Tuesday, April 12, 2011

Representativeness Heuristic and Delisting...

I have been following various delisting cases for quite some time now. Over the last few weeks, the market has taken a fancy to this theme, forcing me to take a step back. (One shouldn't do what the crowd does!) Anyways, I couldn't help but notice a high degree of 'representativeness heuristic' in the events of the past few weeks, hence this post...

What is representativeness heuristic?

representativeness heuristic is a bias in which an individual categorises a situation based on a pattern of previous experiences or beliefs about the scenario.
Umm, if that was a bit heavy, visualise this:
You see a person on the road. He is wearing a starched extra-white shirt (shirt not tucked in). He has an expensive cellfone is his hand. There is a very visible thick gold chain in his neck and an equally thick gold bracelet in his wrist. He is also wearing numerous bejeweled gold rings in his fingers and has a big tika on his forehead. Got the picture in mind? Well, if you suck at visualising stuff, its someone like this:

Now I ask you; What do you think does a person like this do?
a) Software Engineer
b) A local neta of a political party

Chances are, you will choose option b. (Btw, the person in the photo is actually an MLA from Pune)
Now is it a rule that a software engineer cannot dress like this? No! Still, we associate someone like this with a politician, based on our past observations and experience. This is representativeness heuristic. But, its not necessary that our conclusion, based on past observations, may be correct everytime..

Representative heuristic and the market

One can see this phenomenon happening in the market a lot of times. Some examples:

  • Tata Steel declares phenomenal quarterly results and on that day, all steel stocks prices hit the roof. (just an example, but it happens in a lot of sectors)
  • IIP numbers show consumer durables sector doing well and all consumer durable stocks go up on that day. (has happened recently)
  • Rubber prices come down for a brief period and all tyre stocks go up. 
Now, it should be noted that in this phenomenon, all related stocks go up, including the ones which do not deserve to! One can see the representativeness bias in the market on numerous occasions..

Representative heuristic and delisting

Finally! Coming to the point!
In Feb 2011, Altas Copco announced its intention to delist. What followed was very surprising and quite rare in the Indian market.. The promoters were fair and generous to the minority shareholders! ;-) They gave an excellent exit price to the minority. (Also, hats off to JM Financial guys for managing this delisting beautifully!)
Now this is where the representativeness bias has creeped in, imho..

The market seems to think that 
1) Just like Copco, all MNCs will be fair and generous to the minority.
2) Hence it makes sense to buy all these delisting stories and make a killing!

If you think that this is not what the market thinks, look at the price movement in such stocks, after Copco's delisting succeeded..

Data sourced from Edelweiss Website. In some cases, the
calculation seems inaccurate. Anyways, I am not interested
in strict numbers, but in what they represent.

As can be seen, after Copco's generous-hence-successful delisting, the other delisting candidates have shot up, outperforming the index. This is indeed representative bias..

So what do we do about it?
  1. It could very well be the case that what the market thinks is right and the MNC parents of these delisting candidates will be as generous as Atlas Copco. However, it is not necessary! Just because Atlas Copco was generous does not mean everybody will be equally generous. 
  2. One should adopt a logical approach towards analysing delisting cases and not be swayed or affected by biases. Dont take things for granted! More on playing delisting cases here.
Cheers and happy investing!

Sunday, April 10, 2011

DISA India - An Interesting Case

Before I begin blabbering about the company, a disclosure from my side. (Usually I dont give disclosures, but I feel in this case, it is a must). I have been a constant buyer in this stock below 1330 levels and I intend to do it again if I get the chance! I had presented this as an investment idea at a couple of investor conferences during that time, when I was buying, but could not post it on the blog due to paucity of time and in-general-laziness! So please keep this in mind before taking any 'action' in Disa India. Also, PLEASE do read my introductory post.

Now that I have gotten that out of the way, let us look at this particular case...

On the face of it, Disa India Ltd. looks like this:

Nothing worth jumping up from the chair, it would seem.. Well, if we do a regular excel sheet, it would look even sadder.

Disa is one stock idea you just cant express on the excel sheet!!!
To be honest, in case of a lot of interesting investment opportunities, one has to get out of the excel sheet!

I am looking at Disa from two angles; as a delisting candidate and as a business.

Disa - the delisting candidate

If one goes through the latest shareholding pattern, promoters hold 74.27%. However, if we look at the 1%+ holders, another 12.01% are held in an escrow account, these are basically shares that the parent had acquired through an open offer in 2009. However, SEBI contested the open offer price calculation, hence, the shares are held in escrow till the matter is solved. SEBI has lost the case in SAT and has now appealed in the Supreme Court against Disa. More details can be found here.
So effectively, Disa promoters hold 86.28% shares of the company. So they will have to either bring down their holding to 74% or delist in due course of time. As far as I have searched, there are no other subsidiaries of the Norican Group (the parent), which are listed.
This makes Disa India a prime delisting candidate. Time will tell if at all they will opt for delisting, and when. Delisting is anyway going to be difficult, given the super-scattered shareholding pattern. FYI, Disa had tried delisting in 2007. The 'discovered price' came to Rs.2960 per share. This was rejected by the management and delisting failed.

Disa - the business

Disa India is a subsidiary of the Norican Group, a Denmark based entity formed from the merger of Disa (a forging and moulding machinery and equipments manufacturer) and Wheelabrator (a surface treatment and preparation equipment manufacturer) to form a global leader, renamed as the Norican Group. More info here.

For a number of years, Disa was just floating aimlessly. There was virtually no growth, no innovations, no product launches..nothing. The formation of the Norican Group seems to have changed it all. Disa is now expanding, going in for higher R&D, better innovations, launching new products and basically becoming very much proactive. I urge you to please read and absorb this and this article fully. It will surely give you an idea about the 'change' in the company, which I am talking about and the scope for growth for its products.
The December 2010 quarter results do show the improvement in the business. (Most of the new launches were done in mid 2010, so the December 2010 quarter results were of great interest to me.)

Click to enlarge

Disa seems to be quite on track to improve business and financial performance significantly. The product launches, the R&D, the industry feedback, all suggest so.

If I can get India's largest foundry and surface treatment equipment manufacturer at a market cap of Rs.200 cr and an EV of Rs.150ish cr, I think it is a good deal. The delisting angle adds to the goodyness of the deal!
I intend to attend the company's AGM, where I hope to get more information and feedback on the same.

In order to keep the length of the article to a reasonable level (so that the reader will not fall asleep on the keyboard), I have omitted certain details which I felt weren't absolutely critical. Please do get in touch with me in case of any queries or feedback.

Cheers and happy investing!

Tuesday, April 5, 2011

Playing delisting cases..

Hello and wish you all a happy new financial year!
I had recently participated in the Binani Cement delisting, earning around 10% in 3 months. I was very happy and was dancing all over the place, until Atlas Copco happened. I decided to give it a pass and it is now part of my long and illustrious list of opportunity losses! (Copco returns have been much much higher than Binani)
Well, the purpose of this post is to pen down my thought process for participating in delisting cases. I hope to fine tune it, as always..

The basics

  • In order to delist the company from the exchanges, the promoters must follow the reverse book building process, at the end of which they must fulfill two conditions; they must hold more than 90% of the shares and they must buy out more than 50% of the non-promoter shareholding through the reverse book building route.
  • Just to give an example, if a promoter holds 85% of the shares, he must be able to buy 5% to take his stake to 90%. However, the second condition states that he should buy 50% of the non-promoter holding, which is 7.5% (50% of 15%). Hence, just 5% wont do, he should buy at least 7.5% stake through the reverse book building route in order to successfully delist the company.

Parameters involved

While looking at delisting opportunities, I typically look at the following parameters:

  1. Valuation comfort: This is probably the most important parameter I look at. Most important for me because I am quite fattu when it comes to investing! I always look at the possible downside. If there is no valuation comfort and delisting fails, the downside could be very high. Therefore, I usually do not participate in cases where there is no valuation comfort at CMP unless other parameters over-rule it!
  2. Management quality: Will the management be fair?! That too, in India! :-) Most of them are not. Where the management quality is extremely questionable, delisting could be a very unfair affair for the minority. Better to stay away.
  3. Incentive to delist: Why should the promoters go through all the trouble to delist? How would they benefit? If there is high incentive for them to delist, they will do it by hook or crook. They will do it even if they have to be generous to the minority! If there is no incentive, there is high probability that delisting might fail. So trying to figure out the promoters' thought process is very important.
  4. Floor price: Applicable in case where the reverse book building has already started/has been announced. Floor price is the minimum price indicated by the promoters, which they would be ready to pay to the minority, for delisting. Buying the stock close to floor price, subject to other parameters, is extremely cool!
  5. Shareholding pattern: Who are the minority? Are there any 1% plus holders? Are there professional investors who hold large chunk of shares? In cases where the non-promoter shareholding is concentrated, delisting becomes relatively easy. Also, if professional investors hold decent chunk of shares, the possibility of promoters doing funny business gets reduced to some extent.
For me, participating in delisting cases is a combination of the above parameters. Of course, it is extremely relative and the importance to be given to each parameter changes on a case to case basis. Let me just tabulate three recent cases, on the basis of the above parameters:

Out of the above, I participated in the Binani Cement delisting. I am currently looking at Goodyear India Ltd as another possible favourable delisting case.

Comments and suggestions are most welcome..

Cheers and happy investing!