlock the value.
However due to the concern of value trap, I have classified this idea as a graham idea. The key approach in such kind of investing is to invest in a group of such stocks (more than 10-15) where the entire group could do well, with some indivdual stocks performing well and some performing poorly. In contrast, focus investing which involves investing heavily in a select few stocks would not work in the above kind of idea. However with valuations being high, I am not able to find too many good ideas in which I can invest heavily.
see here a post on value traps and critical thinking titled 'Value Delusions and Strategic Thinking' by rick. he discusses about value traps and how to avoid them towards the end of his post.