Wednesday, May 25, 2011

SBI Triplets - Update

This is just an update and a FYI kinda post...
Yesterday, I had posted some stuff on SBI and possible merger of its subsidiaries. SBI Chairman Pratip Chaudhuri has given an interview in ET today. Link for the same.. (Wish I had waited one more day before posting!) :-)

Some relevant stuff from the interview...

Is there a rethinking on the merger of your associate banks? 

We have already absorbed two of them. Now, the dilemma is that subsidiary absorption requires lot of capital (which is) a cost. At the same time, we are more worried about the future of subsidiaries. Most of the subsidiaries are relatively small and have a small geographical presence. Banks like State Bank of Travancoreare not known in the eastern, western and northern parts of India. Therefore, they are limited by their name, culture and history to a particular geography . They can't grow beyond a certain size, and banking is a business which requires capital. Now, how long can you pump in capital? And there is lot of duplication. So, theoretically, merger is a desirable thing. 

But then you have to recognise operational issues because you have to harmonise and make uniform service conditions and there will be a lot of branch overlap. So, another subsidiary absorption or merger does not happen two or three years before the first one has happened . So, let us first digest State Bank of Indore. With Indore merger, our Bhopal circle alone has 1,100 branches. Now there is an issue of size in the Bhopal circle itself. Now if we merge the other subsidiary, what happens to the related circle of the bank? So we are in the process of rationalising and making the national banking structure more robust. Now, from 10,000 branches, we have grown to 13,000 branches, but the number of circles has remained constant at 14. So we need to increase the span of management. 

Does that mean you will not pursue the merger now? 

Associate bank merger is not happening in a hurry. It is not because we are not convinced that merger is the right thing but it is because it requires capital and operational efficiencies. 

So you are pressing the pause button on the merger of associate banks? 

At least for the next one year. We need to give good performance at the end of March 2012 and be on a strong wicket ourselves. It (further merger) will be only in June-July 2012. 

Its now abundantly clear that there ain't gona be no merger in a hurry! Merger of unlisted subsidiaries will happen in second half of CY 2012. Merger of listed subsidiaries will happen much after that!! One should take a buy/sell decision and view the triplets accordingly!!

Cheers and happy investing!!!

Tuesday, May 24, 2011

The SBI Triplets - will their value be discovered?

A big hello to all!
State Bank of India (SBI) has 3 listed subsidiaries; State Bank of Mysore (SBM, 92% holding), State Bank of Bikaner and Jaipur (SBBJ, 75% holding) and State Bank of Travancore (SBT, 75% holding).
In this post, I am not analysing them as 'banks' per say. I am analysing them more from a special situation point of view. In case you would like to know more about analysing banks, do refer to two very good posts by Rohit here and here.

The basic funda
SBI has 5 subsidiaries at present, 3 listed, 2 unlisted and wholly-owned (another 2 have already been merged). These subsidiaries are growing very well, with consistent high increase in book value over the years.
In the recent past, SBI management as well as the Government have been making announcements indicating their seriousness in merging all its subsidiaries with itself. linklinklink and link. For people who are not 'linky', what these articles and announcements broadly state is that over the next 18-24 months, SBI intends to merge all the 5 subsidiaries with itself, starting with the wholly owned ones and then the listed ones.

The opportunity (?)
There is a mismatch between the valuations of SBI and its listed subsidiaries. The possible opportunity lies during the merger of SBI's listed subsidiaries with itself. Let us see if this opportunity exists.

A basic snapshot of SBI and its 3 listed subsidiaries reveals the relatively low valuation of the subsidiaries when compared with SBI itself. Of course, the triplets should be valued lower than SBI, considering their smaller size and reach. Also, I have not taken SBI's book value, adjusted for its various investments. The subsidiaries are being made a bit bigger through rights issues, before they are merged with SBI. SBM and SBBJ rights issues are over and SBT rights issue is in the pipeline.

The big question - is there money to be earned during this merger? At what valuations will the merger happen?
Well, let us see what happened in the merger of State Bank of Indore (SBIndore), just for reference.

The merger of SBIndore happened in the second half of 2010. The swap ratio was fixed at 34 shares of SBI for every 100 shares of SBIndore.
I managed to get my hands on SBIndore 2010 AR. At the time of the merger, the book value of SBIndore was approximately Rs.1100, while that of SBI was Rs.1191 per share. The stock price of SBI at that time was Rs.2100.
So, on a book value basis, SBIndore shares were valued at Rs.405, a discount of 63% to book value!!!
On a stock price basis (not really useful, since only SBI is listed), SBIndore was valued at Rs.714, a discount of 35% to book value!!
Now, SBIndore was wholly owned, so this is not really representative of what the listed subsidiaries will be valued at. But to me, it gives a clue that one should not assume an extremely attractive valuation when the merger happens. The current cheap valuation of the listed subsidiaries correctly reflects this perception, imho. So, at present price, I do not see a very attractive opportunity arising from the merger, which is still some time away.

What would I do?

  • Though these banks are valued cheap, I expect them to remain cheap till clarity emerges from SBI as to the time and valuation of the mergers.
  • I would prefer to commence buying into these subsidiaries at 25-30% discount to their book values at least. I expect them to valued at least at book value during the merger process.
  • I would view SBT differently, purely from the rights issue perspective. My experience in SBBJ rights issue has been good and possibility of higher-than-eligible allotment exists.

The risks
  • Delay in merger proceedings: Till now, there is no 'commitment' from SBI as to the timing of the merger. All announcements are purely indicative.
  • Erosion of the subsidiaries' book value themselves: Primarily due to pension and gratuity liabilities. The notes to the recent results do give indication of the same.
  • Erosion in SBI's performance and book value: As we have seen in the recent results, this is quite a risk. If SBI's own book value is impacted, leading to a derating in the stock and slide in the stock price, the merger would not give high returns for subsidiaries' shareholders.
  • Opposition from employees: This is quite a black-swan type event! However, there was no opposition during the SBIndore merger, where 90% employees consented to the same.

To conclude, I do not find the SBI triplets to be really attractive investment opportunities at present. However, I would keep them in my watch-list and wait for proper opportunities, if they come by..

Cheers and happy investing!!

Thursday, May 12, 2011

DISA India Ltd - AGM notes

DISA India Ltd held its AGM on 6th May, 2011 in Bangalore. Following are some notes from the AGM. This is only a FYI kinda post!

The AGM was attended by the entire Board, the auditor and senior officials. About 20 odd shareholders were present. Other than me, there was only one other professional investor, who had come from Mumbai.
I got a chance to interact with the senior management (they didnt run away asap, as has happened in some AGMs I attended).

Management Perception: Well informed, professional and no-nonsense people. Their answers were plain, to-the-point statements. No beating around the bush, no tall claims.

  • DISA is currently looking at increasing the Wheelabrator range in the country over the next 3 years. The range of machines they plan to introduce will not be limited just to the foundry/casting industries, but will cater to a host of other industries such as railways, defence, construction, ship-building, etc. The management looks at Wheelabrator as a big growth driver. Margins in Wheelabrator products are as high as 30%+. 
  • The management is very clear that all business in India will be done through the listed entity. No Timken-giri here (i.e. no 100% subsidiary of the parent and stuff.) This is beneficial for them too, since they would like to utilise DISA's existing network to promote Wheelabrator products too. DISA Technologies Pvt Ltd will remain a R&D entity only.
  • Currently, the company is working close to full capacity. Capacity, in this case, cannot be measured in usual sense, since what DISA does is mostly assembly. A large number of parts are supplied by its vendors. But the management says that about 20% more turnover is possible with the existing capacity and infra. Due to this, the company is undertaking expansion at both its Hosekote and Tumkur units. Capex in CY11 estimated to be Rs.8-10 cr.
  • Order book as on 30th April 2011 was Rs.103 cr. The company is not at all focusing on exports, since they feel that the opportunity size in India itself is huge. So India would not be made just a low-cost manufacturing hub of the parent or something. Management does not talk about future numbers. (which I think is a good practice.)
  • The management admitted that they were facing problems on the raw material price front (which was evident in the March quarter results, which were declared much after the AGM). There is a 6-9 month lag between the raw material price hike and passing it on to the client. So, in the intermittent period, the company has to take a hit due to increase in raw material price rise. Management considers 18-20% as realistic and achievable operating margins.
  • The company is also keenly looking at inorganic growth (surprising!). No details were given on the same.
  • Company is also looking at increasing filters business and spare parts/after sales service business, which is a higher margin area. 
  • The case with SEBI is pending with the Supreme Court. Currently its in a 'tareekh-pe-tareekh' mode. Until this case is resolved, there are no chances of delisting .Management did not comment or give any clue about delisting or the intention of the promoters.
  • On being quizzed about competitors like Sinto, Koyo, some Indian manufacturers, etc., the management admitted that competition is there and some established competitors are looking at the Indian markets. But the management is quite comfortable, given the headstart and the future plan they have for the company.
Shareholders were extremely vocal (i am putting it mildly!) about non-declaration of dividend. The usual stuff which happens at most AGMs happened. A bit of entertainment.
Do get in touch in case you think i have missed some point or you have any questions.

Cheers and happy investing!