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.

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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! 

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!