Saturday, December 15, 2012

Marg Ltd Open Offer - a lose-lose situation

Marg Ltd (BSE 530543) is a Chennai based infrastructure company. About an year ago, the company had announced a voluntary open offer to acquire 20% of the shares of the company at Rs.91 per share. However, SEBI detected violations of the takeover code in the same and investigations started. This article will make the background of the case pretty clear.

Well, today SEBI has directed the promoters of Marg to revise the open offer price to Rs.340 per share! Article This consists of the 'proper' open offer price of Rs.216, plus interest of Rs.124. The market price of the company's shares was Rs.50 yesterday and the open offer price is more than 6 times the current market price! Promoters hold 54% in the company. Seems like a sweet deal. Well, the market participants have also given its thumbs-up to this development, the stock was up 6% today.

Click to enlarge

I also got quite a lot of emails, pointing out the clear-cut arbitrage available here. Buy the shares at CMP of Rs.53, tender them in the open offer at Rs.340. Even if there is a 50% acceptance, thats big money! How I wish it were that simple. 

Please consider the following points, before rushing to place your 'buy' order..
  • The promoters of the company have fought tooth-and-nail with SEBI against this open offer. They have shown no intention or willingness to go for this open offer.
  • They have already announced that they will be appealing against this SEBI order before the Securities Appellate Tribunal (SAT). 
  • Now typically, it takes 2-3 years for SAT to arrive at a decision. If the decision goes in favour of SEBI, the promoters have the option to appeal to the Supreme Court (which I think they surely will).
  • Now, cases in the Supreme Court routinely last for more than 5 years very easily. Cases like those of DISA have been left hanging and there are others which are in process for more than that! 
  • Till the time the final decision of the Supreme Court comes, the promoters have no need to make an open offer. (In fact, even after a Supreme Court decision, the promoters have the option to appeal to a bigger bench of the Honourable Court). 
  • So, lets say 2 years at the SAT and 5 years at the Supreme Court (I am always an optimist!)..this open offer issue will drag on for at least 7-8 years, before a final judgement is given or the promoters settle out of court. (The second option appears very difficult)


So, I think there is a high probability that this open offer will remain open for a long loooonnnggg time! 

Are you comfortable holding this stock for, lets say, a decade, waiting for the open offer? One should do proper fundamental analysis and determine the company's value to decide on this front. However, in my humble opinion, the words 'fundamental analysis', 'value' and 'Marg Ltd' should not be used in the same sentence!! :-)

I am very sure that I will be more than happy to give this situation a 100% pass. Muzhe iss Marg pe nahi chalna hai!

If you are thinking of getting into this one, its my request to please think twice, take some rest and then think twice again!

Cheers and happy investing!!




Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional analyst, I may have positions in stocks discussed.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Monday, December 10, 2012

Phillips Carbon Black - Goes in the red!

In this post, I am merely providing an update of some interesting things that have happened  with respect to Phillips Carbon over the past year or so, in normal, jargon-free, understandable English! This is not at all a reco to buy/sell (I am a reco-less person) and I would urge readers to digest the info and then take their own buy/sell decisions based on own analysis, logic and common sense.


The basic fundas

  • Carbon black is used mostly as a pigment, which finds vast application in the tyre industry, among others.
  • The basic raw material for carbon black is carbon black feedstock (CBFS), which can be obtained in 2 ways; from oil refineries (Indian way of doing things) or through the coal tar distillation route (Chinese way of doing things!). The price of  CBFS obtained from oil refineries is directly linked to crude prices.
  • Well, it so happened that due to increase in crude prices, the Indian way of making carbon black became more expensive than the Chinese way. As a result, the Chinese happily started dumping carbon black in the Indian markets. Being a complete commodity, branding, manufacturer reputation etc just does not matter.
  • The annual Indian demand for carbon black is about 6.5 lakh tons, while the Indian manufacturers produce about 7.2 lakh tons, some of which is exported.
  • The Indian carbon black market is a duopoly, with just 2 companies; Phillips Carbon and Aditya Birla Nuvo controlling more than 80% of the market.
  • Now, till FY11, the Chinese imports of carbon black in India were about 16000 tons annually, which is no big deal. But then, the dumping started. In FY12, Chinese imports increased to about 80000 tons and over the trailing 12 months, have been estimated to have crossed 1.1 lakh tons. Now thats a big deal. If one wants to understand more on this, one can read this notification by the DG - Safeguards. Gives very good data as well as an overview of the sector. (I have highlighted the document for faster reading)
  • Landed cost of the China-maal is about 18-20% lower (esti) than the locally sold carbon black. So obviously, the local manufacturers could not compete and were severely hit. Phillips Carbon was no exception and the recent results paint a very sorry picture. 


What has happened now

  • The Indian manufacturers obviously got pissed off and made a case before the Govt to impose a safeguard duty on Chinese imports to curtail their dumping.
  • The Govt found the concerns of the Indian industry valid and a safeguard duty of 30% was imposed on Chinese carbon black for a period of 15 months from Oct 5, 2012. Go India!
  • Of course, there would be existing stock of cheap, pre-duty Chinese carbon black, yet to be exhausted, so one cannot expect immediate miracles for the Indian manufacturers.


What are the risks if one thinks of investing

  • The company does something RPG-ish! 
  • Further increase in crude prices
  • Raw material is heavily imported and rupee is at 54ish.
  • Severe slowdown in Auto sector, trickling down to severe slowdown for carbon black sector
  • A really awful upcoming quarterly result is possible!


My thoughts

  • As far as possible, one should not look at an RPG company as a long term investment. So, at least for me, that door is closed. 
  • However, what does Phillips Carbon earn in a 'normalised scenario'? Well, Rs.1800-2000 cr of sales with 6-7% PAT margins seems doable for the company. So, is Rs.100 cr PAT? Easily possible. Btw, the stock price has drifted down from Rs.220ish to Rs.95 over the last two years, giving a market cap of Rs.330 cr at present. Interesting!
  • So whenever the company starts showing improved profitability, the market will reward it with a nice spurt in the stock price. Forget EPS growth, forget 're-rating'..even a 'reversion to mean' can give good returns in this case.
  • Now, the big question is - when will this happen?! While I will not talk about that, I can say that I dont think it will happen in this quarter's (December) result, since existing cheap Chinese stock will take time to get exhausted. December result may also be equally bad, in which case the stock price will take a further hit. But this does have potential as a 2-3 quarter short term puff!

So will Phillips Carbon start batting properly or will it get bowled by the Chinaman?! Time will tell!

Until then,
Cheers and happy investing!!!




Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional analyst, I may have positions in stocks discussed.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Friday, November 23, 2012

Noida Toll Bridge - A few (disturbing) developments

Noida Toll Bridge has been a favourite of a lot of value oriented investors for a variety of reasons. Those who are not acquainted with the company may please go through this very very detailed report on the company. Specially, as seen in the recently quarterly results, since it has become a net-debt-free company, a lot of people are sitting up and taking notice. I will not dwell upon the troubled past of the company. The company has excellent cashflows and debt is all set to be repaid over the next couple of years. The expectation that good amount of dividend payout will happen from next year onward makes this stock very interesting indeed.

However, a couple of quarters ago, this note in the quarterly result caught my attention.

Click to enlarge

It was quite odd that the Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed the details of the same.

Then came the news about 10 odd days ago that the company had hiked the toll rates for the DND flyover. This was completely legal and within the terms of the agreement that the company had with the Government. However, this decision did not go down well with the masses. (Yes, the same thing has happened before too.) There were mass scale agitations (news article) against the company by the Federation of Noida Residents Welfare Association. Other bodies have joined in the agitation too. They have also filed a PIL against the company. Broadly they think that the original MOU (agreement) which the company had with the Government itself is unfair and needs to be scrapped!!! They have "also written to the UP Chief Minister to review the MOU and take back the DND Flyover and make it free" !!!

So can the Government do this? Apparently, yes, its very much possible!! The Government can review and modify terms of an existing project like this 'in public interest'. Please go through this article in which the authors have stated that this is a common practice internationally and they have given examples of the same being done too! (To be fair, I have not come across anything like this being done in India so far.)

In the meantime, the company has succumbed to the public pressure and has rolled back the hike in toll rates.

How does this affect the investors in Noida Toll Bridge? The shareholders have waited for an awfully long time to get any sort of returns on their investment. The report that I posted in the beginning talks about the really hard time that the company went through in the initial phases. Now that good times could start for the company and its shareholders, these new developments have popped in. Few things that could happen..

  • There could be massive hue and cry about the 'unjust' and 'unfair' levy of toll on the DND Flyover with demands that the toll be scrapped. The Government could indeed play its 'in public interest' card and modify the MOU or scrap it completely. The company could then go to court, etc etc. (I think chance of this happening is remote)
  • Also, the company has rights to develop a large parcel of land near the flyover, which could be objected to for a variety of reasons by a variety of parties! :-) (I think chance of this happening is high)
  • Or of course, nothing of the above might happen. However, given the massive publicity and media coverage given to this, the company will find it extremely difficult, if not impossible to raise toll rates in future. (I think the chance of this happening is very high)
  • Of course, the Government might do some minor modifications to the MOU to appease the parties involved and then it could be life as usual for the company. (I think the chance of this happening is fairly high).

The shareholders today do face a terminal risk to their investment in the company. Even though one may argue that the possibility of this happening is remote and probability is small, the risk is such that if it materialises, the entire company and its business model will be finished. Low probability, super high risk event!! I am not at all saying that the company is a surely bad investment (whether it is good or bad is every individual investors' decision), but anyone making investment in the company's shares should keep this risk in mind for sure. The stock is surely 'cheap' and its DCF looks great in an excel sheet, but then these out-of-excel risks are also very material to note and consider in the investment decision making process.

Let us all hope for a proper and fair resolution to this whole Do Not Disturb Flyover issue!

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Saturday, November 17, 2012

Disa India Ltd - Update

Disa India Ltd has come out with the following announcement yesterday..

DISA Holding A/S (the "Seller") has submitted to BSE a Notice of Offer for Sale an aggregate of upto 173,483 equity shares of face value of Rs. 10/- each of Disa India Ltd. (the "Company and such equity shares referred to as "Sale Shares") aggregating to 11.487% of the total paid up share capital of the Company as on November 15, 2012 by Promoter through a sale on the separate window provided by the BSE Ltd for this purpose.

The Sale shall take place at the separate window of the BSE Ltd and shall commence on November 20, 2012 at 9.15 a.m. and shall close the same day at 3.30 p.m. Indian Standard Time ("Sale Date").



So it seems like delisting is off. Monday should be 'interesting' as far as the stock price is concerned! :-) This is one more nail in the coffin for the 'delisting theme' in the Indian markets.

What is more interesting (and coincidental) is a conversation I had with my good friend Niren over a cup of our daily chai. It was a huge coincidence that we discussed Disa yesterday afternoon and this announcement came in the evening. (All unparliamentary words have been edited from the conversation! :-) )

Niren: So what do you think about the business at present? Clearly there is a slowdown.
Me: O yes, no question about it. Overall, new capex is happening slow or is being differed. The situation is not very great at present as is visible from the last 3 quarters results. So even though the potential is quite huge, conversion of the same in terms of numbers is not happening at present.
Niren: So do you think its cheap at present? Would you buy?
Me: O no not at all. I dont think its cheap at present to buy. But its not expensive enough for me to sell too!
Niren: And what about the delisting angle?
Me: Logically, I think they would delist. They have transferred the disputed shares in quite a hurry, maybe to delist before the deadline. Also, the parent is a private equity group. For them, an unlisted company would be much more easier to sell, whenever they decide to exit.
Niren: But this is not a very big part of the overall group worldwide. Would the parent care enough to delist?
Me: Ya, looking at their actions and thinking from their point of view, I think it makes sense for them to delist.
Niren: Hmmm...

HAHAHAHAHAHAHA!!! I am sure Niren is laughing too. We had this discussion and their announcement came in a couple of hours after that.

On a serious note, lessons learnt:

  • We are not as smart as we think! Logic, mindmaps, 'thinking from their point of view' etc etc. will not always work :-) Market always does stuff to remind us of this fact and keep up humble. 
  • More importantly, this further reinforces my belief to always always always look at the valuations. In Disa, if the business wasnt good and valuations were too irrational, I would have totally panicked after this announcement came. 
  • Special situations players should take this as a big warning regarding so called delisting stories which are quoting at extremely irrational valuations. If valuations do not make much sense, then its not worth the risk hanging on, hoping for delisting.
  • All decisions should be taken on the basis of the underlying business and its valuations alone, without getting distracted by events and news. This helps maintain rationality in decision making.


Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Thursday, November 15, 2012

CMI FPE Ltd. - Interesting, but still work-in-progress..

Wish all of you a very happy and peaceful Diwali..

Well, I often take up the following exercise in my class. You may find it interesting too..

Say there are 2 companies A Ltd and B Ltd. Both are textile companies of the exact same size, having same margin, same products, financials and similar quality of management.

Now say that A Ltd has just bought a new machine, which increases their productivity and thereby, their margins by 5%.

Given a choice, which company's shares will you buy?

Usually, people say A Ltd, which might be your answer too. What if I tell you that there are 3 choices. (No, 50-50 in A and B Ltd is not the third choice).

Well, an interesting answer (I wont call it the right answer) is; You should buy neither A Ltd nor B Ltd shares. Given a choice, you should buy the shares of the company which manufactures those machines!!!

The funda is very simple. What stops B Ltd from purchasing the same machine tomorrow? When their margins increase too, they might start a price war to gain market share. In the process, none of the textile companies will benefit. Only 2 parties will benefit; the end consumer and the machinery manufacturer!
When any sector goes through a boom phase, if one can go up the chain and identify the capital equipment manufacturer, that can become a better investment than the players in that sector! Well, if you would have identified this in the textile sector, in the context of the TUF scheme, you would have invested in Lakshmi Machine Works and your investment would have been up more than 10 times in about 10 years. Not bad!

Without drifting further, I should come straight to the topic of the post - CMI FPE Ltd. As mentioned in the title, it is still WIP for me. I think I need to do a lot more study on the company.

Background

CMI FPE was earlier known as Flat Products Equipment India Ltd and was set up by Late Dr. T.R.Mehta, who was basically a technocrat. He sold the company to the Belgian group CMI in 2008 since he did not have a successor to run the company. CMI also bought a Pvt Ltd company of the promoter, which is now named as CMI Industry Automation Pvt Ltd. CMI currently holds 75% stake in CMI FPE and 100% stake in CMI Industry Automation.
The company is basically a provider of capital equipment required by the steel sector. The company manufactures products like Cold Rolling Mill Complexes, Galvanising Lines, etc. The group is one of the largest and the lowest cost manufacturers of this equipment in the world.
Its but obvious that the fortunes of the company are pegged to the fortunes of the steel sector, which is not exactly going through a rosy period right now. But after all, steel is a cyclical sector and when it turns around, CMI FPE could benefit bigtime, like in the example above.

Basic Financials
Market Cap: Rs.330 cr (CMP Rs.670) (One may note that in FY11, the company recorded sales of Rs.437 cr and PAT of Rs.47 cr. There was Rs.25 cr other income)
By and large debt free. Works on customer advances. PE ratio etc would look ridiculously high, since the last few quarters have been quite bad. Dividend payout at 20ish % has been ok.
Excellent cashflow generation till FY11. FY12 has been bad for the company on all parameters.

Positives

  1. The company works in a very niche sector, with best-in-class technology having huge entry barriers. 
  2. The company is supported by a very strong parent, having global presence. 
  3. From what I could find out, CMI FPE is now the only manufacturing outfit of the entire group globally in this business line. Outsourcing opportunities could be huge.
  4. Slowly, the company is also expanding into new products like PLTCM and providing ancillary services to its clients.
  5. The company has a strong order book position. (estimated to be more than Rs.800 cr)
  6. The cashflows are strong, since the company works on advances from customers. 
  7. I really liked the management's approach. Currently, the company is going through a tough time. During this period, instead of taking a step back, the management has chosen to modernise and expand the company's facilities. Please go through this and this very carefully. Basically, the management has chosen to bear short term pain and keep themselves ready to take advantage of the time when the cycle turns. Also, expanding capacity during a slowdown is usually cheaper. Such contrarian thinking is something which I honestly like.
Negatives
  1. Of course, the biggest negative currently is that their customer sector is going through a tough time. Capex is being differed all over the world by steel companies. Consequently, inspite of having decent order book, execution of the same is being differed by customers of CMI. The pain is very much visible in the recent quarter numbers. (Actually this is why I started looking at it in the first place.)
  2. I am unable to get a proper hang of the steel cycle. So, will the wait for the cycle to turn be a short one or a super long one? Thats something I do not know.
  3. If one looks on the traditional 'value' parameters such as PE, dividend yield etc, this stock will look insanely expensive and wont appeal to many. But I think just looking at the company in number terms is not right. Business and products is what is also important.
  4. CMI FPE has doubled its capacity, even though its existing capacity may not be fully utilised. This will surely lead to increase in the overall fixed cost of the company. As a result, till business conditions improve, the results of the company will look even worse.
  5. Things are a bit opaque on levy of royalty/technical fees etc by the parent on the Indian company. I am not still clear on that front.
  6. There has been recent announcement that the parent would be merging its own 100% subsidiary into the listed company. The details of the merger and the valuation etc has not yet been announced. But it could lead to a corporate governance issue. I am sure everyone remembers the Akzo Nobel incident. Corporate governance issue = derating and further drop in stock price. Howeverrrr, there is one more angle of looking at this event. Hint: Current promoter holding is 75%. The merger would result into the promoter holding going beyond 75%. An MNC subsidiary which could have 75% plus promoter holding, where stock price has been massively hit due to unfavourable business cycle..hmmm.. I will not say more because the D-word is a taboo currently!! :-)
So all-in-all, I find this to be a very interesting case worth studying in-depth. Primary research and things such as talking with industry people, getting multiple views and angles is very important when needs to get out of the excel sheet and understand the business properly. As I said earlier, a lot more work needs to be done on this..

Cheers and happy investing!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Friday, October 19, 2012

An update on stuff...

Hello to all! Well, I have finished torturing my students (my lectures are over) and now its time to concentrate more on torturing my readers! :-)
I have this habit of putting up brief updates at regular intervals, so here it goes..

Mr.Market has smiled upon most of us and I believe that all of our portfolios will be galloping for whatever reasons! Many of us will be secretly considering ourselves as amazing stock pickers and investors. However, very few acknowledge the role that luck plays in investing. The usual thought process of a lot of investors is that if profit is made, it was skill, while if loss is incurred, it was (bad) luck. Its a very convenient way of turning our confidence into over-confidence. I had earlier written on the topic of skill v/s luck in investing.
Well, a couple of people, Abhinav and Niren have recently started a blog about investing, with this as the central theme. While I haven't had the chance to interact with Abhinav extensively, Niren and I have been friends for more than a decade and we meet up everyday for a cuppa tea. He is someone I regard highly as an investor and is someone whose thoughts any keen investor should follow. Here is a link to their introductory post. (Yes, I am promoting my friend's blog.. yes, I think he is a very smart investor and brings a fresh, new approach to the table..no, he did not ask me to do it...yes, I will make him pay for tea for at least a week!)

Well, after diverting from the topic of this post and trying to promote my friend's blog to the very few readers of my blog, lemme get back to business!!

I had written about NBCC a couple of months ago. My view on the stock as a long term holding is not very positive due to the reasons mentioned. However, it is expected that the revenue and profit booking of their commercial real estate project which I had mentioned could happen in the either Q2 or Q3 FY12. When this happens, it will result in an exceptionally amazing quarterly result and there could be a nice spike-up in the stock price. However, from the longer term point of view, my concerns still remain and in my view treating this as a 'compounding long term story' is quite risky. Treat this as a 2-3 quarter 'trade'!!

APW President AGM was attended by a friend of mine. No fresh information was obtained. In my view, due to the lethargy of the promoters, valuations which are not 'sitter' valuations, in a industry which is not exactly going through good times, one should not take a large position in this.

Sundaram Clayton demerger record date is over and the existing company has also been delisted for some period of time. I was not invested in this situation, but I intend to keep a watch on the scenario post-relisting.

DISA India has given decent returns and since I had disclosed that I was buying the stock, I should disclose that I still hold the entire position. I am not even thinking about the delisting angle and I am comfortable as long as I can see that the business is doing well and valuations are not over-the-top. People interested in DISA might find this article interesting. :-)

Ashiana Housing has gone through some interesting times. I absolutely adore the management. In my view, they are best-in-class. However, due to the change in accounting policy they have initiated, one should expect very lumpy earnings going forward. While that does not matter to me, it might matter to Mr.Market! However, two factors - lack of growth and the unwillingness to distribute healthy dividend inspite of having great cashflow - make me sit back and think on the stock unemotionally. While I do not think that the company will destroy wealth, I fear that the stock could deliver sub-par returns due to these factors.

Falcon Tyres is something I had found very interesting in a negative sense! I continue to track the stock with interest! Apna kuch lena-dena nahi hai, but still, complete interest! :-)


Well, that's all for now. I am looking at a few interesting new ideas..will update about them soon.

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Sunday, September 23, 2012

A good site for investors

A good friend of mine, Ayush and his brother Pratyush write an excellent blog.
They have also recently started a new website http://www.screener.in/
This, I feel, is an excellent website for any serious investor. Not only does it give you screeners and filters, but it also gives you last 10 years' data as well as numerous value-adding content, email updates, etc.
Registration is free. Do make good use of it.

Disclosures;
1. I am not connected in any professional way with the above website.
2. One of the owners of the site, Ayush, is a good friend of mine. However, he did not tell me to write about/promote the site. In fact, to be honest, he does not even know that I am writing this post. My sole purpose behind writing this is that investors should be made aware of this good resource.
3. I am a user of the above mentioned site.

Wednesday, September 12, 2012

A bit more on open offers..

I had recently written a post on the acceptance ratio in open offers and I got a lot of interesting feedback on the same on the blog as well as on email.
Someone claimed that there is nothing special or interesting in the actual acceptance ratio being so high vis-a-vis the theoretical acceptance ratio. Someone else thought that I have an itch to blog, which is why I have put up a useless post. :-)
Well, everybody has an opinion, which should be respected. But someone also suggested that a bit more details about open offers and the opportunity to earn in them would be helpful. I think thats a very valid suggestion, which is the reason for this post.
Even though I supposedly have an itch to blog, in this case, there is not much need for me to write about it. Kiran has already written on this topic in great detail. I would request that anyone who is interested in knowing more about open offer trades should go through the excellent post by Kiran. Kiran's post also contains a link to a word document, in which he has analysed the open offer in greater detail. Kindly go through the same too, I assure you that it will be extremely helpful.
After going through the same, I think you will appreciate the importance of acceptance ratio in open offers. And why the high actual acceptance ratio is actually such a big deal.
Hope this helped..
Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Monday, September 10, 2012

An interesting observation on open offers..

This post is a result of an over-a-cup-of-tea-discussion with Mr.Niren Parekh. Niren is a very good friend and an excellent investor. Also, he is too lazy to start a blog! The post is a result of an observation made originally by him and so I cannot claim this to be my own brain-work.

Open offers are excellent special situation cases. Although the absolute return in such offers is typically not very large, if done properly, they can offer excellent short-term returns with relatively less risk. Annualised returns in most cases will be in the high teens.

The amount of open offers have increased in the recent past due to increasing M&A activity and also due to low valuations, leading to promoters wanting to increase their stakes. This has led to some interesting opportunities for astute investors..

The Basics

Open offers get triggered for a variety of reasons. It could be as a result of change in ownership control of a company (e.g. ESAB) or it may be completely voluntary (e.g. Tata Sponge).
In an open offer, an existing or a new promoter (or a third party) makes an offer to acquire the shares of the non-promoter shareholders at a certain price, as mandated by law.
After following the entire legal procedure, the promoter opens this offer and the non-promoters shareholders tender their shares in the open offer.

The Acceptance Ratio

Lets suppose that ABC Ltd has a total share capital consisting of 500 equity shares. Current promoter holds 200 shares, making his holding 40%. Non-promoter shareholders hold 300 shares, making their holding 60%. Now, to increase his stake, the promoter makes an open offer for an additional 20% (100 shares).
The non-promoter shareholders will tender their shares in the open offer. Total non-promoter shares are 300, out of which the promoter wants only 100, making the acceptance ratio 33%. Which means, out of every 3 shares tendered by non-promoter shareholders, only 1 will be accepted by the promoter and money will be paid for it. The remaining 2 shares will be returned back to the shareholders.
Now, this entire calculation is based on the assumption that all non-promoter shareholders will tender. What if some of the non-promoter shareholders are not interested in tendering? Then, with respect to those who do tender, the promoter will accept more than 33%. (Finally, he wants 100 shares. From whom and how much they come, doesnt matter!)
So, the theoretical acceptance ratio we calculate before the open offer begins and the actual acceptance ratio we see after the offer ends can be vastly different. This happens because some shareholders are not interested in tendering. Some others do not know what tendering means and completely miss the open offer! So, for those who do tender, the acceptance ratio becomes higher! This is where an astute special situations investor can make money.
Let us look at a few open offers in the recent past.











Now what we see is a HUGE difference between the theoretical and actual acceptance. This tells us that there is a high proportion of investors who have not been tendering in the open offers, investors who can also be referred to as brain-dead investors in a lighter vein! Even in the case of Akzo and Thomas Cook, the acceptance ratio has been phenomenally high. Specially in the case of Akzo, it was 100% for the small shareholder category. Any special situations investor who would have participated in these offers would have made a LOT of money. (I have not shown the annualised returns in these open offers here, since thats not the topic of this post.)

Of course the question arises..how can one profit from this observation? Can we make some educated guess as to how much will the actual acceptance ratio be, so that positions can be taken accordingly?
I have been tinkering with various factors like the extent of 'retail' and small shareholders, % of shares in physical form, etc. But so far, I have been unable to figure out a way in which the actual acceptance ratio can be predicted with fair certainty..well, the search continues!
I eagerly look forward to the open offers of Shanthi Gears and Future Capital. Lets see if this trend continues.
Till then..
Cheers and happy investing!!

P.S. This post is only to point out the extent to which the 'brain-dead investors' exist in open offers. Therefore, no discussion has been done on the returns in these offers, taxation implication, time and legal risks etc.



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Tuesday, August 21, 2012

NBCC - Fantastic business and 'sitter' valuation, but...

National Buildings Construction Company (NBCC) is a BSE, NSE listed PSU. The company came out with its IPO in March 2012 at Rs.106 per share. The current financials of the company are as under:

Seems great! I can almost see all the Graham fans salivating!!
Well, it gets even better!


Unlike a lot of companies, where cash is more than market cap, this company is not facing any problems on the business front.

The business:
NBCC's business is pretty straight forward. It operates in 3 segments;
1. Project Management & Consultancy: In this segment, the company does residential and commercial civil work for various Govt departments. e.g. a ministry wants to build a new building or a new housing colony is to be constructed for Govt employees, NBCC is appointed to carry out the work. NBCC itself does not engage in any construction activity, but outsources it to other parties on a tender basis. NBCC thus acts as a nodal agency for the Govt, providing project management and consultancy services. It gets anywhere between 6-10% of the project cost as its fees.
2. Real Estate Development: In this segment, the company owns land and acts as a developer, constructing and selling commercial and residential real estate. The company has land bank of 125 acres spread over various cities in Northern India.
3. Power Sector: This is a smaller business segment, where the company does civil work for power sector projects. e.g. construction of cooling towers, chimneys and such other structural work.

Consider the following additional points:

  1. Business is booming. The company has a current order book of more then Rs.10000 cr, while its FY12 sales stood at Rs.3500 cr. Being a Govt driven business, it is not as affected as other companies due to various negative macro factors.
  2. The business does not require a lot of capital, since NBCC itself does not do any civil work. It outsources the work. The company therefore generates excellent cash and gets large advances. Fantastic business!!
  3. One large commercial real estate project of the company at Okhla is nearing completion. It is expected that this project alone will generate revenues of Rs.400-450 cr and profit of Rs.180-200 cr! (Since accounting is done on completed contract basis, nothing has been booked yet).
  4. NBCC has been granted CPWD (central public works dept) status. Hence, it is eligible to get numerous Govt civil construction contracts, which are otherwise not open to other companies. 
  5. The company has a large land bank and numerous real estate projects in progress. More details on the same can be obtained here.
Now the obvious question..you have a company having cash on book greater than market cap. It also has a low-capital, virtually recession proof, assured business. It also has valuable assets (land). It pays full tax and gives decent dividend too. So why shouldn't one buy this left right and centre?! Well, before you do that, let me ruin your happiness by putting forth some more points!!
  1. The biggest problem I have with the company is that the company's promoter is an extremeeeeeeely irrational being. The promoter is known to take decisions which make no business sense. In this case, e.g. if the promoter 'directs' the company to put money into, lets say, a large BOT project..or the promoter 'directs' the company to put money into an ailing power project, or buy a coal block! Not only will this entire cash on books disappear, but the company will be additionally saddled with debt. When will this happen? Maybe never..maybe tomorrow! Improper capital allocation is the biggest risk..There will always be this hanging sword for investors in this company and good investing cannot be done with swords around! :-D
  2. The 'cash' that one sees on the books does not entirely belong to NBCC. About Rs.500 cr is the company's own money, while the rest comes from advances received. On this related topic, do read this excellent post by Prof Bakshi.
  3. FY12 contingent liabilities 'claims not acknowledged as debts' stand at Rs.1055 cr! Thats quite a lot! I couldn't get much info on the nature of these contingent liabilities.
  4. The business is virtually tailor-made for corruption!!! NBCC gets contracts and outsources them to others. A corrupt official can easily earn a bit 'on the side' in this process. If a large scale corruption scandal comes out, it will hit the reputation, valuation and market cap of the company! (There are corruption cases against 16 employees of the company already, as per the RHP).
  5. There were newspaper reports and talks about the company getting into power generation!! Boy that would be a real bad capital allocation decision, considering the excellent current business. Although the company has denied this, the RHP talks about the company's intentions to get into BOT/BOLT/BOOM projects. 

Conclusion


The capital allocation overhang will always remain in this particular stock. Market will always be edgy, expecting the company to piss off money into some unrelated business, just because it is 'directed' to do so. With an overhang like this, its difficult that the company will get premium valuations. The cheap stock will remain cheap and may become a typical value trap. If the company really does waste cash like it is feared, then one can expect the market cap to drift a lot down too!
In my opinion, if you want to make a lot of money, investing in this company is not for you. But if you want to avoid losing a lot of money, this company is worth a look for you. Whatever you may decide, in case you invest, it would be wise to always keep tabs on what the company is doing and how it is allocating its capital. It shouldn't happen that you wake up one fine day with a big loss in the stock, then you start investigating and then you find that the company has just blown money away. Being vigilant is a must!!

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Wednesday, August 15, 2012

APW President - A Delisting Case

Until a few months ago, delisting was the flavour of the day. With recency bias of cases like Alfa Laval and Atlas Copco, an equation was formed.. MNC + above 75% holding = Profit guaranteed! In some cases, MNCs with less than 75% promoter holding ran up too! It makes no sense to participate in these opportunities when the crowd is running after them. Consensus is seldom right! I had written a post on this too..

However, over a period of time, the market has slowly forgotten the entire delisting theme. People no longer ask me (or give me unsolicitated khabars) about delisting. Its no more the 'in-thing'. So, its time to at least start looking into it. :-)

One such case which me and my friend Ninad discussed is that of APW President Systems Ltd. The company is now a Schneider Group company, with the promoters holding 75%. They have already announced their intention to delist.

I had earlier written about how to analyse delisting cases and what points one should consider for decision making, in my opinion. Let's try and look at APW from the delisting point of view..

  1. Valuation Comfort: One of the most important criteria I look at while analysing delisting cases. If there is no valuation comfort, I would be more than ok giving the opportunity a pass. APW is available at a market cap of Rs.125 cr and an EV of about Rs.145 cr. FY12 sales were Rs.97 cr, while there was a loss of Rs.5.8 cr at the PAT level. On the face of it, the valuations look expensive. However, one should also take into account that any acquisition is usually followed by 'cleaning of books', where there will be quite some write-offs and hits on the profitability. Prior to the acquisition, however, the company had PAT of Rs.10 cr in FY09 and Rs.6 cr in FY10. The company definitely has potential, if its capacities are utilised properly, under the right set of promoters. In my view, at the current market cap, its neither too cheap, not too expensive..its somewhere in the mid-range, but still not at go-out-and-take-a-big-position valuation. Barely acceptable!
  2. Management Quality: Management quality is of paramount importance. If the management is not good, the minority shareholders will not get a fair exit. Schneider Group is a global leader in the electrical parts, components and allied spaces. Based on my reading, I have not found anything blatantly wrong which the management has done in the past. I am ok with the management quality..Acceptable!
  3. Incentive to delist: Why should promoters delist the company? What incentive do they have? Trying to study this will help us understand the seriousness of the promoters to delist the company. In the case of APW, the promoters have kept their holding at 75%. So, there is no legal compulsion/deadline for them to delist. However, Schneider has been on an acquisition spree in India in the recent past, snapping up one business after another.  Link to article. Most of the companies they acquired were either privately held, or they acquired the business in question, without acquiring the company. The group seems more comfy with having privately held companies. They may also be looking at APW as a low cost manufacturing base. Further, they have announced their intention to delist the company, even though it is not at all legally mandatory for them to do so. I cant conclude for sure whether there is a high incentive to delist, but one can say that there is serious intention to delist.
  4. Floor Price: The company has announced Rs.164.30 as the floor price whereas the promoters have announced Rs.195 as the  indicative price for delisting. CMP of Rs.205 is about 40% above the floor and 5% above the indicative price. 
  5. Shareholding pattern: A concentrated non-promoter shareholding pattern makes delisting easy since the promoters have to 'deal with' lesser number of shareholders. In this case, promoters hold 75% and need minimum 15% more to delist. Here, the facts become very interesting.

In March 2012, the shareholding was pretty concentrated, with just 4 shareholders holding 11.96%. 5 other individual shareholders held 2.42%. So, just 9 players held 14.38%. Delisting looked very much doable.

However, in the June 2012 shareholding, everybody has disappeared! Globe and Rajasthan, which are arb players are no longer there in the 1%+ category. M Rutty & Co, which was one of the erstwhile promoters have also disappeared, while APW Electro has reduced its holding. The overall shareholding has gotten a lot more dispersed in these 3 months, thereby making delisting more difficult comparatively.

Conclusion

At current market cap, APW is not a screaming buy. The promoters are not under any legal obligation to delist. So if they decide not to go ahead with the delisting, the price would correct a lot, since there are losses in the past year and the new management has not disclosed its plans for the company. Market would typically react to this in a very negative way. So, building a big position at this market cap seems very risky to me. I would like to attend the AGM of the company, to be held in September, to get more clarity on this (if possible!).

Cheers and happy investing!


Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Monday, July 30, 2012

Annual Reports and revised Schedule VI

The annual reports season is upon us. This is a very exciting time for anyone who is serious about investing. Annual reports give a lot of information and are extremely useful for analysis.
However, from FY12 onwards, the New Schedule VI has come into effect. The presentation of financial statements (as well as schedules and notes to accounts) is governed by Schedule VI. As a result, the way in which the financial statements are presented this year onwards will be completely different from those of last year. This, of course, completely screws up my excel sheets as I will have to rearrange the numbers to make it comparable to previous years. Very irritating indeed, but totally unavoidable!
Therefore, one should know how the presentation is done now, so that the financial statements can be understood and appreciated better. Specially, on the balance sheet side, the way long term and short term/current liabilities are presented has changed significantly. Many documents are available on the net regarding the new Schedule VI. The Institute of Company Secretaries of India has come up with a well drafted note which explains the entire difference between the old and the new schedule. The note can be accessed here. Please go through the same, it is very important.

A couple of negative points about the new Schedule VI come to mind;
1) It is no longer mandatory to give details of management remuneration in the financial statements. (although computation still has to be done as per the Companies Act). I think this is a big big negative. Unreasonable managerial remuneration is one of the points which tells investors about the quality of management and the disclosures of this should not have been discontinued.
2) A bigger and more worrying point is that now it is no longer mandatory to give Quantitative Details. Earlier, companies had to disclose the details of raw material and sales, product wise, in terms of quantity and rupees. This enabled calculation of per unit cost of raw material and sales. For me, this was something invaluable, which has now been discontinued and is a huge negative as far as my research and analysis goes. Sad, very sad.

Well, no use cribbing. The law is the law and it is us investors who will have to adjust our analysis accordingly. Knowing about these things is therefore very important so that decision-making can be done properly..

Cheers and happy investing..

Wednesday, June 27, 2012

In a lighter vein..

The following post has a lot of entertainment value and should not be taken too seriously!!

BSE, NSE announcements are a great source of getting information and generating ideas. However, sometimes, companies come out with hilarious announcements. Check out this one from Madras  Fertilisers, which a reader shared with me..

Click to enlarge
Who says auditors do not have a sense of humour!! :-)


Recently, I came across another, rather value-adding announcement, which is as follows:

Click to enlarge
From this announcement, i learnt the following things:

  1. Numerology is important. 
  2. Numerology can be applied to alphabets also, even though they are not numbers. 
  3. A company can appoint a numerologist. So like a Company Secretary, there can be a Company Numerologist.
  4. The name of a company affects the performance of a company. So, probably, Microsoft will do better if its renamed Microsoftt.
A lot of my analyst friends applied their creativity to this event (ya, analysts can be creative and funny too!) and the following jokes started floating around..

  1. The company now has AA rating. They should further try for a AAA rating :-)
  2. Maybe they can add F in the beginning of the second word.
  3. The company people should consult a neurologist, before consulting a numerologist!
I think its obvious that I had nothing better to do today! But a bit of fun is always good..
And the market is one place where one can have lots of fun. Its never boring!

Cheers and happy (funny) investing!!



Disclaimer(s)!! (although I dont think they are necessary in this case!!)
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Wednesday, June 20, 2012

Sundaram Clayton Demerger - Some Clarifications

I had written about the amalgamation-demerger scheme between Sundaram Clayton (SCL), Anusha Investments (AIL), TVS Investments (TVSIL) and Sundaram Investments (SIL) a few days ago. I had highlighted a questionable corporate governance action in that post.
I got a number of emails, asking queries about the demerger. Seems like there is a bit of confusion about how the scheme has been interpreted/understood by people. So, here are some clarifications about the same.

What is the entire scheme?

Click to enlarge



What will happen due to the scheme?

  1. AIL (along with the TVS Motor stake) will get amalgamated with SCL and will stay in SCL itself. Nothing related to AIL is getting demerged. Since its a wholly owned company anyway, this has no effect on the financials.
  2. Existing shares of SCL will get cancelled. For every 2 of existing SCL shares, you will get 1 share of SCL and 1 share of SIL (all FV remain same)
  3. As a result, the number of shares in SCL's share capital will become half, from 3.8 cr shares, to 1.9 cr shares, FV Rs.5.
  4. The shares of SIL will not be listed. Instead, an exit option at Rs.48 per share is being provided (as detailed in previous post)
  5. Shares of SCL will be listed.
  6. % shareholding of everybody remains the same.


Is Rs.48 per share a fair exit for SIL shareholders?

In my opinion, it is a fair and generous exit being given to SIL shareholders. SIL will be essentially an investment company, with some investments which are not doing well (like TVS Electronics) and which will have very low dividend paying ability. SIL will have capital of 1.95 cr equity shares of Rs.5 each. At Rs.48, thats a valuation (market cap) of Rs.94 cr which is being provided to the shareholders of SIL.
If SIL were to be listed, looking at its financial position, I do not think that it will receive the same stock price (Rs.48) or market cap (Rs.94 cr). Shares of such holding companies remain listed at huge discounts. Hence, its my personal opinion that the shareholders of SIL are being given a more than fair deal.



Then whats my problem with the scheme?

The problem I had and which i mentioned in the previous post is about who is paying this money for exit, to SIL minority shareholders. Its not the promoters. Its a (indirectly) wholly controlled subsidiary of SCL itself, which is paying. So nothing goes out of the promoters pockets for gaining virtual 100% control of SIL. To be fair, the amount involved is relatively smaller, about 19 cr (20% of SIL).


Other points

  1. Since there is share capital restructuring happening in SCL, in my view, SCL will get delisted for a few days.
  2. When SCL relists again, its number of shares will be half of those at present. So, its EPS will become double. Hence, the price should also become double. I think SCL should be in the 275-325 range once it lists, if its at CMP till ex-date. (Please dont be happy..even though the price might double, your number of shares will become half..hence there will be no impact on the total value).
  3. The option being given to SIL shareholders is to either take an equity share or take a redeemable preference share of SIL. In my view, it makes most sense to opt for the equity share instead of the debenture, in case you are a shareholder of the SCL on record date. (I am not a shareholder of the company as on date, I have yet to complete my research on this special situation fully. I may or may not buy the shares in future).
I hope this post gives a bit more clarity on the scheme. In my earlier post, i had given greater emphasis on the corporate governance angle, rather than the scheme structure. Please do raise queries you might have or point out any errors you think I might have made. I will try my level best to resolve them.

Cheers and happy investing...


Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Thursday, June 7, 2012

Sundaram Clayton Demerger - Not so Sundar?

Sundaram Clayton is going through a demerger. The scheme, which can be found here recently received shareholder approval.

Now all of us have certain impression about various promoter groups; about their ability, about their integrity, about the way they treat the minority. So if I say Essar Group, you will probably say bhaago! You wont say that if I mention the TVS Group (corrected), right? They have been generally known for their integrity. However, the current demerger in Sundaram Clayton (promoter holding 80%) may change one's impression/opinion about the Group. Lets take a look at what is happening here..

The Demerger

The entire scheme of amalgamation & demerger is as follows:

1) Anusha Investments Ltd (AIL), a wholly owned subsidiary of Sundaram Clayton Ltd (SCL) will be amalgamated with SCL. (So, no dilution, no change in shareholding)
2) The 'non-automotive business' of SCL will be demerged and put into Sundaram Investments Ltd (SIL), which is currently a wholly owned subsidiary of SCL.
3) SCL's entire existing equity capital will be cancelled. For every 2 shares you hold in SCL, you will get 1 equity share of SCL and 1 equity share of SIL or 1 redeemable preference share of SIL, depending upon what the shareholder chooses. (Everything of same face value). In effect, the number of equity shares of SCL will become half. % shareholding of all parties will remain same in both companies.
4) The resulting company, SIL, will not be listed. Instead, an exit option will be provided to both the equity as well as preference shareholders of SIL. Equity as well as preference shareholders will be given an exit at Rs.48 per share of SIL. Exit will be given by Sundaram Engineering Products Services Ltd (SEPSL), another group company.

There are some weird things here, sure. But there are a couple of things which I found disturbing. Lets see what these issues are..

Issue 1: Delisting without Reverse Book Building

Shareholders of SIL (the resulting company) will be given an exit option. Now, they will have to take this option, since the shares are not going to be listed. So effectively, the result will be that there will be no non-promoter shareholders in SIL. There are 2 points which one might find objectionable here..
1) The entire non-automotive business is effectively getting delisted, without any reverse book building process. (Since this is being done through an approved scheme).
2) This will happen at a pre-decided price of Rs.48 per share. Now, the question is, whether this is a fair price? This is based on an independent valuation report, which has not been shared with the shareholders. But the point is that the minority shareholders have no say in the matter, which is against the basic funda of delisting.
Now the other side of the coin.. One can say that, anyway, holding companies such as what SIL will become, do not get proper discounting and valuation in the market. They quote at very very low valuations, as low as 5-10% of the value of their holdings. So, by giving an exit at a price which is at least higher than this, the management is actually doing minority shareholders a favour! Depends on what point of view you have!

Issue 2: Who pays for the exit (delisting)

When a company is delisted, the promoters pay the minority shareholders to acquire their share and have full control over the company. Logically, in case of the resulting company SIL, when the exit is being provided to the minority investors (who will hold 20%), it is the promoters who should be paying for this exit out of their own pockets. However, in this case, SEPSL will be paying the minority for the exit. Lets see who owns SEPSL.

Click to enlarge

So in effect,
1) SEPSL is indirectly held fully by SCL. So at the group level, its SCL who is paying the minority for their exit from SIL. Sooo after the exit, 80% of SIL will be held by the promoters, while 20% will be held indirectly by SCL, in which promoters hold 80% anyways.
2) So effectively, promoters are getting 100% control of the non-automotive business of SCL, without paying a single rupee from their own pocket. Illegal? nope.. Ethical? I wont say so!

To conclude.. although in this post, I have not discussed whether there is a money making opportunity in SCL currently (i will keep that to myself!!), what disturbed me is that a group like TVS (corrected) is doing something questionable, in a totally opaque sort of way. Not a very good sign at all. Just goes to prove that due diligence is a must, irrespective of the overall reputation and impression of the management in question. (A little part of me honestly hopes and wishes that i am wrong about this..such things are not expected from the TVS Group (corrected))

Cheers and happy investing!!


Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Monday, May 21, 2012

The Facebook IPO and why we are blessed to have SEBI!

I know I know..another article on the Facebook IPO..you must be already bored reading 'Facebook' in the title. But I am not going to talk about how an 8-year old company came out of nowhere to claim a market cap of more than that of HP and Starbucks combined. I am not going to talk about how the valuations of Facebook must have given a hard time to the supporters of the IPO, coz damn! They are so hard to be justified. I am not going to talk about the 'business model', neither am I going to talk about the addiction and disadvantages of social networking. I am sure you must have read alllll of these, many times over. I am instead, going to talk about something else. I would really like to talk about a few legal and procedural aspects of the IPO process in the US. (Statutory disclosure: I have never had, nor do I intend to have a Facebook account!)


I was reading bits and pieces about the Facebook IPO and I found some stuff that is really appalling. While I always hear a majority of Indian investors cursing the Government in general and SEBI in particular, these details will make one admire and respect SEBI. SEBI people, please take a bow. 
Check out these details..




Why did Facebook go public in the first place? All of us will agree that this is typically not a time for IPOs. People are cautious (read scared), overall valuations are not senseless and internet companies are not exactly the darlings of the market. Then, did you ever wonder why did Facebook decide to go for an IPO? The main reason for this were this and this. These are basically 'platforms which help investors connect'. They are not meant for everyone and only individuals having above $1 million networth can participate. In effect, these are nothing but stock exchanges, but not regulated as such. So private investors can login to the sites and put up their securities (which may not be listed) for sale, to be bought by other private investors. Due to these sites, there was a huge frenzy for buying-selling Facebook shares by the employees as well as early investors. This led to the number of shareholders going above 500. Now, it seems that as per US laws, if you have 500+ shareholders, you automatically become a 'public reporting company', which means you are bound by all reporting requirements of a listed company without any benefits of being listed. I think the Facebook people might have thought, might as well get listed! 
Well, basically these sites (platforms) created the required frenzy for Facebook shares helping them get obscene valuation. Its really good that such stuff is absolutely not allowed in India. Only authorised exchanges can provide a platform to trade in stocks..Thank you SEBI for that!!


Another aha moment I had was when I read about how the allotment of shares happens in an IPO in the US. In India, there are 3 defined classes of investors, with an allocated quota of shares for each, during an IPO. Thats quite fair for everyone, including the little guys. In the US, there is no such thing.. Effectively, the merchant bankers decide to whom the allotment is to be made. Damn, thats so unfair. This also leads to a different side-effect. Not everyone will be eligible to get the shares, helping merchant bankers boast about the IPO to gullible investor more! Its a simple thing; when you tell someone that you might not get something, he will want it even more! Thats good frenzy for you, just what the doctor ordered for an IPO. I feel that in India, the allotment process is comparatively much more fair..Thank you SEBI for that!


The third interesting point is that Mr.Zuckerberg will continue to own a bit above 55% voting shares. Under stock exchange rules in the US, a company where you have a controlled group that owns more than 50% of the outstanding rights of the company, you have certain exemptions that apply from corporate governance requirements that otherwise apply to other companies. So in this case there is no requirement to have an independent majority board, independent compensation committee, or an independent director nomination function. Now this is plain ridiculous. In fact, shouldnt it be just opposite? A company having a 'controlled group' should have more independent directors, not zero! But, thats what the law states and effectively allows a small group to control the entire company, no questions asked! In India, the provisions regarding independent directors are pretty stiff. (Although I wont comment on the independence of directors, at least the provisions are sound). Thank you SEBI for that!




For a person like me, who does not follow the US market, these few rules and provisions of the 'developed market' really took me by surprise. I had always found SEBI to be a really good regulator and this made my opinion stronger. There is no denying that loopholes exist and shortcomings are there, but I strongly believe that ours is an extremely proactive and fair regulator..

If I had a Facebook account, I would surely 'FRIEND' SEBI and 'LIKE' it a lot!

Cheers and happy investing!!