Tuesday, May 1, 2012

Falcon Tyres - Hats off, promoters!

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!!

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Anonymous said...

ha ha ha. superb, simply superb!

Vikas said...

Hi Neeraj,
I am a silent reader of your blog since few months.Once again an excellent blog.
Keep it up.
These things will never be understood by ( half knowledge) retail investors.
On this outset, I would like to ask one query about another Promoters - SRF ltd.
Its in textiles, packaging, tyre cord ( so diversified)and its carbon credit story.
In regards of P/BV and PE its highly undervauled stock.Dividend yield is excellent.
And more interesting part is promoters had 75% shares pledged.( 2-3yrs back) But with this CERs they have not only revoked pledged shares but also bought back shares twice in last yr.

But still market is not giving it appropriate valuation since last 5 yrs.
What can be the reason.
Means is it a VALUE TRAP?


Neeraj Marathe said...

Hello anon,
I am sure u are talking about the falcon promoters, right? :)

Dhwanil said...

Hi Neeraj,

truly ingenious way of keeping minority shareholders out of the picture! It truly reflects the spirit of When there is a will, there is a way..:-)

It further reconfirms my conviction about not investing in companies if one is circumspect about management's integrity, no matter how good the bargain may seem.

by the way, how did you spot this jugglery?

Best Regards
Dhwanil Desai

Tarun Talwar said...

Hi Neeraj,

Another Ruia, same story. I read the announcement, then annual report and then the share price history. It's no coincidence that the shares have been converted at absolutely the bottom price. the intrinsic value of this company could be at least 5 times its market cap given its plants, lands and profitability. I did not think about the open offer and 3 parties angle at all, which shows how good and experienced you are. My only thought was about 90% shareholding without a need to make any offer to minority.

Thanks for sharing your insight on this.

Raja said...

Ah !! I was going through this post the other day


Firstly the gentleman has mistaken Falcon for Dunlop ?

and then the this line...
"The loan was taken for working capital requirements and the allotment to these entities would help in better restructuring of the company."

Surely better restructuring :) What a perspective !!

And the source of the article is attributed to Money Life !


Neeraj Marathe said...

Hello Vikas,
To be honest, i have not looked at SRF. Probably, the reason for low valuations is that its a company dealing in cyclical commodities. I cant be sure coz i havnt studied it, but thats my gut feel.

Neeraj Marathe said...

Hi Dhwanil,
Well, i read BSE announcements. Thats where i read about this. Rest of the info is there in the AR..then its just a matter of joining the dots i guess..
I totally agree about the importance of mgmt while investing..

Neeraj Marathe said...

Hi Raja,
Well, i think its about Dunlop itself. What the article says seems to be correct imho..

Fundoo_Pupil said...

Hi Neeraj,

Good find.
However, I think you are not right on India Sec. In that, major stake was with 2 FIIs, one of which (Passage to India)also had a stage in Dhanlakshmi Bank.

Regarding cheap delisting, Patni would also fall in that criteria.

What say?

Neeraj Marathe said...

Hi JK,
In case of India Securities, regardless of the nature and type of the party, the basic modus operandi was the same..issue large number of shares to a a few institutions..later, they co-operate in delisting..there too, very few parties decided the fate of a large number of minority shareholders..of course, nothing illegal in it..
I hvnt seen Patni, so i dont really know.

Neeraj Marathe said...

Hello Tarun,
"Another Ruia, same story." Good one! :-)

Dayanand Deshpande said...

Very nice research, Neeraj! We need to create a forum/ website to bring out the retail-unfriendly promoters/ management. We can have a rating system for the benefit of the retail shareholders!

Neeraj Marathe said...

Thats a fantastic idea DD..there are many such cases like Falcon, where the 'unfriendliness' of the promoters is not direct, hence difficult to ascertain. A database like this would be surely beneficial.
Am sure you must have heard of watchoutinvestors.com..its also a good site..

Dayanand Deshpande said...

thanks, Neeraj for the website. we have another support from Amit..read this link: http://multibaggersindia.blogspot.in/2012/05/investor-is-king.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+MultibaggerStocksIndia+(Multibagger+Stocks+India)
so the investor-rating-website is now a matter of time...cheers! - DD

Neeraj Marathe said...

Thnx DD..

Anonymous said...

Hi Neeraj

I hold around Rs 6000 worth of shares of falcon at current price..when they did this jugglery i eas pretty sure that those third parties are related to promoters...ur analysis has confirmed that...great post by you..thanks

there is one company called geodesic...I have huge investment tin that ...

Neeraj Marathe said...

Most welcome anon..
And all the best with geodesic!

Anonymous said...

Neeraj - Great Blog. Thanks for taking all the effort.

BTW how to you read BSE/NSE announcements. I know they are on their websites, but is there any easy to use tool for the same?

Neeraj Marathe said...

Hi Anon,
Well, its a boring thing, but i read them on the exchanges website..i do not know of any tool for the same..