THOUGHTS ON THOUGHTS

Sah Petroleums - Bonus Issue

noreply@blogger.com (Neeraj Marathe) — Thu, 06 Jun 2013 12:55:00 +0000

Hello to everybody after quite some time. I have not been able to update the blog in the recent past due to certain reasons, but I am back, with a whimper at least!

I had written on Sah Petro a couple of months ago. Please do go through the same to get some background on the company. Some of my fears like those regarding inter transfer of shares among promoters did not materialise, which is good! But the generous dividend they recently declared is not so good!

Sah Petro's promoter holding stands at about 87%, with Navis Capital (a PE fund) holding 62% and the erstwhile promoters holding 25%. In order to comply with SEBI's minimum public shareholding norms, the company recently announced the issue of bonus shares to non-promoters. In effect, the promoters will be diluting their own holding without getting any money for it. Now why exactly would a PE fund do this is an obvious question, but thats besides the point because, well, they are doing it!

An anonymous reader requested me to write an article on this situation, hence this post!

Whats going to happen?

Click to enlarge

In effect, if you buy 19 shares of the company at Rs.22 (total Rs.418), you get 23 shares extra. Free! So your holding cost for the total of 19+23=42 shares becomes Rs.418, translating into a per share cost of Rs.9.95. If we consider the taxation advantage we get due to bonus-stripping, our cost would be even lower. Current price is Rs.22, resulting in a fairly large difference. (All calculations are based on the current market price of Rs.22, which is a moving number. Since the stock has been shifted to T2T category, there will be some fall in the price probably).

What should one do?

Our holding cost of Rs.9.95 translates into an effective market cap of Rs.50 cr, on the expanded capital. So, in effect, the question to be asked is; would we be comfortable buying Sah Petro for Rs.50 cr? Well, as of March 2013, the company had Rs.60 cr cash on books, which makes it an interesting proposition indeed. (I do have some concerns here, which are detailed in the earlier post on Sah).

Is there an arbitrage opportunity?

The ex-date is about 1.5 to 2 months away. The arbitrage here is simple. Buy the shares before ex-date for Rs.22 (CMP) and sell them off on or after ex-date (for a higher price than Rs.9.95), resulting in a neat profit within a couple of months. Sounds simple, but we need to answer a zillion dollar question; how much will be price fall on and after the ex-date?!
If we do it mathematically, it would be something like this;

Thats a theoretical and mathematical calculation, but what will the market do? To get a clue, lets learn from history. Another company called Warren Tea also had recently issued bonus shares to comply with the minimum public holding norms. The price action in that stock was follows:

Price before the bonus announcement (21/01/2013): Rs.316
Price immediately after the bonus announcement (22/02/2013): Rs.373 (price exploded. In Sah Petro too, there was a 20% upper circuit on the day of the announcement)
Price before ex-date (20/03/2013): Rs.372. (21/03/2013 was the ex-date)
Ratio: 7 shares for every 10 held, to non-promoters.

If we do a similar mathematical calculation as above, the price on ex-date should have been Rs.334. But what actually happened was quite different.

On ex-date (21/03/2013) itself, the stock closed on the lower circuit, at Rs.298.
After that the slide continued till Rs.215-220, where the stock became stable. (Incidentally, the cost, after considering bonus shares would have been Rs.218!!)
In effect, if you were unlucky enough not to be able to sell immediately on or after ex-date due to the lower circuits, you would not have made much money on this as an arb trade.
The sorry price chart of this whole drama is as follows:

Click to enlarge

The market did not price this mathematically, and therefore, we should not assume that the stock will settle at the mathematically calculated price. Traders and arb guys will sell wholesale post ex-date and it will drift a lot lower. Will it come all the way down to Rs.9.95 is something I cannot predict! However, if it settles at even Rs.12-13, an arbitrage opportunity does exist.

So, what can be done?

This does look like a neat arb opportunity, but I would disregard the same from my mental calculations.
The only question I would ask is; disregarding the special situation, fundamentally, am I comfortable buying Sah Petro at Rs.9.95 (which is a market cap of Rs.50 cr) and holding it? Are the valuations attractive enough at Rs.9.95? Finally that is the base level question, which gives us comfort in case things do not go as per plan.
If the answer to the above is yes, I would surely buy. Arbitrage, if it happens, would be most welcome and an added bonus. (No pun intended)

I feel this is an ok, if not a fabulous opportunity. What do you feel?

Cheers and happy bonus investing!!

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!

Clariant Chemicals' sale of business - no clarity here!

noreply@blogger.com (Neeraj Marathe) — Wed, 17 Apr 2013 07:43:00 +0000

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!!

SEBI's new baby - rules for illiquid stocks

noreply@blogger.com (Neeraj Marathe) — Mon, 15 Apr 2013 14:12:00 +0000

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.

Sah Petroleums Ltd and the power of "brand"!

noreply@blogger.com (Neeraj Marathe) — Thu, 21 Mar 2013 18:16:00 +0000

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

Castrol's EBIDTA margin is much higher than the rest of the pack. Its % raw material consumption is much lower than others.
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!!!
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.
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).
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! :-)
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.
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!!

Quarterly Update - Phillips Carbon and NBCC

noreply@blogger.com (Neeraj Marathe) — Wed, 27 Feb 2013 12:47:00 +0000

Some developments have been taking place in both these companies I track. Hence, the update..

Phillips Carbon - Pain continues..

I had written about Phillips Carbon some time ago. After that, the December 2012 quarterly result has come in. The company reported a totally subdued performance (to be honest, I was expecting a much worse result). I had mentioned some risks in the earlier write-up, many of which have started playing out. Following points may be noted:

CBFS (raw material) prices continue to be high. Over the last one year, they have really spiked up. Although the carbon black prices have also increased, it has not been enough to cover the raw material price increase. The situation is not expected to improve anytime soon and one can expect the next 2-3 quarters to remain subdued. The following table gives a bit of perspective on the matter.

Ratio: Roughly 56 kg of carbon black can be obtained from 100 kg of CBFS. Prices given are blended of domestic as well as foreign and hence cannot give us a 100% perfect view.. * indicates approximate price.

The company's power sales continue, but at lower realisations. Merchant power rates are also not exactly going through a great time.
There is slowdown in the auto sector, which trickles down to a slowdown for the carbon black sector. The company is currently trying to develop its export sales, but given the slowdown in Europe and the China-angle, that seems quite difficult.
There is an interesting comment in the Q3FY13 investor presentation. Post imposition of safeguard duty on Chinese carbon black, "imports in India from China have reduced, however, total imports in India continue to remain the same." :-) That's interesting!
I believe the company will skip dividend this year/declare nominal dividend. So please dont look at the "5.3% dividend yield" based on last year's dividend, shown on most financial websites.
Debt will prove a further drag on performance, specially in a cyclical downturn like the one at present.

All-in-all, nothing great is expected to happen here in the near term. In fact, if auto sales slow down further, the company's performance would nose-dive further. The imposition of safeguard duty does help, but the other risks will undo that help!!

NBCC - Comfort increases..

I had written about NBCC some time ago. My initial thought was to approach this more as a 2-3 quarter trade, since I had discomfort with certain risks which I had highlighted. Post the Q3FY13 result, the management held a concall, which gives me more comfort about the company. Following are some developments regarding NBCC..

The current quarter result was not upto the mark due to certain one-time expenses charged during the quarter. Pension charges of Rs.20 cr and EDC, IDC charges of Rs.5 cr were charged during the quarter, due to which the profitability looks subdued.
During the present FY, the company has purchased 3 additional land parcels (4 acres in Alwar, 4 acres in Lucknow and 2 acres in Ghaziabad) for a total of Rs.100 cr.
The company has not yet booked any revenues for the New Okhla project. The booking will happen in FY14. In Q4FY13, the management expects to book Rs.100 cr revenue and Rs.33 cr PAT for their Gurgaon projects.
In the PMC business, in case of any delay or quality issues in the construction etc, it is the contractor who is penalised if need be. NBCC has no liability on itself. Its position stays protected.
For FY14, the management has guided PAT of Rs.225-250 cr.
Company currently has Rs.1100 cr of cash, out of which Rs.300 cr is theirs and the rest are advances received.
As per norms, the company has to distribute minimum 20% of the profits as dividend. NBCC has been paying out roughly 25%. On the guided profit, that works out to roughly Rs.5 dividend for FY14.
Most importantly, when asked whether the PMC business may be opened up to non-government companies (in which case, NBCC's role will become irrelevant), the management seemed quite confident that under the existing structure, there is no visible threat of the same in the near future. This gives me quite some comfort.

Of course, I intend to hold the stock at least till the New Okhla real estate project's revenue booking happens. But this is one stock I would hold, but actively track. Any negative development on the business front or the capital allocation front would warrant a review of whether to continue holding the stock.

Cheers and happy, safe investing!!

Goldstone Infratech Ltd. - Another open open-offer!!

noreply@blogger.com (Neeraj Marathe) — Thu, 31 Jan 2013 08:32:00 +0000

The market is full of apparent opportunities, where the hidden risks are huge. A lot of times, the risks become clear only after we have incurred a loss in such opportunities!! (i.e. in hindsight)
Goldstone is another such apparent opportunity, where the risks need to be given due consideration. It is an opportunity which has arisen simply due to legal compulsions and is not backed by proper fundamentals and valuations.

Background

Goldstone Infratech Ltd (GIL) is a Secundarabad based company, manufacturing insulators of various types. Absolutely no comments on the business/fundamentals of the company or the quality of management. (Enough said?!) Currently, the promoters of the company are fighting a case against SEBI in the Supreme Court. The subject matter of the case is an open offer made 4 years ago.

Facts of the case and time-line

A promoter company, Goldstone Exports Ltd (GEL) (renamed as Trinity Infraventures Ltd) used to hold 9.51% stake in the company.

January 25, 2007: GIL’s Board considered issue of 1.5 crore share warrants to GEL, convertible @ Rs.22/share. (Equity at that time consisted of 2.1 cr shares of Rs.4 each). This would take GEL’s stake to 47%, if converted.

February 24, 2007: GIL holds an EGM where shareholders approve the issue of warrants. GEL pays 10% of the amount for the warrants, which are convertible within 18 months.

October 28, 2008: GEL pays remaining amount to get the warrants converted into equity shares.

October 29, 2008: GIL’s Board allots the requisite 1.5 crore shares to GEL. Takeover Code (old) is triggered since GEL’s stake increases from 9.51% to 47%.

November 4, 2008: GEL makes public announcement and comes out with open offer for 20% shares @ Rs.23/share. Price is calculated as per takeover code.

November 17, 2008: GEL files draft letter of offer with SEBI through their merchant banker Saffron Capital Advisors.

SEBI se punga!

While calculating the open offer price, GEL considered January 25, 2007 as the relevant date. This was the date on which the Board had authorised the issue of warrants, hence, open offer price as per GEL's calculation was Rs.23/-.
SEBI objected to this, saying that the relevant date for open offer price calculation should be taken as October 29, 2008. This was the date on which the Board authorised the issue of shares. Open offer price as per SEBI calculation came to Rs.43/-.
GEL felt aggrieved and filed an appeal against SEBI's contention with the Securities Appellate Tribunal. (SAT appeal no.9 of 2009). SAT upheld SEBI's contention in their decision.
GEL continued to feel aggrieved and appealed to the Supreme Court against SAT's order. (Civil appeal no.7666 of 2009)
The case went in a tareeq-pe-tareeq mode from then on, until recently. In the hearing which took place on August 13, 2012, the case has been listed for final disposal. Although that hearing has not yet happened, whenever it does happen, the final decision of the case will be very near.

The opportunity (?)

If the result of the case is in the promoter's favour, open offer will come at Rs.23.
If it is in SEBI's favour, open offer will come at Rs.43 (plus interest). In the meanwhile, the stock price has slid to Rs. 10.5/-.
Promoters hold 50.75% and they have to make an open offer for 20% of the public holding of 49.25%. Interesting!

The risks

Event risk: There is virtually no event risk. The promoter has bought the shares and increased his stake, hence open offer has to happen. The promoters have also given a bank guarantee of Rs.7.5 cr. (Total equity capital of the company is 3.6 cr equity shares of Rs.4 FV).

Time risk: Now this is the most important and very material risk. The whole opportunity is hinged on a court case. We all know that court cases in India can live longer than characters of Saas Bhi Kabhi Bahu Thi. There is absolutely no logical call one can take on when will the case be decided. 1 year more? 2 years more? Dunno! However, in this case, at least an announcement for final hearing has come. So its like one can see the destination, but one still has no idea how far it is!

Shareholder risk: 2 pure financial investors hold about 10% of the company. Now if these big guys start selling for whatever reason, the price will take a massive hit. Since I am unable to value the company, that would result in a really uncomfortable position.

All-in-all, quite an interesting case, with a lot of interesting risks! Before taking any buy/sell call on the stock, please give proper thought to 2 things; your risk appetite and what kind of portfolio allocation should you give to this, if any! Do not rush to buy it. If you buy without much thought, later there will be similar rush to sell without much thought! And when you buy as well as sell without much thought, the end result is usually not very pretty! :-)

Cheers and happy investing!!!

Deccan Chronicle results - Boy O Boy!!

noreply@blogger.com (Neeraj Marathe) — Tue, 22 Jan 2013 13:07:00 +0000

I got an early morning call today from a very amused Ninad asking me to go online ASAP and check out Deccan Chronicle's quarter and year-end results for September 2012. Now everybody knows that there have been a lot of problems the company is facing and the whole situation has raised a lot of unanswered questions too. But to be honest, I was totally unprepared for what I saw in the results. The P&L is screwed, but the balance sheet is royally screwed. Check out the result.
Seeing the balance sheet took me back to the days when I was an 11th standard commerce student. Those days, while solving accounts sums in class, we used to do virtually anything possible so that the balance sheet tallies. :-) Something similar seems to be the case with Deccan Chronicle's current results!
The company has extended its accounting year from March to September. So the current year end results are for 18 months vis-a-vis the 12 month period for March 2011 and are hence not comparable. Let us see what all the company has managed to achieve during these 18 months..

Revenues for the 18 month period are down by Rs.190 cr as compared to the previous 12 month period, from Rs.976 cr to Rs.786 cr. Well thats no big deal, it happens.
What is a big deal is that inspite of revenues being down Rs.190 cr, the total expenses are up by a whopping Rs.500 cr! This has been led by a huge increase in the raw materials consumed as well as 'other expenses'. Hmm!
Finance costs are up from Rs.59 cr to Rs.733 cr!! The company has reported a whopping Rs.1040 cr loss during the period.
Public shareholding is up from 36% to 61%, inspite of a buyback being done during this period.

The balance sheet is something which is beyond funny!

The entire reserves of the company have been eroded due to the loss and the net worth of the company (and the book value) has come down from Rs.1280 cr to Rs.10 cr! So much for investing on the basis of book value per share!
Total borrowings have gone up from Rs.713 cr to Rs.3900 cr!! Cash on the balance sheet has disappeared, from Rs.704 cr to Rs.16 cr.
Inventories are down by Rs.110 cr and debtors are down by Rs.120 cr.
So basically, current assets have gone down, freeing up cash, lot of money has been borrowed and cash itself is down. Total cash generation this way is around Rs.4100 cr. So where has all this money raised gone??
Well, fixed assets are up, from Rs.926 cr to Rs.3870 cr. Ahhh so thats where the money has gone. I do wonder what fixed assets they might have bought though.
Point No.6 to the notes says that liabilities includes Rs.3987 cr due to lenders as a result of restructuring of operations and recasting of financial statements! Maaan thats one biggg recast!!

Like my 11th standard teacher used to say.. beta, your balance sheet has tallied, but it makes no sense!!

All this raises the following questions in my mind, a lot of which have no answers!

Has there been an accounting fraud in the company? Well it does seem so, since the company has talked about 'recasting' its financial statements.
Well, so why has there been no admission of guilt, no senti letter from the promoter etc, like in Satyam's case?? Why has no legal action been taken against anybody? Who is responsible?
What was the rating agency doing? They could not locate any problem with the company for quite some time until recently, when it was already too late. Here is an article on the same. So whats the use of a credit rating anyway?
What were the banks doing? Even in the March 2012 result, finance costs are low. Maybe the reported debts were also low. Now suddenly it materialises that a lot of banks have lent them a lot of money!
What were we doing?! Could investors have known about this? I never tracked or held this stock, but I went through the previous years' annual reports after the problems surfaced and to be honest, at least I could not find any problem with them. If it was a well managed accounting fraud, there is no way to find it out!

Lessons learnt:

Primary research is extremely important. Its not that it was an unknown fact that DC was fudging numbers, as this article says. One needs to get out of the excel sheet and annual report to get a better understanding of the business.
Our mind is tuned to availability bias. So everytime some company faces problems like this, we immediately remember the huge returns which risk-takers earned in a Satyam or a Wockhardt-like distressed case. We remember this since this is what gets talked about around us and is available to our brain all the time. No one talks about the huge number of cases on the other side like an Asian Electronics or a Pyramid Siamira, in which investors lost their shirts (and I guess, other assorted items of clothing)
Unless the entire extent and quantum of problem is known, it does not make sense to buy a falling star. People did talk about buying DC when it came down from Rs.100 to Rs.20, saying aur kitna neeche jayega..well its at Rs.5 today and falling. Better to err on the side of being cautious and suffer opportunity losses in such cases.

Cheers and happy, safe investing!!!

Marg Ltd Open Offer - a lose-lose situation

noreply@blogger.com (Neeraj Marathe) — Fri, 14 Dec 2012 18:48:00 +0000

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!!

Phillips Carbon Black - Goes in the red!

noreply@blogger.com (Neeraj Marathe) — Mon, 10 Dec 2012 12:57:00 +0000

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!!!

Noida Toll Bridge - A few (disturbing) developments

noreply@blogger.com (Neeraj Marathe) — Thu, 22 Nov 2012 20:51:00 +0000

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!

Disa India Ltd - Update

noreply@blogger.com (Neeraj Marathe) — Sat, 17 Nov 2012 06:14:00 +0000

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!

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

noreply@blogger.com (Neeraj Marathe) — Thu, 15 Nov 2012 07:49:00 +0000

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

The company works in a very niche sector, with best-in-class technology having huge entry barriers.
The company is supported by a very strong parent, having global presence.
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.
Slowly, the company is also expanding into new products like PLTCM and providing ancillary services to its clients.
The company has a strong order book position. (estimated to be more than Rs.800 cr)
The cashflows are strong, since the company works on advances from customers.
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

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.)
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.
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.
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.
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.
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!

An update on stuff...

noreply@blogger.com (Neeraj Marathe) — Fri, 19 Oct 2012 06:11:00 +0000

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!

A good site for investors

noreply@blogger.com (Neeraj Marathe) — Sun, 23 Sep 2012 13:26:00 +0000

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.

A bit more on open offers..

noreply@blogger.com (Neeraj Marathe) — Wed, 12 Sep 2012 13:50:00 +0000

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!

An interesting observation on open offers..

noreply@blogger.com (Neeraj Marathe) — Mon, 10 Sep 2012 16:35:00 +0000

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!

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

noreply@blogger.com (Neeraj Marathe) — Mon, 20 Aug 2012 19:32:00 +0000

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:

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.
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!!
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).
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.
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!!

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
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.
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.
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).
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!

APW President - A Delisting Case

noreply@blogger.com (Neeraj Marathe) — Tue, 14 Aug 2012 20:04:00 +0000

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..

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!
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!
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.
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.
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!

Annual Reports and revised Schedule VI

noreply@blogger.com (Neeraj Marathe) — Mon, 30 Jul 2012 10:14:00 +0000

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..

In a lighter vein..

noreply@blogger.com (Neeraj Marathe) — Wed, 27 Jun 2012 13:08:00 +0000

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:

Numerology is important.
Numerology can be applied to alphabets also, even though they are not numbers.
A company can appoint a numerologist. So like a Company Secretary, there can be a Company Numerologist.
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..

The company now has AA rating. They should further try for a AAA rating :-)
Maybe they can add F in the beginning of the second word.
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!

Sundaram Clayton Demerger - Some Clarifications

noreply@blogger.com (Neeraj Marathe) — Tue, 19 Jun 2012 18:51:00 +0000

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?

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.
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)
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.
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)
Shares of SCL will be listed.
% 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

Since there is share capital restructuring happening in SCL, in my view, SCL will get delisted for a few days.
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).
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!

Sundaram Clayton Demerger - Not so Sundar?

noreply@blogger.com (Neeraj Marathe) — Thu, 07 Jun 2012 14:33:00 +0000

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!

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

noreply@blogger.com (Neeraj Marathe) — Mon, 21 May 2012 18:20:00 +0000

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!!

Disa India Ltd - AGM Notes

noreply@blogger.com (Neeraj Marathe) — Wed, 16 May 2012 12:09:00 +0000

Hello to all. As i write this, the Sensex has ended about 300 points down. Good old days are coming back again! :-) Just kidding!
I attended the AGM of Disa India Ltd on 9th May, 2012 in Bangalore. This is the link to my previous article on the company, which also contains links to some more previous articles on the company!
I would rate the company's management very very highly. The overall body language was positive. The management is always open to answering all reasonable questions, without making any tall claims, etc. No-nonsense and to-the-point. My kinda people!

Some notes about the AGM...

On the demand side, the company is still seeing robust demand. Some slowdown was seen in the quarter ended December 2011, but since January 2012, enquiries and orders have improved substantially.

Wheelabrator now contributes about 25% of the sales. Good visibility being seen in this segment also. 2 new machines are planned to be introduced in the near future. Mr.Carmichael, who was VP of the Wheelabrator business worldwide has been inducted in Disa India's Board.

Latest order book is around Rs.85 cr.

Growth seen on both fronts; new foundries as well as automation of existing manual foundries. On sustainability of demand, the management gave an interesting statistic; out of about 5000 foundries in India, 4000 are fully manual.

On transfer of shares from escrow account, the management clarified that although the case is still going on, the company gave an undertaking to abide by the Supreme Court’s decision, whatever it might be. Hence, the Supreme Court gave them the permission to transfer the shares. The promoters now officially hold 86.5%.

Delisting: no comments since decision has to be taken by promoters, not by the Indian board of directors

Cheers and happy investing

Falcon Tyres - Hats off, promoters!

noreply@blogger.com (Neeraj Marathe) — Mon, 30 Apr 2012 19:44:00 +0000

Falcon Tyres is a BSE listed Pawan Ruia group company. (These are not the same as the Ruias of Essar, but they are just as deadly!)
The Pawan Ruia Group has two companies (among others), Falcon Tyres and Dunlop. Now, the Ruias have never really been very minority shareholder friendly. There is no need to debate that.

Recently, they did something really blatant in Dunlop. There was quite some hue and cry about it, which I am sure, will be forgotten soon.

However, what is more interesting, is what they are doing in Falcon Tyres. This is much more discreet than what they did in Dunlop :-)

Lets start from the beginning, for the simple reason that one should not start from the end..(Ya ok, bad joke)

Currently, the promoters hold 81.07% of Falcon Tyres. The promoters have also been generous enough to give large amount of interest-free unsecured loans to Falcon. As per the 2011 Annual Report, the amount of these loans was Rs.132 cr. Nice! Anybody willing to give me money, interest-free, please?

Now comes this announcement. Please do read it once. This announcement entails the following:
1) The loans given by the promoters seem to have been transferred to 'unrelated parties'.
2) These 'unrelated parties' are being allotted equity shares pursuant to conversion of the unsecured loans into equity shares, at a price calculated as per SEBI guidelines. This will lead lead to massive dilution.
3) Please note that the entire loan (which is now Rs.144 cr it seems) has been transferred by the promoter to three different parties. Allotment will take place to three parties. Not one, or two, but three parties.

This is what the shareholding before and after this allotment would look like..

So what should one make out of this entire event? Some things come to mind..

1) Why did the promoter transfer the loans to outside parties? Why didn't he allot shares to himself on conversion? Well, because that would lead to minimum public shareholding as well as open offer problems, since the promoters already hold 81%.
2) Are these 'outside parties' really 'outside' parties? Or is there some understanding between them and the promoters? Well, we will never know!
3) Why three outside parties? Well, because, with three parties, this massive dilution of shares can be divided among them, so that any one of them does not acquire more than 25%, thereby eliminating the necessity to do a compulsory open offer. This would not have been possible with just one or two parties. Smart!
4) So, anything else special about it? Well, of course! Please refer to the post allotment shareholding above. The promoters plus these three allottees would together hold 91.67% of the share capital. So basically, with this allotment, the promoter satisfies the 75% shareholding criteria (his shareholding is 81% presently, which comes down). He can relax about that. Plus, at any point of time, if he wishes to delist the company, all he has to do is talk with just these three parties. If they tender, his holding goes above 90% and he can delist! Now thats sooo convenient. No minority shareholders ka zhigzhig. What would be even more convenient is if these three parties have been allotted the shares with a tacit understanding that they will tender the shares at a later date for delisting. Super smart! But we will never know if that is the case.

This entire methodology is smartly designed in a way which gives maximum flexibility as well as control to the promoters. Their shareholding comes below 75%, so there is no problem on that front. Also, they can pretty well delist the company whenever they want, without being blackmailed by minority shareholders for giving a higher exit price. A disproportionately small group of shareholders would decide the fate of the entire minority shareholders. (Are the MNCs listening? This is a great alternative to being fair to shareholders!) :-)

Did you think this entire methodology is revolutionary? Its something new? Well, its not!!

Another company of another Ruia Group, India Securities, recently delisted from the Indian markets using this very same methodology, at a really low price.

Will Falcon tread down the same path? Well, we cant say it will happen, until it happens!

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!