The bizarre case of Elcid Investments: A 25,000x Multibagger? 

In this fancy world of the stock market, every investor is looking for undervalued stocks but generally ends up investing in penny stocks in the hope of multiplying their money. In a rush to make quick bucks, people often miss out on the true gems in the process.

Seeing the current massive bull run, where Nifty is breaking its highs every next day, most stocks on Dalal Street may be looking overvalued. However, there is no dearth of undervalued stocks either! Among them, one is trading at a negligible price compared to its book value.

We are talking about a microcap company “Elcid Investments”, which has a CMP of Rs 16.20 but its Book Value per Share(BVPS) is worth over Rs 4,00,000! Prima facie, it looks like a penny stock, with no investors willing to purchase it. The script has changed hands a mere 50 times since 2011.

Who are the owners of the company and how are they connected to Asian Paints?

All the directors of the company are members of the same family, namely “Vakil”. The company has just 3 employees and was registered in 1981 in Mumbai.

Two members of the Vakil family, Amrita & Abhay are also the directors of Asian Paints. Back in 1945, Asian Paints was founded by 4 friends – Champaklal Choksey, Chimanlal Choksi, Suryakant Dani, and Arvind Vakil. The Choksey family later exited and the remaining 3 families today own Asian paints. The Vakils own the shares of Asian paints via Elcid investments.

Elcid Investments has no business other than investing in different companies. Over 98% of its income comes in the form of dividends and the company also has two wholly-owned subsidiaries: Murahar Investments & Trading Company and Suptaswar Investments & Trading company. Both these subsidiaries are registered with the RBI as NBFCs.

Why does the company have a market capitalization of a mere Rs 32 Lakhs?

The promoters held around 80 percent stake in the company until December 2012 and were compelled to reduce it by June 2013 to comply with SEBI's new norms which stated that all privately promoted companies were required to have a public shareholding of at least 25 percent. Thus, to avoid increasing its public shareholding, the promoters of Elcid decided to delist the stock from the exchange. 

In February 2013, the company came up with its first delisting offer for the entire public shareholding of 40,750 shares or 20.38 percent stake, offering Rs 11,455 per share. For reference, the share had last traded for around Rs 3 in 2011. A decent enough return for the investors, right? But, they wouldn't budge, because it was undervalued (the net asset value of the company’s stake in Asian Paints was over Rs 2,000 crore then, or approximately Rs 1,00,000 per share).

After the failed delisting attempt, the promoters came up with an open offer to dilute 4.75 percent of their holding at Rs 5,000 apiece for the public in May 2013. Since the shares were on offer at a huge discount to the intrinsic value, the offer for sale was fully subscribed. But the investors who bought shares at Rs 5,000 eight years ago are now stuck with a trading price of Rs 16- almost a 100 percent loss. The total number of outstanding shares of the company is 2,00,000 and the market cap comes out to Rs. 32,00,000 (Market price per share* Number of shares= 16*2,00,000).

What makes Elcid Investments a goldmine? 

Elcid Investments hold 2.95% of Asian Paints. Therefore, technically, the value of the company should at least be worth 2.95% of the value of Asian Paints. That's not all, it also has numerous investments in listed and unlisted shares, the most famous one being One97 Communications, or as we all commonly know it as Paytm, which is about to launch its IPO.

Calculation of BVPS-

Holding Companies are generally known to trade at 20 - 30% discount, but in the case of Elcid Investments, the gap is extremely big. The reason why holding companies trade at such a discount is that if they were to sell all their shares in the company, then the price would go down drastically as the supply would shoot up. Thus, holding companies can seldom gain as much as they are worth.

After all, who in their sane minds would be willing to sell it for pennies, when the stock is worth lakhs? And without any transaction, the stock prices won't rise. A vicious cycle, you see.

Shareholding of Elcid- The Entry of 3A CAPITAL

Prima facie, there can be no gainer from mispricing and it is a case of everybody losing. However, a close look at shareholding over the years shows an interesting trend. In 2014 after the OFS, the promoter family held 74.9% shareholding and Mr. Nadir Vakil held another 8%. In FY18, though, we saw the exit of Mr. Nadir Vakil and there were entries of new shareholders by the name of 3A Capital and a few others.

3A Capital needs special mention because it’s a firm that specializes in buying “unquoted, unlisted, suspended and illiquid shares of companies”.

Mispricing: Vultures at the gate

Now, given the quoted price of Elcid investments is Rs 16, minority investors are stuck with an illiquid holding of the company. The mispricing vultures knock at the gates of minority, making offers of buying the illiquid stock of Elcid at Rs 40,000 /share (started from Rs 10,000 some time back).

The question is, why would somebody buy these illiquid shares? The buyer could have a more long-term outlook or be aware that the price discovery will happen soon or could be taking a punt.     

Well, given that the promoters failed to delist the company- they were compelled to issue an OFS at a discounted price of Rs 5,000. The promoters were the biggest losers in the OFS while the minority who participated were the gainers. Not fighting for price discovery by the promoters hints at their complete apathy to minority shareholders' interest. Meanwhile, vultures trying to buy the share at a lower price make things doubtful.

Minority Investors are stuck: Why is SEBI sleeping?

While buying the company stock at Rs 5,000 in OFS was a no-brainer as it was available at a 99% discount to the market value of investments, the investors were in for a bitter shock. There is no way investors can exit legally with the current stock price at Rs 16. They have reached out to SEBI for enabling a one-time price discovery of the stock through a one-time call option mechanism, and to the high court as well, but with no solution. SEBI should be worried about the minority shareholders who are stuck with paper gains of Rs 1,500 Cr to 2,500 Cr. In cases like this, the exchanges should be more proactive and ensure that laws are enabled to protect the minority shareholders.

This entire ordeal ensued because of SEBI implementing the 25% minimum public shareholding rule. The question lies why did SEBI allow an OFS at Rs 5,000 per share when the CMP was just Rs 3 per share? And if it was allowed, why can it not mandate a one-time price discovery mechanism? It will be interesting to wait and see if SEBI helps out the minority investors or not.

That’s all for this week! We hope you liked it and would love to know your thoughts in the comment section. This article is written and curated by Sashank Suraiya and Shivang Goenka.

(Sashank Suraiya is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)

(Shivang Goenka is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)