This idea originally came from Jatin Khemani – an equity analyst and my ex-student - he surely knows more about stocks than me. So this blog post is dedicated to Jatin.
The Noida Toll Bridge linking Delhi and Noida is run by listed company called Noida Toll Bridge Company Limited. This company, as one can imagine, has a very simple business model -it spends on maintaining the toll road and gets revenue from people who use the toll road. With increasing traffic in Delhi, their revenues are growing and so is their profits.
In the past 6-7 years, their Earnings per share (EPS) has grown from Rs. 0.59 (in 2007) to Rs. 2.25 (in 2013) – a 25% CAGR. The company uses this profit to reduce it’s debts and their debts has gone down from Rs. 323 crores (in 2006) to Rs. 23 crores (in 2013).
In the past three years –they have started giving dividends to shareholders – they gave 5% dividend in 2011 and in 2012 and they doubled it to 10% in 2013. This 10% in 2013 meant that on an EPS of Rs 2.25 they gave Rs 1.0 as dividend per share– a dividend payout of 44% (meaning that 44% of their profits was given back to shareholders).
So in effect, the management is using the profits generated to pay back some loans and also pay back some profits to the shareholders. As the loan amount is going down, the dividend payment is going up – the dividend per share has doubled from 5% to 10% in 2013.
In 2014, the current year, their revenues for the period April to December has grown by 14% and net profit and the EPS for the same period has grown by 25%. The company has already paid 10% dividend (Rs 1 per share) and they still have money to pay more dividend as the loans are going down now. They have last evening announced that the board will meet on 28th Feb to consider paying further dividend.
When the dividend payout was Rs 1 per year – the share value was hovering around Rs 20 - which meant a dividend yield of around 5%. Now if the dividend payout goes up to Rs 1.5 or Rs 2 per share – at a share price of Rs 20, the dividend yield goes up to 7.5% or 10% (respectively). This makes the share very valuable and will increase the share price to Rs 30 to Rs 40 -so that the dividend yield comes back to 5%.
This means that if you buy the share now (quoting at around Rs 21-22) – you can make a decent appreciation in the next one month. The following are the scenarios if you buy the share at Rs 22 now:
- Scenario 1 – the board decides that they will not pay any more dividend – then the share value will not go up and will settle back around Rs 20 – you will lose 10% on your investment of Rs 22 per share.
- Scenario 2 – the board decides to pay 5% dividend -then the share value should go up to close to Rs 30 and you will make Rs 8 in capital appreciation and Rs 0.5 in dividend - a profit of 38% in about a month. This is a likely scenario as I see it.
- Scenario 3 - the board decides to pay 10% dividend -then the share value should go up to Rs 35-40 and you will make Rs 13 in capital appreciation and Rs 1 in dividend - a profit of 59% in about a month. This is a very optimistic scenario and may not happen.
So I would recommend that you invest in the stock as soon as possible and buy it at Rs 22 or below – currently it is at 21.95.
And wait for the results of the board meeting of 28thFeb.
Thank you Jatin, for this idea.