Quarterly Update - Phillips Carbon and NBCC

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!!

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! 

Deccan Chronicle results - Boy O Boy!!

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!!!

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!