Clariant Chemicals' sale of business - no clarity here!

Lets play a small word association game. I will write a word and you say the first thing that comes to your mind upon reading the word..


1. Stock market  (Most of you will probably say high returns, volatility, manipulation, satta, etc)

2. Government  (Most of you will probably say lethargic, corrupt, unreliable, etc)

3. Wife  (Dangerous territory..so no comments from my side)

4. MNC Management  (I am sure most of you will say high quality, clean, professional, fair, etc)


Well, such has been the record of managements of MNC subsidiaries that we generally associate them with everything goody goody. A lot of these companies have been prolific wealth creators for investors over the years. And hats off to these guys.

But, it is not necessary that all MNC managements would be great, fair, transparent and professional. This is not something we can take for granted. Such representativeness bias can be highly dangerous to investors.

Lets take the recent happenings in an MNC subsidiary, Clariant Chemicals India Ltd.

Whenever the name Clariant Chemicals is mentioned, I have always seen experienced investors going gaga about the company. And rightly so. The company has grown profitably and has distributed liberal dividends. So, when the global CEO said in December 2011 that they aim to reach Rs.4600 cr in India sales by 2016/17 (CY11 sales were just Rs.1000 cr), investors sat up and took notice. Of course a management of this quality would have a broad plan under which they were making such claims right? Sadly, that doesn't seem to be the case. Not only have the sales been flat in 2011 and 2012, but recently, the company has announced sale of a large chunk of the Indian business (as a result of sale of the global business unit). Now how will the sales grow to the levels promised is beyond my understanding!!

First, let us look at this deal. The global Textile Chem, Paper Specialties and Emulsions business of Clariant (including Clariant India's business unit) are being sold to SK Capital for about Rs.3000 cr. Since Clariant India's business unit will also be sold, Clariant India will get part of this money. Well, sounds ok.

What is not ok is the way Clariant India has treated minority shareholders regarding this deal.

On 26/03/2013, Clariant India put out an announcement saying that Clariant India will get Rs.209.15 cr out of the total pot for sale of the mentioned businesses. From where did this sacrosanct number come was not given. To be fair, what is being given to Clariant India seems to be a good deal. The global business was sold at about 0.45x sales, while the India business is being given 0.6x sales. We have no idea about the India business profitability though! I was waiting for the postal ballot for this to be published, which would give more details and justification for the deal and what Clariant India is receiving.

I thought that decent clarifications and info will be given when they give out the notice for the postal ballot on this issue. (Since this sale cannot be done without the approval of shareholders).

However, I was absolutely shocked when the postal ballot was put up on BSE. It seems like the management is totally taking the minority Indian shareholders for granted.

Consider this.. the postal ballot is basically to ask the shareholders whether they are ok with the sale of the mentioned businesses for Rs.209.15 cr.
Now, if you want to take a proper informed decision whether to say yes/no on this, you will need info about the business being sold, right?

Shockingly, the explanatory statement to the postal ballot simply states that "TPE business contributes about 35% to the net sales of the company and includes a manufacturing plant for textile products situated at Roha". Thats it!!!!!!!!! It gives absolutely no more details about anything!! So how would you say yes/no to this resolution for selling the business? They are just not giving you any info!!

• So basically, does the Board want us to blindly trust whatever they say as true and fair? 
• Nothing has been mentioned as to who did the valuation, how was the number arrived at?
• We do not know how much profitability will reduce, how much fixed assets will go out? In short, there is virtually no info given on how much would the remaining business be like?
• So what purpose will this postal ballot serve? How does the Board expect shareholders to take a decision, when they are just not providing any info to take the decision?!

The Board does not seem to take into consideration the minority shareholders' opinion for this. It seems as though they are saying 'look this is what we have decided, just agree to this'. Not the best in terms of corporate governance, eh? I would request all shareholders to oppose this resolution and spread the word to everyone you know to oppose it.
This is just not done.

If things like this continue, then the 'management premium' that the valuations of MNCs were getting will soon turn into 'management discount'!!

Cheers and happy desi 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 investor, 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! 

SEBI's new baby - rules for illiquid stocks

I am sure most of you must have heard of SEBI's new rules for trading in what it calls 'illiquid stocks' which came into effect from 8th April 2013. Some of you may not have heard of it because surprisingly, the media has just not highlighted the issue! Perhaps there is not much incentive for the media to get involved here! ;-) These rules hit more than 2100 hundred companies among the listed space, as can be seen in the annexure to this notice. SEBI has not explained exactly why this has been done, but supposedly it has been to control manipulation in smaller companies. In my very humble opinion, the new rules can be best described as insane! (To put it mildly).

Lets see what all this is about..

I think it all started when, in 2010, an academician decided to write a paper on how call auction system can be implemented to solve certain difficulties in the capital market. The paper can be downloaded here. The author is an extremely accomplished academician and a highly educated individual and is a member of SEBI's SMAC from January 2009. Her CV can be viewed here.
Well, it seems like SEBI really liked the paper and decided to take a cue from it and thus were born rules for call auctions in illiquid stocks. In it, firstly, SEBI defines what it means by 'illiquid stocks' by prescribing few quantitative criteria..


Criteria for illiquidity – For the purpose of this circular, a scrip, whether trading 
in normal market or trade for trade settlement, shall be classified as illiquid on 
a stock exchange if all the following conditions are met:
2.2.1. The average daily trading volume of a scrip in a quarter is less than 
10000;
2.2.2. The average daily number of trades is less than 50 in a quarter; 
2.2.3. The scrip is classified as illiquid at all exchanges where it is traded.


All those stocks which come under this will not be traded in the normal fashion. Instead, they will be traded through an auction mechanism which goes like this..


2.6. Number of auction sessions – Periodic call auction sessions of one hour each 
shall be conducted throughout the trading hours with the first session starting 
at 9:30am.
2.7. Session duration - The call auction session duration shall be one hour, of 
which 45 minutes shall be allowed for order entry, order modification and order 
cancellation, 8 minutes shall be for order matching and trade confirmation and 
remaining 7 minutes shall be a buffer period for closing the current session 
and facilitating the transition to next session. The session shall close randomly 
during last one minute of order entry between the 44th & 45th minute. Such 
random closure shall be system driven.
2.8. Un-matched orders- All un-matched orders remaining at the end of a call 
auction session shall be purged.


Fancy!!! But practically speaking, it has merely made investors like me miserable.

1. Investors now have to track and keep a watch on the market (stocks) the whole day. They are being encouraged to always keep tracking the market, which is a big negative as far as long term investing is concerned.
2. Every hour, a fresh order has to be placed. I think my broker would now hate me more than he hates his mother-in-law.
3. Since a lot of market participants are clueless as to what is all this, there has been extremely low participation and volume in the affected stocks. People must surely be feeling 'trapped' in certain stock, since virtually no exit is available.
4. Practically, this whole section of the listed space will now be closed to institutions, since I am sure they will have better things to do!!! Such lower participation does not help proper price discovery.
5. Also, will promoters take advantage of lower liquidity and panic selling to shore up their holding at lower prices?

I suppose that all this was done to curb manipulation. But setting up quantitative criteria for this purpose does not help. Manipulators can just ensure that these criteria are met and their stocks remain out of the net! But in the process, a lot of genuine companies with genuine shareholders will suffer.

I am no-one to preach on this. What is right/what is wrong is immaterial. Laws are laws and rules are rules. So what can be done about it?

1. I am hoping that as time passes, the market participants will get slowly used to the new method and some bit of sense will return to this section of the market. Otherwise, effectively, this section of the market is practically dead. The stocks covered by these rules for illiquid stocks have become more illiquid than they were earlier!!!
2. I tried viewing this as an opportunity. Probably some panic selling due to absence of liquidity may help us get some good stocks at lower prices. Somehow, that just hasnt happened till now. Lets see what the future holds.
3. I feel it is best to try and adapt to the new system, instead of cribbing or complaining about it. Have a good talk with your broker and ensure his cooperation without frustration in this matter. If instructed properly, the broker can handle the order placing and monitoring part, without much botheration to us.

In a nutshell, this is surely a huge negative for people who invest in small, unknown companies with a lot of value. If price discovery is hampered, returns just cannot be earned. I am keeping my fingers crossed and hoping that over a period of time, all the problems associated with this will be ironed out. After all, we must accept finite disappointment, but never lose infinite hope!! - Martin Luther King, Jr.

Cheers and happy illiquid investing!!

P.S. One may also like to read about this whole issue in Moneylife.

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 investor, 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! 

Sah Petroleums Ltd and the power of "brand"!

This post aims to serve two purposes; to look into Sah Petro as a company and to look at what branding can do to a product!
Lets start with the latter..

All of us would agree that branding works wonders for any product. Many-a-time, we buy a branded product just because its branded, with no idea about what real value addition the branding has done to the base product!
To give a related example, given a choice, what would you fill in your vehicle; Castrol oil or some unbranded oil? Ok, lets further assume that your mechanic is telling you that there is no technical difference in the two oils, but Castrol costs 60% more..then? I am sure that still, you would prefer Castrol. Why take the risk right? Now what do we know about the technical aspects of engine oil? How is Castrol better? Honestly, we dont. Still, we would prefer it since its 'branded'. And the brand is hammered on our heads all the time through clever, targeted advertising. So we do not mind paying up a bit extra for the branded goods.

Well, you will surely say that this was all general gyaan, which everyone knows. How can one prove it?

Please have a look at the following table; (these are FY11 numbers..FY12 onwards, companies do not give the quantitative info in the ARs. I agree the numbers are dated, but they serve the purpose).

Click to enlarge

1. Castrol's EBIDTA margin is much higher than the rest of the pack. Its % raw material consumption is much lower than others. 
2. Because Castrol is much larger in size, its advertisement spend is much much higher than others (although in % of sales terms, its the same as others). Higher advertising means you promote your brand more, which gets more customers to go for your brand, which makes you bigger, which enables you to have higher advertising budgets, which means you promote your brand more...and so on..Virtuous circle indeed!!! 
3. This business is kinda simple.. you buy 'base oil', refine it, pack it nicely and sell it out. A bit of differentiation here and there is possible. If you look at the last row in the table, all the players buy base oil at more or less the same price per litre. 
4. But, the second-last line where the difference lies. Just look at the average selling price per litre of all the players. (It is not 100% comparable, since Sah sells transformer oils and unbranded oil too, but the sales break-up is not available).
5. The bigger your brand is, the more you can claim it to be better than others and then you can have the audacity to price it significantly higher than others. In fact, simply because its priced higher, a lot of people will consider it to be better! :-) 
6. Castrol prices its product significantly higher than others since its products are branded. Sah does not have a great brand and it sells unbranded oil too, so its realisation is far lower, its margins are far lower, its profits are far lower. 
7. The only way to increase profitability in this business is to increase your selling price. And the only way to do that is to strengthen your brand.

So thats what branding can do to your business! Power of brand is truly immense!!


Now lets get back to Sah Petro as a company. Numbers-wise, it appears very interesting and dirt cheap. I would request you to please take a cursory look at the numbers before reading further. The numbers are available on any financial website, so I wont dwell much upon the same. Lets answer a few questions:

Is the business stable in terms of revenues and margins?
The margins would not be stable. These guys carry quite a lot of inventory. A dip in oil prices would lead to a lot of losses. Since they do not have a powerful brand, a lot of pricing power should not be expected. Also, it appears that they punt around a bit in forex transactions and dont disclose it properly too.

Is the management good?
Well, the company is majority owned by Navis Capital, a PE fund (62%). The erstwhile promoters, Sah family holds about 25%, making the total promoter holding of around 87%. The original promoters were not the best-in-class. They used to punt around a lot in the shares of the company. Navis Capital is a PE and will have their own agenda to pursue. I wouldn't give high marks to the management. Also, I cannot understand exactly who manages the company..Navis, who is the majority shareholder? Or the family, who occupies all the executive positions and has founded the company. From the overall scheme of things, I think that the Sah family still runs the company. Will there be conflicts between these two promoters? Maybe!!

What about the cash?
The company carries cash of around Rs.55 cr, against market cap of Rs.80 cr. That makes it very interesting valuations-wise and Graham-wise! The cash-flow is also ok ok..But the problem is, why have they kept this cash? They do not declare any material dividend. (FY11 dividend was 5 paise..FY12 dividend was 1 paisa!!). Probably, they might have conserved this to go for a big-bang advertising spree. Or to guard against any large loss which may happen due to oil price/forex movements. Whatever the case may be, will we see the cash in our hands as shareholders? Seems Doubtful.

Ultimately, wont the PE exit?
Yes, and that will trigger an open offer. But its too early for them to exit. They got into the company in 2008. Usually a PE cycle lasts for 5-7 years, so a likely exit is still at least 2-3 years away. Also, Navis is currently sitting on more than 50% losses on their investment in Sah Petro.

87% promoter holding = delisting!!
These days, the D word is quite a taboo. More and more people I know are swearing never to get into the delisting theme. Logically, one would say that its better for Navis to get Sah delisted, since selling it off later would be easier. The current valuation is not sky high, making delisting a doable and desirable option for the promoter. However, do take a look at their recent insider trading announcements. The promoters have started 'gifting' shares to 'immediate relatives'. Now will these relatives be also considered in the promoter/PAC category? Or will they be classified as public shareholders? From the announcements, it does look like they are in the promoter category, but we will have to wait for the March 2013 shareholding pattern to confirm this. If they are not classified in the promoter category, then bringing down the promoter holding to 75% wont be a big issue and the D word should not be uttered. Lets wait and watch!

Overall opinion
The stock is available cheap, not doubt. But there is a reason why its cheap. I cannot see any trigger which would lead to a rerating or discovery of 'value' in this one. A sudden good quarter would lead to the stock price zooming up, but I do not have the competency to visualise the same. The business is quite volatile, the management is not very comforting and the cash they are hoarding is not being distributed at all. To use cricketing terminology, the stock would be 'well-left' for me as of now. (Fair warning: it can be proven with empirical evidence that the stock price of whatever is 'well left' by me tends to zoom up!)

Do lemme know your thoughts on my thoughts...

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 investor, 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!