Archive for category Stock Analysis

ISGEC Stock Story

ISGEC has been one of the very good winners in 2014 in my portfolio. Due to multiple requests to expand on this story, I have prepared a quick presentation to detail the story.

Contrary to public opinion on twitter and whatsapp, identifying and working on this business was a complete collaborative effort. Om and Dhruvesh – two very good friends of mine worked on this story along with me and were critical in various thought processes, scenario analysis and tons of brainstorming. Due to these two people and two people alone was the reason why I had the confidence to take a bigger position than usual on a Capital Goods story. We traveled to Yamunanagar from Mumbai, Hyderabad and Bangalore for the AGM in August 1st week. It was a fantastic learning experience along with being a super fun trip.

Hope the story becomes more clear with this presentation. Let me know if you have any questions on the business (and not the current price and prospective future price, as I don’t have ANY clue where the price will go in the near or distant future).

Link to the presentation below:

Isgec_Stock Story

Disclosure: This is NOT a Buy/Sell/Hold recommendation discussion. This blog is only for educational purposes. Om, Dhruvesh or me are neither research analysts nor do we have any fancy sounding certifications. All three of us are still invested in the story. Please contact your financial adviser before taking any decisions.

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Stock Analysis: Poly Medicure

Poly Medicure is a leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Safety IV devices itself is globally a $300-350 Mn annual market size today. (This was a 20 year patent granted to Braun in 1999, so is valid till 2018).

They manufacture around 95 products.

Subsidiaries in China and US. Egypt is a joint venture. China has been a major factor in reduction of raw materials.

Major RM is plastics, which is dependent on crude oil. Custom duty on medical and life saving equipment reduced by the Govt. in Feb’13 budget.

Revenue growth of 25% (approx.) and NPM of 12-13% from the past 3-4 years. See no reason why the revenue increase won’t continue at about 20% and NPMs sustain at 12-13% for the next 2-3 years. Forex derivative contracts expired in Oct 2012. Now, only simple forward hedging.

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players in this space. Poly Med won cases against B Braun in India and Germany and Malaysia but lost in Spain. They are planning to tie up with major OEMs and contract manufacture for them. No major plans to foray on its own due to huge costs involved.

Safety IV Cannuale sells at Rs. 18/- while IV Cannuale sells at Rs. 6/- even though it costs only Rs.0.5/- for safety. Currently, Poly Med sells IV Cannuale majorly and Safety IV Cannuale only in some geographies.

Has 3 plants – Faridabad, Jaipur and Haridwar. No expansions possible in the existing Faridabad and Haridwar plants. Jaipur SEZ plant to be operational by March 2014. They have got new land in HSIDC, Faridabad. Capital expenditure of Jaipur SEZ – 38 cr (21 cr loan, 17 cr internal accruals). Investing in Haridwar plant to focus more on domestic market. In FY14, domestic market contributed only 50-60 cr. Rest from exports. Got USFDA approval for its Faridabad plant in Dec 2010.

R&D as a % of sales:

They have increased R&D spend as a % of sales from the past 3 years.

2013

2012

2011

2010

2009

1.75%

1.36%

0.41%

0.46%

0.48%

Risks:

a) Increase in RM costs (crude oil proxy)

b) Exchange rate fluctuations (although, it’s a net exporter)

c) Changing import duty structures (although, off late, govt. has framed favorable policies towards medical and life saving devices)

d) Medical devices heavily regulated (nature of business)

Related Party Transactions and Compensation:

They score pretty high on related party transactions and compensation as a % of sales.

Series of related party transactions with Vitromed healthcare

VitroMed txns

2013

2012

2011

2010

Sales

15 cr

11 cr

8 cr

8 cr

Jobwork

21.5 cr

15 cr

13 cr

10 cr

% of PolyMed Sales

14.5%

12.4%

12.4%

13.2%

MD & ED’s compensation

2013

2012

2011

2010

MD&ED’s comp

3.5 cr

3.1 cr

2.17 cr

1.73 cr

Sales of PolyMed

252 cr

209 cr

170 cr

136 cr

PAT of PolyMed

24 cr

19.2 cr

21.7 cr

16.4 cr

% of Sales

1.4%

1.5%

1.3%

1.3%

% of PAT

14.6%

16.1%

10.1%

10.4%

Valuation and Investment theme:

Polymed looks like a 20-25% compounding story with a fairly high probability from these levels. FY13 250 cr sales, 24 cr profit. FY14E 300-310 cr sales, 40 cr profit.

Next 3 years, even if sales double (and assuming NPMs would remain at 12-13% – op. leverage would be set off by increased depreciation of Jaipur SEZ) implies 72 cr profit. Assigning a 20 multiple leads us to 1400 cr marketcap. Current marketcap 750 cr. Implies a 25% CAGR from current levels

Jaipur SEZ spend is about 38 cr and expected sales is about 100-120 cr (2.5-3x asset turnover). If some OEM comes along and if Jaipur SEZ can deliver full demand, sales can double in 2 yrs, and the CAGR would jump to 40%.

Management compensation seems extremely high. Related party txn with Vitromed also needs to be monitored.

However, there is a long ramp for Poly Medicure to grow at 20-25% CAGR. Medical disposable business is an evergreen huge business (unless, there is suddenly a replacement of IV Cannuale with some other tech.) And FY18-19, Poly Med can start selling Safety IV Cannuale anywhere in the world (Braun’s patent expires). Safety IV cannuale is 3-4 times more expensive than IV Cannuale. Think about the impact on revenues and margins.

Disclaimer: This is not a recommendation to buy/sell. This post is only for educational purposes. Please do your own diligence before buying/selling Poly Medicure

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Stock Analysis: Sabero Organics

I had researched on Sabero Organics about a month back but was too lazy to update on the blog. Thought would rectify it in the new year 🙂

I have not yet invested in the stock. Still reading and researching. Right now, the opportunity costs of investing are pretty high.

Brief:

Sabero Organics – manufactures agro-chemicals – fungicides, herbicides and insecticides. Sabero is a leading manufacturer of generic products in the agro-chemical space.

Investing theme is broadly – i) patents of major patented agro-chemical products will expire in 2014 ii) Due to increasing environmental concerns and consolidation in China (along with appreciation of yuan), there is a significant possibility of lower production from the Chinese along with better price from India iii) Significant operating leverage and synergies that can be achieved by the Coromandel group.

Their major products in each of the segments are:

1) Herbicide – Glyphosate

2) Fungicide – Mancozeb (registered in the first country in Europe (France) recently); potential of Mancozeb worldwide is $500M; current share is 10-11%; aspiration to take to 20%; it contributes 35-40% of Sabero’s sales (while other core products such as Acephate, Monocrotophos, Glyphosate each contribute 15 per cent to the total sales respectively with the balance 15 per cent coming from Chloropyriphos and others intermediates.)

3) Insecticides – Monochrotophos (main competitor: United Phosphorous)

Share of revenue of Fungicide:Insecticide:Herbicide is 40:40:20

They have subsidiaries in Australia, Europe, Brazil and Argentina.

2009 – 10 AR

Customers of Sabero Organics:

a) 30% of business from MNCs

b) 40% of business from domestic and international B2B

c) 30% of business from dealer distribution network

Sabero is setting up a plant in Dahej SEZ at a cost of Rs. 55 cr. Potential sales of 2-3 times investment. Funded from $9M in ECB debt and rest from internal accruals.

Increased capacity of Chloropyriphos by 50% by Sep 2010.

2010 – 11 AR

2 plants shutdown primarily due to project executions and EMS (environmental) objections

Started supplying to Brazil. Got technical registration for Mancozeb (Brazil is the 2nd largest customer after US in agro-chemicals)

Dahej plant will manufacture synthetic pyrethroids, which have a potential market size of $600M-$700M

Main RMs of Sabero – Ethylenediamine (suppliers are Akzo Nobel, Huntsman and BASF) and Phosphorous, Acetic Anhydride (main supplier Celanese)

Mancozeb plant working at 60% capacity

Supply to Europe has not begun as data protection gets over in June 2011 (Update: In 2013 AR, they do indicate they have registered in France)

40% marketshare in Monochrotophos, rest 60% with United Phosphorous (Cheminova exited the business, leading to a duopoly here)

The joint venture to co-venture partner Markan is under arbitration (Update: In 2012 AR, they have resolved it, taking a hit of approx. 2cr)

2011 – 12 AR

Coromandel (and its subsidiary Parry Chemicals) take 74.57% ownership; Sabero will contribute only 5% of Coromandel’s revenue.

There was a PIL (public interest litigation) filed against the company. Considerable investments were done in environmental management systesm and processes. April 2011 – they were manufacturing 0%; Dec 2011 – their capacity was ramped up to 75%

Manufacture of formulations has begun in Dahej in March 2012

Case with Brazilian company settled

Propineb, with a market potential of $150M – commercialization will begin next year

There has been a sharp fall in the number of Glyphosate herbicide manufacturers, and there can be a 30% reduction in capacity due to consolidation in China in the next 3-5 yrs

Power, fuel and utilities costs shot up to 13.6% vs 7% last year

RM costs also rose sharply

Domestic scale up didn’t happen properly because of availability of products (due to constrained capacity) and erratic monsoons

2012 – 13 AR

Many agro-chemicals going off-patent and due to GM seeds, there has been diversion of R&D funds from agrochemicals to GM seeds

Propineb has been launched (worldwide market of $110M)

Current status of registrations: 296 registrations on 16 products in over 54 countries (183 unique proudcts/country combo)

There has been a 40% increase in trade payables and 100% increase in trade receivables, while sales have grown by only 44%. The massive increase in trade receivables vis-à-vis sales is shown up as negative operating cashflow (-19cr) for the first time. (Are they pushing products on lenient terms then?)

There is absolutely no mention of the status of the Dahej plant.

There are planning to do some capital investment in utilities (drawing board stage), and are targeting EBITDA margins from current 10% to 15%. They can potentially do a 1000 cr turnover in FY15.

Financials:

 

FY13

FY12

FY11

FY10

FY09

Sales

515

358

413

430

367

EBITDA

51

-34

41.3

85.828

52.3709

EBITDA %

9.9%

-9.5%

10%

20.0%

14.3%

PAT

7.7

-61

11

39

22

PAT %

1.5%

-17.0%

2.7%

9.1%

6.0%

Net Fixed Assets

198

173

133

95

94

Fixed Asset Turnover

2.8

2.3

3.6

4.6

3.9

           

Domestic

41%

48%

45%

41%

 

Exports

59%

42%

55%

59%

 

H1 FY14 PAT is 26 cr. Given H1 and H2 are similar for Sabero, FY14 PAT would be 52 cr. (There would be no tax impact this year because 61 cr is carried forward from FY12. 7.7 cr has been set off. This 52 cr can also be set off against 61 cr). Tax impact would be 30% from FY15 (unless we know further status of Dahej in which case, it may be a bit lower).

PAT 52 cr. Mkt cap – 492 cr. P/E of 9.5 (Even EV/EBIT (since Sabero has debt) is about 9.5). What would be a fair valuation for such a company?

For FY15, assume best case scenario:

1000 cr turnover, 15% EBITDA margins would imply 150 cr EBITDA. 30 cr interest deduction. 120 cr EBT. 30% tax – PAT would be 84 cr. On a similar 10x multiple, we are looking at 70% upsides from here.

On a realistic basis, 1000 cr turnover, 10% EBITDA, would lead to 50-55 cr of PAT. There is no growth between FY14 and FY15 in PAT (due to full taxation in 2015). Beyond that, there are too many variables.

Of course, increased demand for Mancozeb from Europe (if France is done, other countries can’t be far behind) may further provide tailwinds.

Risks:

The major risk I see here is any PIL would lead to further pullbacks as production might be stopped. Also, GPCB has given time till mid-Feb to clear out some backlogs on environmental concerns. I think getting a clearance would be paramount (although, given Coromandel’s pedigree, don’t see much of a risk here).

Another major risk is obviously steep increase in RM prices. This is a risk on balance – as production of end product from other countries is dwindling, and as is the manufacture of phosphorous from China. We may get into a higher pricing scenario, but so would our RM cost increase. Net-net, I don’t see an asymmetric benefit of China rampdown.

Another risk is inter-party related transactions – say, if the Dahej plant production is being restructured to be a backward integrated supplier for Coromandel-Liberty merger, then the upside is going to be very limited. We need to be careful of the pricing structure here. Of course, delisting is another risk (will lead to re-investment risk)

Disclosure: I have not invested as of yet. This is not a buy/sell recommendation. This post is only for learning and posterity. Please do your own due diligence before investing

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MCX – Undervalued?

Back to blogging after a long long pause.

Anyway, given the hullabaloo around NSEL, FT and MCX, there have been certain conclusions that NSEL is a gone case and so is FT. The only remaining entity of Jignesh Shah’s empire is MCX. And an opportunity to buy an exchange with a significant moat in the commodity trading business for about 2000 cr seems enticing for many.

For those who are new to MCX and want to understand more about MCX, Rudra has got a very comprehensive explanation about its business model, its competitive advantages and risks here. He has covered all angles (the blog is obviously before all the ruckus on NSEL in August).

The price action of MCX below – 1 year back, it was quoting at about Rs.1500/-. Around start of this financial year, it quoted at about Rs.850/- (The budget in Feb’13 proposed and imposed a commodities transaction tax (CTT) on all non-agricultural commodities which led to a drastic fall in volume). Then about August, the NSEL saga struck and the price dropped to a low of Rs. 238/-. It recovered a bit, and HDFC Mutual Fund bought a large quantity at about Rs. 293/-. Yesterday, it quoted at around 410/- and today, it was up by 10% to 455/- (a market cap of Rs.2300 cr).

image

We are all fascinated by bottom-fishing, but we are always unsure of getting stuck at the bottom. And so it was with MCX. Nobody bought at Rs. 238/- (when cash per share, seemingly on B/S and again confirmed by Sep 2013 B/S was about Rs. 180/- a share). Now, when the price has doubled (seemingly after FMC has ring-fenced and necklace-spiked MCX from the vultures), people have developed an immense interest in MCX’s seemingly unbreakable moat, its multitude of competitive advantages and why it’s a great buy at these levels, given normal profitability.

Given the state of affairs, I decided to see the volume of contracts at MCX (obviously, more the no. of contracts, the more MCX revenues and profits boost up, just like a toll-bridge). The major products traded at MCX are only four – Gold, Silver, Copper and Crude. Rest of the commodities are too small to be even counted (inspite of MCX’s major push towards agricultural commodities – FCRA hasn’t yet come up with regulations for options on commodities, which are crucial for agricultural commodities – and given the NSEL fiasco, they won’t be in a hurry). So, here I plot the contract volume of all 4 products –

image

image

As you can see, volumes have plummeted in the initial part of the year due to CTT, and most probably plummeted further after the NSEL fiasco. Of course, not much commodity volatility globally across these 4 commodities is also one of the reasons for this poor performance. On an average, y-o-y since August, Gold’s contracts have gone down by 60%, Silver by 63%, Copper by 63% and Crude by 74%.

For the year ended FY13, MCX ended up with 299 cr of net profit. Analysts who assumed this profit to be the base case, and who assumed that volumes at an exchange will ALWAYS grow are in for a rude shock with MCX. The profit for Q1 FY14 was Rs. 60 cr, Q2 FY14 was 27 cr and given the severe contract volume drop in Q3, I would expect MCX profit to end up somewhere around 18 – 20 cr (if not less). Net-net, if a similar trend continues through to next year, I would expect MCX to end up with profits around Rs. 125 – Rs 130 cr.

In my view, this needs to be the base profit expectation (maybe even lower, given that Gold is about to break $1200 internationally and there might be further lack of interest due to absence of options) to evaluate MCX rather than the elusive Rs.300 cr as the base case. Applying a 20x P/E (it’s at 10 P/E TTM, but exchanges with such moat I think should trade fairly at 20 P/E), we arrive at a market cap of Rs. 2600 cr, a measly 13% above current price levels.

Contra-viewpoint: Of course, all of these fundamental valuations go out of the window if a reputed player like HDFC/Kotak take over 26% of the company (from Jignesh Shah). In that case, the market price can fly anywhere, maybe even double. But I am still not buying.

Long term view: Even considering a HDFC/Kotak buying out the stake, the price may double from here in quick time (< 1-2 years). But am I confident that the volume of commodities traded at MCX would increase 20% year-on-year for the next 10 years? I am really not sure. Hence, I am not taking a bet for now, inspite of a decently high probablity that there are a couple of good triggers for an increased market price in the short term. As and when I learn more about MCX’s business or about FCRA’s view on introducing commodity-related options at MCX, I may change my view. But for now, I am letting this pass, purely based on fundamental valuations than bet my money on any buy-out speculation (which may come true after all).

Disc: Not invested. Still studying the MCX stock (business)

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Interesting Corporate Actions – PVR Ltd and TV18

There have been a few interesting corporate actions over the past 2 months. I will elaborate a couple of them here.

a) PVR Ltd – The first one is from PVR Ltd. (of PVR Cinemas fame). I observed this strange set of events way back in August and yesterday’s Devesh’s tweet on the event was the final push required to write this blogpost.

In summary, PVR Ltd. did a buyback in 2011 (in the May-Oct timeframe) and now sold shares (in the Aug-Oct timeframe). You’d wonder if PVR was in the entertainment business or financial engineering business. On the whole, it seems to be value-accretive to PVR, but this buy-sell stuff in the space of 1 year is a little unsettling.

The details.

PVR in June 2011 announced a buyback of shares not exceeding Rs. 26.21 cr representing 9.99% of the company (as an aside, a buyback greater than 10% requires a EGM and hence most companies don’t do it), with the max. share price of Rs. 140/-. 10% of 27,149,372 shares (total equity) represented 2,714,937 as per audited Balance Sheet at March 31, 2011. The Company proposed to buy-back a minimum of 562,000 Equity Shares.

Anyway, cut to the chase, as per this September 2011 notice, PVR had bought back 1,388,328 shares utilizing Rs. 15.82 cr (excluding brokerage and taxes) and that was the end of the buyback (that is approx. 5.1% equity was bought back at an average price of Rs.114/-). As an aside, the book value (net of debt) of PVR Ltd. as of March 2011 was Rs.126.12 cr. That is, 12.55% of book was used to buy approx 5% of equity back – not a great buyback by any standard, but not extremely poor either.

Anyhow, that was history. Cut back to the present. Aug 2012. This news item indicates that a private equity player called L Capital wanted to buy 10% of PVR’s equity at a price of Rs. 200/- (a 7.5% premium on the then market price Rs.186/-). This translated to 28.85 lakh shares (well, there were just 2.595 cr shares after the buyback and then PVR issued a some fresh shares (0.3 cr shares) to L Eco (at Rs.200/-) leading to equity dilution and hence now the equity is actually 2.85 cr shares). With this sale, PVR gets Rs. 57.7 cr for further expansion.  (There is a small bit on further Rs.50 cr investment from L Capital into PVR Leisure, a PVR subsidiary (and PVR will eventually have only a 35-40% stake in this business), but that is not pertinent to this discussion).

So, net-net,

PVR bought back 13.88 lakh shares for Rs. 15.82 cr in Sep 2011.

PVR sold 28.85 lakh shares for Rs. 57.7 cr in Sep 2012.

Is it value-accretive to PVR? Certainly. Even if you consider that the 13.88 lakh shares which were bought back were sold, the firm netted a gain of 75% within one year without considering the extra benefits of the network of a private equity player, the extra investment into the PVR subsidiary etc. Also, the debt has not increased due to the equity sale, so hurrah!

But should PVR indulge in this buying and selling of equity frequently? The jury is still out on that one.

b) TV18 – This Network18 group has always fascinated me. Not like a Page Industries fascinating, but fascinating with their ingenious financial engineering capability.

This time, the Network18 media group decided on the rights issue part of engineering. Of course, all and sundry do know about the Reliance-Raghav Bahl-ETV-Network18-TV18 story and complications, so I will not get into it (please to google, if you are not aware of it – the twists and turns will put the movie ‘Race’ to shame).

I will analyze this TV18 rights issue as an ‘expert’. That is, I will try to exactly explain why the stock moved from the lows of 20 to the highs of 30 today. (Actually, to be fair to ‘experts’, I am cheating. I had done this analysis much before and only blogging about it today). I have had no positions nor will I ever have positions with the Network18 media group. Their skill in shortchanging minority shareholders is unparalleled and since I have a day job, I can’t monitor their schemes daily.

Anyway, here’s the analysis I had done once the rights issue was declared –

The rights issue size of TV18 is Rs. 2700 cr. For every 11 shares held, 41 shares will be issued on a rights basis, each share costing Rs. 20/-. CMP of TV18 Rs. 22/-. If I had 100 shares today (as total equity), post-rights issue, I will have 500 shares for the company. But since the equity is coming through at close to market price, major correction may not happen. In fact, there might be upsides (unless of course, the management dreams up something else). The management of Network18 stock will garner money through its own rights issue and invest in TV18 rights issue. Therefore, the chances of higher allotment are very low (and since the rights price is very close to market price, why would I want to go for a higher allotment?)

The stated intention of the management is that total debt of TV18 would be re-paid and remaining amount would be used to fund the acquisition of ETV channels. The possible increase in revenue due to acquisition of ETV channels aside, this debt repayment has very interesting ramifications on the EPS of TV18.

Consider the P&L statement for the year ending March 31, 2012 (I am looking at standalone results. The consolidated results are much worse, and they are losing money at an operating level). The EBITDA of the company is Rs. 97.42 cr. The interest payment is Rs. 93.48 cr. That is, 96% of the money generated is funding the interest costs. What would happen if the interest costs vanished, since the debt would be extinguished? Let’s do a small financial exercise –

Assume revenue doesn’t increase (which is a pessimistic assumption, since ETV channels are going to earn some revenue). So, EBITDA, say will be around Rs. 97 cr. Now, there are no interest costs to service since the debt has been extinguished, utilizing the funds from the rights issue. Depreciation of Rs. 25 cr. Therefore, PBT is Rs. 72 cr. Due to accumulated losses over the past 6 years (yeah, they have been losing money in all six except the year ending 2012), taxes would be zero. Profit would be Rs. 72 cr.

Now, the equity base currently is 34 cr shares. March 2012 profit is Rs. 9 cr. That is Rs. 0.26 per share. The equity base will increase by 135 cr shares, taking the total equity base to 169 cr shares.

Therefore, technically (forget the interest of June 2012 quarter for a moment), the EPS would be Rs. 72 cr/169 cr =  Rs. 0.42 per share, an increase of 63% in EPS, without any increase in revenue. Of course, now we consider June 2012 interest and Sep 2012 interest (sum approx to Rs. 58 cr). That would bring down the EPS to Rs. 0.09/-, but that’s only in the short term.

If the tailwind of digitization works (Safir Anand’s pet topic) and ETV revenues flow through, at the very least, TV18 is going to earn a decent profit, maybe equivalent to March 2012 profit, but with zero debt. A stronger balance sheet ideally should propel this stock to greater heights. Even considering consolidated results, if the management pays off the entire debt as claimed, I think TV18 will generate a decent profit at the end of FY13. However, I am not buying. Too many ifs and buts.

P.S: If you are on twitter and not following Devesh  (@_devesh_) and Safir (@safiranand), you are missing on interesting conversations. Go, follow!

Disclosure: I have no positions in PVR and TV18 (or Network18). This is not investing advice. This post is only for analysis purposes and not a buy/sell recommendation.

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Analysis – FCCB Issue – JP Associates

Deepak Shenoy and I had an interesting conversation on Twitter today and I thought, instead of ‘storify’ing it like everybody does, and the ‘storify’ link getting lost in the melee, a blog would be better to capture thoughts. Also, the more I thought about this, some more details emerged. Hence the post.

Disclaimer upfront. There is no investment opportunity in JP Associates through this blogpost. This is only for informational purposes. I am not invested in JP Associates.

Amongst the wonderful companies that issued FCCBs in the boom period of 2006-07, JP Associates stood tall with a $400mn FCCB (I think only Tata Steel was more than that, at $875mn). As this note (which was also filed with NSE) on the website says, JP Assoc. issued $400mn worth zero coupon bonds at Rs. 854.33 (around Rs. 113/- in current pricing terms (they had a 5:1 split in 2007 and a 2:1 bonus in 2009)) with the conversion price being Rs.1238.78 (a 45% premium, which is erroneous – I’ll come to this in a bit) (Rs. 164/- in current pricing terms) (I am not accounting for $ to Rs. depreciation here – if you account that, then conversion price would be Rs. 220/-).

The CMP as of today is Rs. 64/-.

Needless to say, it is quite disastrous. The bondholders obviously did not convert their FCCBs and promptly demanded their money back. So, a few points here considering this past issue before we get to the present.

a) The conversion price was fixed at Rs. 40.35/- to the dollar. In hindsight, that was quite a stupid move by the FCCB holders considering that the rupee is now Rs. 55/- to the dollar (a 35% loss straight out). However, back in 2007, rupee was all the rage and people were talking of Rs. 32/- to the dollar (yes, even the CNBC folks). So yeah, tough luck. Since FCCB holders are usually savvy investors, ideally they should have (maybe, they have!) bought calls above a certain rupee-dollar equation to hedge forex risk.

b) The note (yes, the same note link as above) quotes a 45% premium. However it also mentions that YTM (yield-to-maturity) at 7.95%. In my enthusiasm, I overlooked the semi-annual* bit, and randomly used XIRR which gave me a result of 7.7%. I assumed it was roughly right and got along fine (I usually am fine with approximations rather than calculate to the exact decimal). However, Deepak pointed out that with a semi-annual it would come to 7.57% (for the curious, you need to use the YIELD function in Excel for this. XIRR assumes it’s annual). And indeed it was. Curiosity got the better of me, and I had to leaf through Annual Reports of JP Assoc. There it was! The premium was not actually 45%, but was issued at a 47.7% premium (based on which YTM promptly comes to 7.95%). How can you quote one figure in the ARs and one figure to the NSE is something I have no clue on? I couldn’t find any corrected NSE announcement either. Is this allowed?

Anyway, back to the present.

JP Assoc. as of Mar 30, 2012 had a debt of Rs. 50,300 cr. (CAT question: How many zeroes in that figure?). They had set apart Rs. 780 cr as redemption premium (as of Mar 30, 2012). Deepak informed me that they had paid off $50mn recently. So, out of $400mn FCCB, $50mn was paid off.

So, calculating, $350 mn remains. They raised $150mn just yesterday/today (I’ll come to this in a bit). So, remaining $200mn. If $ to rupee was not fixed at Rs. 40.35/-, the payment would have been Rs. 1100 cr. since the $ to Rs. was fixed at Rs. 40.35/-, JP Assoc. has to pay only Rs. 807 cr. Since they had already set apart Rs. 780 cr as of Mar 30, 2012, Rs. 807 cr by now shouldn’t be a problem. Rs. 300cr was saved by just fixing the $ to Rs. equation (imagine!)

That done, let’s get to the current deal of $150mn (done yesterday/today). This was also run by Barclays (even the last one was). Why did JP Assoc. go for another FCCB yet again? Well, apart from seemingly cheaper funding outside (risk of currency depreciation notwithstanding), there are other factors. As this Business Standard article explains

However, replacing FCCBs with other debt might cause a problem of a different kind. Though the accounting system in India does not require companies to account for FCCB interest costs on an accrual basis, for simpler debts the companies will have to account for the interest costs and that will hit the profit and loss accounts. According to Bloomberg and IIFL Research, JP Associates could end up with an additional interest of Rs 345.6 crore, which will impact the earnings per share of FY14 by 22.9 per cent.

Also, the redemption premium can be directly adjusted against the reserves’ accounts in the balance sheets. This means the debt-to-equity ratios of companies will rise, as adjusting the redemption money against the shareholders’ funds means the latter, or the reserves account, will go down by a similar amount.

Hence, FCCB is the route yet again (to pay off the previous FCCB and so on and so forth till we squeeze the last investor interested in the term ‘FCCB’ I guess!). JP Assoc. had applied for $500mn, got approved for $250mn (by ECB and RBI) and got funding for about $150mn. However, unlike the previous deal, which JP Assoc. got on very sweet terms (peak of the bull run, remember? the party would never end!), this time FCCB holders were smarter. Instead of a zero-coupon, it is a 5.75% coupon payable semi-annually. The conversion price is at a 10% premium to yesterday’s price, which is around Rs. 77.5/-. These FCCBs are redeemable in 2017 (hence approx. YTM works out to be 9.46%). There has been no circular at NSE yet, and hence we do not know how they fixed up the $ to Rs. conversion (which if you recollect has saved JP Assoc. close to Rs.300cr). 9.46% interest rate seems pretty darn cheap for a company with Rs. 50k cr debt, don’t you think (if they have fixed the $-Rs. equation that is)?

So, why did JP Assoc. stock tank today? Well, maybe the market thought that Rs. 77.5 as a conversion premium was a darn good deal for FCCBs and they would convert in 2017, leading to excessive dilution. Or maybe some major investor sold off. Or maybe there is some jhol. Or maybe, realistically, I might be gunning for the ‘expert’ position in CNBC who can explain every market movement with authority. Who knows? 🙂

*Semi-annual is what it says it is. Interest payable every 6 months (although compounded yearly). Most bonds are semi-annual. So, how can someone pay semi-annual interest on a zero coupon bond? Well, in case of zero coupon bond, that semi-annual stuff is used for calculation purposes only (calculating YTM for example). Interesting background story for this semi-annual stuff actually. It seems that this practice came through 100s of years ago when farmers used to borrow for their 6 month crop and hence interest rate back then (and hence coupon) was quoted semi-annually. Hence, majority of the bonds in the US atleast pay coupon semi-annually.

Disclosure: Not invested in JP Associates in any form (not even in their fixed deposit scheme – yes, they have one! check it out on their website). This post is only for educational and analysis purposes and should not be construed as advice for a buy or a sell.

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Special Situation: Thomas Cook (India) – Analysis for Delisting

On May 21 2012, Canada’s Fairfax Financial Holdings Ltd had signed an agreement to acquire Thomas Cook Group 76.69% stake in Thomas Cook (India) for Rs 817 crore. Fairfax Financial Holdings (Prem Watsa is a well known value investor), the parent company of Fairbridge Capital, has been strategic investor especially in the insurance sector. In collaboration with ICICI Bank, the company had created ICICI Lombard, one of the largest private insurance players in India.

Subsequent to the stake sale, as per SEBI regulations, whenever there is a change in promoter (or more than 25% stake is acquired), the acquirer has to come up with an open offer. And they did. 24.17% stake at Rs. 65.48 per share. The offer closed on July 25th, 2012. And post offer public announcement here.

Sl.No. 7.9 in that announcement is very interesting. The acquirer holds 87.1% stake in Thomas Cook (India). All delisting fans should get excited by this percentage. According to SEBI’s delisting deadline, the group has to either delist before June 2013 or reduce their % shareholding to 75% or below. Given the spate of delisting offers (and at exciting prices) (and these guys are just 2.9% away from 90%), is there a possibility of delisting? Or will they reduce their shareholding to below 75%?

Thanks to Ashish Kila, who forwarded me the Delisting and Takeover code document (the new rules, effective October 2011), the answer is that (with 95% probability*) Fairbridge has to reduce its stake to 75% or below. What are the exact rules?

  • If maximum permissible non-public shareholding exceeds, say 75%, pursuant to open offer – the acquirer is required to bring down his or her shareholding to 75% within the time specified as per SCRR (Securities contract regulation rules).
  • The acquirer, whose shareholding exceeds 75% pursuant to an open offer, cannot make a voluntary delisting offer under the SEBI Delisting Regulations, for one year from the date of completion of open offer.

The second point clearly illustrates that Fairbridge Capital cannot come up with a delisting offer since the date of completion of open offer was July 25th 2012 and one year later, the deadline would have passed.

Ergo, Fairbridge has to reduce its stake to 75% or below. Current holding of Fairbridge is 87%. 12% dilution to go (which is a fairly large block of shares). If I were holding Thomas Cook (India), there is an avalanche of shares that could hit the market any time and hence I would sell at this moment.

*I said with 95% probability since two things can happen –

a) SEBI can extend the delisting deadline for all companies. Nobody knows what SEBI can/will do. This delisting theme is quite a speculation that is going on.

b) Fairbridge is not an inexperienced investor. Far from it. They would have obviously known that they have to dilute their stake (I think Fairbridge acquired the stake at Rs.50/- per share from Thomas Cook Group) to 75% or below before the deadline. Or, or get an exception from SEBI. Some legal loophole which might allow them to hold on to their 87% stake and also do a delisting. I wouldn’t know.

Given that, on an expected value basis, this remains a sell at these levels.

Disclosure: I don’t hold the stock (neither did I ever buy it). This post is only for analysis and educational purposes. Kindly do not take this advice as buy/sell recommendation. Please do your own due diligence before acting upon any of the information in this site.

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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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Special Situation: Open Offer Analysis – Tata Steel’s Open Offer for Tinplate Company of India and Tata Sponge Iron

Last Friday (15th June, 2012), there was a corporate announcement by Tata Steel. It had announced an Open Offer for two of its group companies – Tinplate Company of India and Tata Sponge Iron.

Seemingly, there was some insider information trading already (hello, Rajat Gupta speaking!) going by the increase in stock prices of both stocks as seen below (courtesy: Moneycontrol)

Tinplate Company of India

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Tata Sponge Iron

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Of course, nothing can be proved in India and hence we can all rest easy and get back to Insider trading (kidding!).

Anyhow, I was all excited about this Open Offer since the closing price was Rs. 45/- for Tinplate Company of India and Rs. 306/- for Tata Sponge Iron. In my excitement, I wrote up an investment note about this Open Offer. I however didn’t realize that the announcement had come about after market hours and I didn’t consider the impact costs.

Please download the investment note (clicking on the link will automatically start a word document download) Open Offer_Tata Steel_Evaluation that I wrote up for the Open Offer. Even if using this document doesn’t generate any returns currently, it atleast has the framework to work on future open offers.

Looking forward to your comments/insights/learnings from past open offers.

P.S: I had shared this investment note with a few senior investors on Saturday. Thanks to Neeraj and Ankur, I realised that I have to include the following points in that analysis:

a) Consider impact costs. Ankur was a little gentle, saying that I didn’t consider impact costs in the calculations while Neeraj was a little more blunt saying ‘this is theoretically perfect, but practically, the market will not give you a chance since you didn’t consider impact costs’ 🙂 .

b) Tax implications: If and when you tender in an Open Offer, since you don’t pay STT, the gains are subject to taxes (long term and short term). The market will usually raise it up to a level where there is no arbitrage due to the tax angle. This is another angle that I need to add to my Open Offer framework note.

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Investment Note – Haldyn Glass Limited

I had shared an investment note with a few of my investor friends for their inputs and guidance about 6 months back. The stock is up 50% from the time of my investment note. Although I liked the prospects of the company (due to the reasons that will soon be clear), I was not too sure of its customers paying up (Kingfisher primarily) and some balance sheet vulnerabilities. Due to that, I had just taken a 2% allocation in the stock rather than more. In hindsight, I should have loaded up, but hindsight vision is always 20/20. So, no regrets.

The latest quarter results have been very encouraging. The year-end results indicate a 50% jump in EPS with a 66% reduction in debt. In fact, this stock came on my radar due to debt reduction. The other stocks that I am evaluating on this theme are Andhra Petro and Sanghvi Movers.

Disclosure: Still hold the shares bought in Nov’11. There has been some fraud to the extend of Rs. 16 cr (announced in Q4’12) that has presumably been written off against Reserves. Still evaluating. As of now, wouldn’t recommend fresh buying at these levels till some clarity emerges.

–Investment Note follows. This note was written in Nov’11 and hence will not reflect the latest figures. Views invited.

(Word document to download)

Investment Note – Haldyn Glass Limited – Debt Reduction theme

SUMMARY:

We have a

a) Severely undervalued company (the peers quote at much higher multiples, inspite of similar margins and return ratios)

b) Debt reduction (38% in just couple of quarters). Maybe more in the coming quarters.

c) Promoter buying

d) It is almost a debt capacity bargain (and the Graham number etc. is far above the CMP)

Views invited.

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