Over my 24 years of investing, I have rarely come across cash bargains like the one in October 2008, when Eicher Motors, India’s third-largest commercial vehicle (CV) manufacturer, was available for a market cap of Rs.700 crore, when it had net cash of over Rs.1,100 crore on its books. Mind you, this was the time when Royal Enfield (RE) was not even considered a business worth mentioning.
How the company ended up having this pile of cash is an interesting affair. In May 2008, Volvo had entered into an agreement to pick up 8.1% stake in Eicher from the promoters at Rs.691 a share — against the-then trading price of Rs.320 a share — besides acquiring 45.6% stake in a new joint venture (JV) called VE Commercial Vehicles. As per the deal, Eicher was to transfer its truck, bus, components and engineering services businesses to the JV. Eicher’s surplus cash, which was invested in bonds, and the motorcycle business were not transferred to the JV. Instead, Eicher was to receive cash of Rs.210 crore, of which Rs.176 crore was to be paid by the JV company for the transfer of businesses and the balance Rs.34 crore was to come from Volvo, as non-compete fee. Volvo was to transfer its Indian truck dealer and service business along with cash of over Rs.1,000 crore to the JV in return for a 45.6% stake. The balance 54.4% was to be held by Eicher.
As a result of the deal, the net cash on the balance sheet of Eicher exceeded its market cap. In other words, an investor was not paying anything for the remaining assets on its balance sheet. It was a debt-free company and the truck business was consistently profitable and cash generating.
Within the pure CV space, the other comparable players were Tata Motors and Ashok Leyland. In the case of Tata Motors, it was not clear as to how the passenger car business would turn out. Since Leyland made heavy duty trucks, it enjoyed Ebitda margins 200 bps higher than that of Eicher, but its RoCE was in single digits. Similarly, though Eicher — which made LCVs — enjoyed 8-9% Ebitda margins, it enjoyed a ver