The stock price of Bombay Burmah Trading Corporation Limited (BBTC) in yesterday's trade breached our revised target price of Rs.1,486 to hit a high of Rs.1,494. Though stock has moved up by 67% from our initiation price of Rs.878 in a short span of time, we still recommend ACCUMULATE (buy on decline) on the stock (with another 6 to 12 months investment perspective) with a revised target price of Rs.1,613/;
Even after this impressive run-up, the valuation discount to its investment in Britannia stands at 63% at the current market price. However, the average of holding companies (HCs) discount stands at around 50% only.
Why be believe BBTC deserves less discount?
- 95% of BBTC's total investment value comes from Britannia. For most HCs, they come from several companies - theoretically speaking, unlocking possibility from a single investment is relatively higher;
- Most HCs hold shares of firms engaged in diversified and cyclical businesses. However, Britannia is engaged in consistently growing FMCG business, which enjoys much higher premium in markets;
- While many HCs do not have any assets on their own, BBTC has rich assets like huge plantations, and also reportedly significant land parcels;
Outlook and Valuation
In the long-term (in about 2 to 3 years), the stock price could cross Rs.2,000, if the discount to value of its investments comes down to 49% (around the industry average of holding companies). Assuming 59% discount (which is still steeper than the industry average of around 47%), to the market value of investments it holds in Britannia and Bombay Dyeing, we arrive at a revised target price of around Rs.1,613 in the next 6 to 12 months for BBTC.
Risk to our View
Only possible risk to our view is if there is any possible governance issue in terms of divestment of holdings in Britannia in favour of any promoters or other Group entities. However, considering the track record of promoters and also the India's regulatory environment, we firmly believe that such risk is too low.
Shares of BOMBAY BURMAH TRADING CORP.LTD. was last trading in BSE at Rs.1526 as compared to the previous close of Rs. 1487.55. The total number of shares traded during the day was 103262 in over 4781 trades.
The stock hit an intraday high of Rs. 1548.55 and intraday low of 1489.3. The net turnover during the day was Rs. 157739401.