Special Situation or Straight Equity – Sundaram Clayton Demerger

This is another investment that I evaluated over the weekend. Neeraj has already very elegantly put up the structure of the demerger here. Please do read it for a quick summary of the scheme.

I don’t have any specific answers or conclusions at the end of the post. If any of you reading this blog do have any thoughts/conclusions, please do let me know. (Link to the demerger announcement here)

Summary:

Sundaram Clayton (SCL) will demerge its non-automotive business into Sundaram Investments Limited (SIL) and amalgamate its subsidiary Anusha Investments Limited (AIL) into itself.

For every 2 shares of SCL, the investor will get 1 share of SIL (equity or NRPS) and 1 share of de-merged SCL. The investor will be provided an exit option of SIL at Rs. 48/-.

I will not get into whether Rs. 48/- is logical or not. Looks like we don’t have a choice but accept Rs. 48/- and so it will be.

Opportunity Evaluation:

CMP of SCL: Rs. 162/- per share.

Let’s say I buy 2 shares. Cost is Rs. 324/-. Out of this, I will get Rs. 48/- back (assume I take equity vis-a-vis NRPS).

Therefore, I will be left with 1 share of SCL worth 324-48 = Rs. 276/-.

Consolidated EPS for 2010-11 for Sundaram Clayton was Rs.17/- while standalone was just Rs.9.8/-. This means that almost double earnings are coming through from subsidiaries. Majority from AIL seemingly (which owns substantial part of TVS).

Share capital is getting halved (which means technically the EPS will double). Also, since AIL has been completely merged into SCL, the earnings will start getting reflected in standalone now rather than consolidated.

Question: Does that mean that the market will now say, oh boss, SCL is just 5 P/E whereas corresponding stocks are at say 8-10 P/E and hence undervalued?

Another angle – After this amalgamation of SCL, effective ownership of SCL in TVS Motors will be 27.26 Crore Shares (57.4%) (8.84 existing with SCL + 48.56 of AIL). At TVS motors CMP of Rs. 33/-, the value works out to Rs. 908 crs. But the market capitalization of SCL is just Rs. 521 cr. If I were to buy the whole company of SCL, I will get SCL business + approx 400 cr worth of TVS business for free.

Sounds great, no?

But then again, it was always like this. AIL which owned 48.56% of TVS was a fully owned subsidiary of SCL. Just because it is amalgamating, is this value unlocking? Also, shouldn’t I value the TVS business only for dividend purposes (since its only a strategic stake and not a financial one?)

How should we evaluate this opportunity then? First, is there any opportunity at all? Two, should we treat it as a special situation or a straight equity situation? Three, what are your guesses on what will happen once SCL re-lists after the demerger is effected?

Looking forward to your thoughts.

P.S: The court has not yet approved the demerger and hence we don’t have a record date yet.

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  1. #1 by spendasulikeRavi on November 13, 2012 - 3:05 AM

    Hi Kiran,

    Have one doubt….
    How can I sell SIL shares to company ?
    What was the process… as they wont be listed I am not able to see them in my account.
    I am new to this..and luking for ur inputs…

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