Powergrid FPO - A special situation everyone knows about

Something which is too obvious and which everyone knows about rarely works in investing. "The crowd is never right" is the gyaan we often hear and experience too.
So when the Powergrid FPO special situation presented itself, the first thing that came to my mind was that this is too obvious, which should be visible to absolutely anybody. So will it work?!

Background

• Powergrid has come out with its FPO, priced in a band of Rs.85-90 per share. Retail applicants will get a discount of 5% on the final decided issue price. I am assuming the issue price to be Rs.90 and all calculations are based on the same.
• So basically, retail shareholders will be allotted shares @ RS.85.5 per share. As of 5 pm on 12/5/2013, retail applications stood at 4.32 cr shares, against 27.44 cr shares reserved for the category. 
• The issue is therefore subscribed 0.16 times in the retail category as of now, with tomorrow being the last day for applications.
• Even though most retail applications come in on the last day, I feel there is high probability that there will not be any massive over-subscription in the retail category and chances of full allotment are high.
• I offer absolutely no view on the company as a business etc. This is merely a play on the situation and not an 'investment' per say.

The situation

• Apply for 2200 shares at cutoff price (for retail, it will be max Rs.85.5). Expectation here is that allotment will be full/near full.
• Short 1 lot (2000 shares) December 2013 series Powergrid futures @ Rs.92.85. Effectively, you are creating a near 100% hedge and locking in Rs.7.35 profit (by buying at Rs.85.5 and selling at Rs.92.85)
• With the issue closing on December 6th, allotment should happen just before December F&O expiry (26th)
• On expiry, sell equity shares and cover futures short position (both should be at same/near-same price on expiry, hence we would realise Rs.7.35 profit per share)
• The returns here are roughly 8.3% (thats Rs.7.35 on Rs.85.5 invested per share) pre-costs for a 20 day holding period. Not bad!!

Additional points

• Ideally, I would have liked to short the January 2014 series futures, but I learnt that January 2014 onwards, the lot size has been changed to 4000 shares, from the present 2000. :-( Hence, one will have to short December series itself, even though it will be a touch and go situation, time-wise.
• It seems like the whole world has gotten into this trade, of applying for the FPO/going short on December series futures. Hence, the futures are quoting at a Rs.3.3 discount to the cash market price of Rs.96.15.
• The whole trade is of course applicable for only the retail category, making an application under Rs.2 lakhs.

Risks

• One big risk here is if the allotment is not full/near full. In that case, the cash-futures position sizes wont match and this would not be an arbitrage trade. Also, if there is part allotment along with a significant rise in the stock price before expiry (worst case scenario), there would be a loss on this trade. (Since futures price would also rise along with cash market price and hence, loss in futures market would be greater than profit in cash market)
• Another risk here is if the allotment is delayed beyond December 26th for some reason. In that case, the futures position would expire and we would be left holding only the shares of company, un-hedged.

All in all, its an interesting arb opportunity that makes sense. Point is, it makes sense to everyone, so will everyone earn money in it? Lets see how it plays out.

Cheers and happy investing!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. I am not offering any investment advice through these articles. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Sah Petroleums - Bonus Issue

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!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

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

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!!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional investor, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Marg Ltd Open Offer - a lose-lose situation

Marg Ltd (BSE 530543) is a Chennai based infrastructure company. About an year ago, the company had announced a voluntary open offer to acquire 20% of the shares of the company at Rs.91 per share. However, SEBI detected violations of the takeover code in the same and investigations started. This article will make the background of the case pretty clear.

Well, today SEBI has directed the promoters of Marg to revise the open offer price to Rs.340 per share! Article This consists of the 'proper' open offer price of Rs.216, plus interest of Rs.124. The market price of the company's shares was Rs.50 yesterday and the open offer price is more than 6 times the current market price! Promoters hold 54% in the company. Seems like a sweet deal. Well, the market participants have also given its thumbs-up to this development, the stock was up 6% today.

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!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) As a professional analyst, I may have positions in stocks discussed.

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

A bit more on open offers..

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..

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! 

APW President - A Delisting Case

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..

1. 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!
2. 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!
3. 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.
4. 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. 
5. 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!

Sundaram Clayton Demerger - Some Clarifications

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?

1. 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.
2. 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)
3. 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.
4. 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)
5. Shares of SCL will be listed.
6. % 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

1. Since there is share capital restructuring happening in SCL, in my view, SCL will get delisted for a few days.
2. 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).
3. 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?

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!

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!!



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!

Rights Issues - get it right!

People like me, who are not hyper-active in the markets tend to sit on decent percentage of cash for extended periods of time. While this cash typically earns the regular 7-8% in liquid funds, I keep on looking for ways to improve the return on this large part of my portfolio. Rights issues are a great way (among others!) to put the cash to some use and earn that extra return. If you are lucky, you will earn lots in rights issues. If you are unlucky, you wont lose much! Me likes! My kind of situation. :-)

Here is how it works..

One should not deploy money in each and every rights issue which hits the market. Some basic pointers..
1) The company should be a decent company, not going at atrocious valuations. (Although it doesn't matter if its a bit expensive)
2) The rights issue price should be at a decent discount to the current market price. So, a Bajaj Hindustan will not do, but a Neuland Labs will do!
3) If its an unknown company will less institutional holding, it would be great. (I will clarify why it is so in due course.)

Lets say that A Ltd is coming out with a rights issue. The ratio is 1 share for every 2 shares held. The CMP is Rs.50 and rights issue price is Rs.30. Record date is April 19, 2012 (Ex-date will be April 18).

1) Buy 100 shares of A Ltd. close to the ex-date, on lets say April 15th itself at Rs.50. (So that on ex-date, the shares will be there in your demat account.)
2) On ex-date, the stock price should fall in the proportion as well as price of the rights issue. (Although, in the recent case of Neuland Labs, it did not fall at all!) Lets say here, it falls by Rs.8 to Rs.42.
3) Sell your original shares on ex-date. There would be a total loss of Rs.800. However, since you sold on ex-date, you are still eligible to apply for the rights issue.
4) Now, you can participate in the rights issue. On the original 100 shares, you will get 50 shares guaranteed (1 for every 2 held) at Rs.30.
5) However, while applying for the rights issue, you can always apply extra. Here, lets say that you applied for 950 extra shares. Total application would be 50+950=1000 shares at Rs.30 each.
6) Now, if all shareholders apply for the issue, you will not get anything extra. So, you will get only 50 shares at Rs.30. Lets say you are able to sell them at Rs.42. Thats a total profit of Rs.600. So, along with earlier loss of Rs.800, net-net, there is a loss of Rs.200 on the entire transaction. Since original position is small, the amount of loss is not much, in absolute terms/as a % of portfolio
7) However, if its an unknown company etc, where other shareholders did not apply, you can get extra allotment. Lets say, you got all 1000 shares you applied for, at Rs.30. And you managed to sell them at Rs.42. Thats a profit of Rs.12000! Minus original loss of Rs.800, which gives us a net profit of Rs.11200. Not bad. (I am not considering short term cap gain tax etc to just to keep things simple.)
8) The only risk here is in a situation where you got full allotment, and by the time the allotment was done, the stock price just crashed much below the rights issue price..then you are in trouble. That is why I laid down some basic pointers above.

So if you are lucky (yes, total luck, not skill!), you will get extra allotment and earn decent amount. If you are not lucky, the loss will not be very high, since initial position itself was small.

Some rights issues in which I got lucky in the recent past were Camlin Fine (got HUGELY lucky here!), SBBJ, etc. Others, in which I was not so lucky (no extra allotment) were Veljan, Sadbhav Engg (this one was interesting, since there were attached warrants too), etc. However, there was no loss in the same. Lets see what happens in Neuland!

One tukka in rights issues, where you get massive allotment, can give a huge alpha to your portfolio. e.g. in Camlin Fine, market price was Rs.105 (Rs.10 paid up), while the rights issue was at Rs.15.75!!! I applied a lot extra and for some reason, I got full allotment! Great return, without much analysis or trouble to the brain! Super balle balle.

Hope you get the rights right! Till then..

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) 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!

Provogue (India) Ltd - Follow-up

I had written about Provogue demerger a few days ago. Its surely an interesting case with lots of apparent value, but with a very very questionable management. Although my position in it is not very large, I have never ever been so uncomfortable in any stock in my life!
An interesting thing has happened recently. The following announcement has been made on Provogue on NSE:


Members of the Exchange are hereby informed that the trading in equity shares of Provogue (India) Limited shall be suspended w.e.f. March 07, 2012 (i.e. closing hours of trading on March 06, 2012) on account of Scheme of Arrangement & Amalgamation.


This does not happen normally in demergers. Its happening here due to capital reduction in Provogue, which is part of the scheme. Now the interesting thing about this is made up of two parts; one, that the announcement hasn't been made yet on BSE, and so I bloody missed reading it immediately. It won't happen that it will remain listed on BSE while its delisted on NSE. I think it wont be listed on either for some period of time. Secondly, this is something that I was afraid of, (since there is capital reduction happening in Provogue as part of the scheme), hence, I had checked it with the CS of the company when I had begun research on the stock. He had informed me at that time that Provogue will not be delisted.


Now, it seems that it will be!! So what does this mean for us? We will not be able to sell Provogue shares on ex-date (7th March 2012) since it wont be trading on that day. So there are two options:

1. Sell out pre-demerger; i.e. before 7th. One will not get shares of Prozone in that case.
2. Hold on and wait for Provogue to get listed again. Then sell off the original (Provogue) position. One will receive shares of Prozone in that case.

So what is the risk? 

• Time risk: How long will it take to get Provogue relisted? Usually, it does not take long, its only capital reduction. It could take maximum 8-10 days at best. However, if one invests on the basis of best-case scenarios, one should not be in the market at all!! What if due to some god-forsaken reason, it takes a long long time for Provogue to relist again? The money remains trapped in an already uncomfy position. Not an ideal scenario, at least for me.
• Market risk: What if the market collapses during the time Provogue is not listed? If it gets relisted during bad times, the price could be severely depressed, resulting in losses on the original position.
• Provogue risk: This is a special category of risk, applicable only in this case. Under this risk, anything can go wrong! Hehe. (Just kidding)

What am I doing?

I intend to sell of my entire position asap, pre-demerger itself. In a position which is already stretching my risk threshold and making me uncomfy, this event increases the risk phenomenally for me. I am very happy and content with my 30-35% profit and am willing to pass on the baton to make more money to others who are willing to take the risk and are ok with it. :-) In special situations, one has to be nimble, think straight and clear, and be ready to take decisions fast, with changing facts.


On a different note, who says luck does not play a role in making money? Earning money in Provogue is enough proof of luck, imho! :-)


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!

Provogue (India) Ltd - Demerger

Provogue is going through a demerger. For a lot of investors out there, looking at a company like Provogue would be quite a taboo and honestly, its difficult to argue with that view! :-) Still, I decided to give it a look without having any mindblocks, and a few surprising things emerged! Let us take a look at what is happening.

The Scheme

The scheme of demerger-amalgamation envisages the demerger of the 'retail estate centric real estate development business' of the company into a separate company and listing of the same. The entire structure is a bit complicated, so instead of explaining it, let us try and view it in pictorial form.

Through the scheme itself, Provogue would be reducing its capital from FV Rs.2 to FV Re.1. (I think it would be primarily to write off the goodwill on Provogue's balance sheet.) This would happen post demerger. Through the demerger, shareholders of Provogue will get equal shares of the demerged company Prozone Capital (Ratio of 1:1). All the necessary approvals have been received and the company can now declare the record date for the same.

The opportunity (?)

Provogue is currently valued by the market at CMP Rs.26 as follows:

Click to enlarge

Currently, besides the retail business, Provogue also has another business housed in its subsidiaries. It owns and leases out malls, primarily in tier 2 and 3 cities. This business is more in the 'setting up' stage and is currently not earning any profits. However, the company has also done an interesting thing. It has acquired land parcels around their proposed malls, which also gives it a third business line, that of real estate development! These businesses are housed in Prozone Enterprises, in which Provogue holds 75%. The rest 25% is held by UK based Capital Shopping Centers Group (CSC). Consider the following:

• CSC paid Rs.202 cr for its 25% stake in 2006, valuing Prozone Enterprises at more than Rs.800 cr.
• Triangle Real Estate Fund paid Rs.306 cr in 2010 for 35% stake in 3 SPVs of Prozone Enterprises, valuing them at Rs.865 cr.
• Prozone Enterprises' 10 lakh sq.ft. Aurangabad Mall is already operational, with large occupancy reported. The mall could bring in at least Rs.30-35 cr yearly lease rentals at peak occupancy.
• More malls are planned at Coimbatore, Indore and Nagpur.
• Prozone Enterprises is also constructing a  commercial offices center  near the Aurangabad Mall. Expected saleable area is 4 lakh sq.ft.
• Omni Infra, a subsidiary of Prozone is in the process of constructing a residential township at Indore. Phase 1 of the same will consist of 11 buildings, with a total saleable area of 1 million sq.ft.
• As per unconfirmed reports, Prozone owns a total about 150 acres of land.
• All the subsidiaries are adequately financed, primarily because the company has been able to dilute equity at substantial premium. 

Even though the total assets and holdings in Prozone Enterprises are not clear, its Aurangabad Mall alone can be worth Rs.100 cr at least, assuming Rs.30 cr lease rentals and Rs.10-12 cr PAT. It is not clear whether the company intends to lease out or sell space in the Aurangabad commercial offices center, but if they decide to sell it, that alone can easily net them at least Rs.100 cr (on a very lower side). The 1 million sq ft Phase 1 of the Indore township can earn them Rs.50-60 cr more, assuming a profit of Rs.500 per sq.ft. We cannot take a call on the remaining assets of Prozone Enterprises, since proper data is not available.
Take a look at this table, taken from Provogue's AR..

Click to enlarge

So we are getting all of the above plus Provogue's own retail business for a market cap of Rs.300 cr and an EV of Rs.550 cr! That is quite interesting! Value creation through demerger indeed! ;-)

Risks / negatives

When we are talking about Provogue, this section becomes very important! :-)

• The promoters/management of the company are, well, how should I put it..umm..very adventurous! (drug case etc) It is also obvious that they are interested in their stock's market price (approved a buyback and then did nothing). It is a management that I would rate very low and I would not trust them at all. This is a huge huge negative, specially in the context of putting money in special situations.
• The 'value' in Provogue exists primarily because the management has been able to dilute equity, both in Provogue as well as its subsidiaries at atrocious prices and valuations. (Provogue had made a private placement at 200 bucks, then one more at 97). Now that the price is 25 bucks, the huge money which came in at such prices makes the balance sheet look much better in comparison to the present market cap! :-) The business, per say, earns no cash and I absolutely hate such businesses.
• Information is not properly available. Provogue is like a cabbage! Inside the layer of the main company lies a layer of subsidiaries. If you peel off that layer, there is another layer of step-down subsidiaries inside. Peel off that layer and...well you get the point. There are total 27 subsidiaries of Provogue and various businesses are housed in various subsidiaries as SPVs. Since detailed info about the subsidiaries need not be given as per law, it is very difficult to gauge which has what! 
• There is large institutional holding in the company. (I imagine they must be very pissed off, since they have bought at much much higher prices). One of the institutions which had more than 5% has been selling continuously, keeping the price bogged down. Now something like this should not usually bother us, but in special situations, where exit has to be fast, this should be seen properly. (Btw, Mr.Rakesh Jhunjhunwala has increased his holding in the recent Dec 2011 quarter. I wonder how this news did not lead to a rally in the stock!!)
• It is not clear how the PE guys who put money in SPVs are going to exit. I would like to know that, since I would also be a shareholder along with them!

My take

I am not at all interested in the standalone business of Provogue. It is a cash guzzling business with a questionable management. Its the demerged part which interests me. That seems to be a much better business. With CSC holding 25% there, the probability of the management doing any blatant hanky-panky also reduces greatly. So the strategy would be to sell of Provogue shares on the ex-date.

If it were any other company with a decent management, available at these valuations, I would have taken a very sizable position. However, with Provogue, I do not have the guts to take a big big position. (One may argue that these valuations exist only because its Provogue!!). The critical call to take is about how much would the price fall on ex-date. My call is that the price will not fall much, since there will be no impact on Provogue's EPS. Also, the balance sheet will not be hugely impacted, since lot of dilution has happened at subsidiary level. Capital reduction also does not lead to a great fall in price, if history is a guide. So, selling off Provogue on ex-date and holding the demerged company shares at very low effective cost makes most sense to me. 

Let us see how this one goes!

Cheers and happy investing!

P.S. Disclosure from my side: I was not under the influence of any drugs/substances at the time of writing this post. (I know this is a cheap shot, but could not resist taking it!!)



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!

Network18 Preference Shares - Amazing return, amazing risk!

Hello all..

Network18 Media and Investments Ltd is in the business of forming and selling subsidiaries, getting into joint ventures and raising finance. (Ok, that was sarcastic..its broadly a media company)

In March 2008, the company came out with a rights issue consisting of equity and preference shares. The preference shares of the company are listed on BSE (scrip code 700132) and NSE.

The opportunity

• The preference shares have a face value of Rs.150 and are to be redeemed at par in May 2013.
• The preference shares have a 5% dividend payout, which is cumulative.
• Till today, the company has not paid any dividend on the preference shares and it is fair to assume that the entire chunk will be paid along with the principal at the time of redemption.
• So, at the time of redemption, a person holding the preference shares should get Rs.150 (principal) and Rs.37.5 (accumulated dividend @ 5% p.a. for 5 years). Thats a total of Rs.187.5/-.
• The preference shares are presently trading at Rs.105/-.
• So if one buys it at present at Rs.105, then one would get Rs. 187.5 in May 2013.
• Thats a return of 79% in 20 months! Super cool!

The problems

Nothing is for free and same is the case here. Lets just take a look at the risks and the problems...

• Network18 is not exactly a conservative investor's dream. The business is damn difficult to understand, given the fact that it changes all the time due to frequent M&A activities. The profitability has been erratic, with the company making profits just once in the last 5 years. More importantly, cash-flows have been really pathetic, with the company reporting a negative cash flow from operations of Rs.306 cr in FY11.
• The company has Rs.1775 cr of debt but it has about Rs.350 cr of liquid investments too.
• The company keeps on getting money by selling subsidiaries and businesses here n there!
• The company will require about Rs.195 cr to redeem the preference shares (along with dividend), which may not seem out of reach, but considering the large debt and negative cash-flows, seems unnerving, to say the least..
• The biggest risk here is the management. They are no saints, lemme tell you! Just look at this postal ballot they got passed..
• Basically what they did was something like this...the Companies Act confers voting rights on preference shareholders, if their dividend is not paid for a period of 2 years. Since Network18 had not paid dividend, the preference shareholders would have gained voting rights.
• So the company declared that it had received letters from preference shareholders that they would like to waive their extra rights (now why would anybody do that) and hence, through postal ballot, they got these preference shareholders' rights waived. (Promoters must be holding at least 50% of the preference shares, as per my reading)
• So would they pay up at the time of redemption? Or would they find some loophole or the other and do some hanky-panky? Thats a tough one to answer..

To conclude

• Although the possible return here is mouthwatering, there are 2 big risks; the financial position and the management. 
• Both of them scare me to a great extent, to take a meaningful position.
• If one is ok with these risks and one thinks that they are not very material, Network18 offers a great opportunity to make respectable returns in this uncertain market. The preference shares are fairly liquid too. 
• Given my risk appetite, I personally intend to give this one a miss for now, but I would like to keep a watch on future events (like insider buying) to revisit my decision. For the bold and the dangerous people out there, do take a look at this opportunity.

Cheers and happy investing!!

Edited note (added on 03/10/2011): After talking with a coupla legal dudes and taking some serious professional legal opinions, it turns out that in case of unavailability of profits, there is no onus on the management to declare and pay cumulative preference share dividend. In such case, they could very well get away with redeeming the preference shares at Rs.150, and not paying the cumulative dividend at all. Which essentially means, that they would have used the preference shares ka paisa free of cost for 5 years! :-)
In such case, (assuming they honestly redeem it without changing the terms of the issue and all) the return would be about 42% in 20 months..anyway, the risk remains very high and I am not really inclined to get into it..