So, it’s that day of the year where everybody looks at the year gone by – some with happiness, some with wistfulness and some others with a tinge of sadness. Nevertheless, everyone except for the greatest of cynics look forward to the new year with hope, enthusiasm and happiness.
So, here’s wishing all of you a fantastic happy new year 2014!
From an investing standpoint, I wanted to jot down some notes for posterity –
a) Performance: At the beginning of this year, I started deploying most of my capital towards equities. Right now, except for emergency funds (and gold and real estate of the old), most of it is in equities. Maybe it’s a sign that the market top is here and it’s all downhill from here 🙂 My portfolio’s return over the past 5 years is now 30.4% CAGR, helped massively by some decent investments I have made over the last year. 25% of my portfolio has been invested in HDFC Bank and that has returned 0% over the past 1 year. If I remove the best performing stock in my portfolio (which gives a slight indication of whether the portfolio is robust enough, and that you weren’t just ‘lucky’), the returns fall to about 22% CAGR. 8% CAGR difference is massive if you consider a long enough timeline – but for now, the portfolio seems robust enough, although there is a long way to go in terms of a perfect portfolio.
b) HDFC Bank: As I said above, it constitutes 25% of the entire portfolio and has returned 0% over the past 1 year. I have an idea of what to do with most of the stocks in my portfolio except this one. This is probably the bluest of the blue chips and has been with me for the longest time (esops) and has compounded extremely well. I do understand (and have read) that the stocks don’t know you own them and you need to be un-emotional about stocks etc., but this one is slightly special. Many a time, I have come mighty close to selling a portion (or all of it) to invest in other opportunities, but have held myself back so far. Other good friends of mine have suggested to take the option of LAS (loan against securities) against this. Somehow, I am slightly averse to leverage. Anyway, this stock has been my biggest dilemma of 2013. Behavioral science is that much more tougher to implement when one stock is a runaway success.
c) Friends: To begin with, they were just acquaintances who used to interact regularly on investing forums like valuepickr and whatsapp groups. Slowly, over many conversations, and on everything under the sun, this year has been amazing in terms of getting to-gether with like-minded friends and learning a lot from them. It is my belief that incremental CAGR will come, not just by reading and working on your own but also consulting with like-minded friends who can teach you a lot about investing much faster and point out behavioral flaws in the nicest manner. This easily has been my biggest benefit of 2013 and hope to continue in 2014 and beyond.
d) Mistakes of Omission: Well, I would not call them mistakes because I had consciously avoided them after reading up on their businesses. These businesses have gone on to becomes doublers in about 6 months or less. One of the changes that I have noticed over the past year is that I no longer feel the need to ‘catch-up’ or ‘missing out’ on a stock. Stocks like PI Industries, Acrysil, MPS etc. have doubled in the last 6 months. I had read about them but didn’t invest in them. The reasons are many – I either didn’t understand the business completely or didn’t like the management or didn’t understand the competitive landscape well and hence didn’t invest in them. I maintain a 7-10 stock portfolio most of the time and I can’t afford not understanding a business/not understanding the triggers for growth/not able to track more details on the company. I am not really too worried about mistakes of omission (and I honestly think nobody should unless their capital is massive).
e) Mistakes of Commission: This one gets my goat. Thankfully, there have not been too many of them this year. However, I did lose 0.5% of my portfolio capital on one single stock – CP labs this year. In fact, I sold the stock at a 20% loss and the stock has promptly moved up 50% from the time I sold – talk about wonderful timing 🙂 This stock had all the wonderful influences of psychology while buying it and also while selling it. A story for another day perhaps. Other than that, lost tiny bits of money on APW President delisting and Cravatex (I kick myself for this investment – as it was on a whim, a bias for action than anything else). The takeaway for me from this year is to not invest on a whim and not get taken by the influences of psychology. Both are of course extremely tough to do, but that’s the challenge, ain’t it?
f) Unsatisfactory Profits: This is a strange case where I made some good profits, but am still unhappy to have take then decision to buy (and then sell). The stock case in point is Avanti Feeds. I saw massive value when the stock declared its Q1 results this year and bought quite a bit in my portfolio (at around Rs.170). The price kept increasing from then on, but I was on tenterhooks all the time – especially because there were so many variables to track. Inspite of all the assurances from various forums, I was really not comfortable holding the stock and tracking the stock on a daily basis (can’t do because of my day job). So, I sold – in the range of Rs.240-Rs.265. Decent profits but not satisfactory. I really want to get into a system of investing in stocks with not too many variables in 2014 and beyond, especially the ones that don’t keep me on tenterhooks every day.
g) Special Situations: As you would have noticed over the past year, I have not written about special situations on this blog (or actually, written on hardly anything at all). I have stopped analyzing them for multitude of reasons – a) I have realized that they are very intellectually stimulating but not very monetarily stimulating, considering effort vs return b) They don’t end up giving me the comfort of compounding and am exposed to reinvestment risks c) Too much competition chasing too few special situations, resulting in hardly any arbitrage. I may invest in special situations in the future, but they are going to be very few in number.
Hope to blog more in 2014. And wish you a very happy and prosperous new year.
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).
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 –
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)
Today was a very humbling experience. I did a mammoth exercise of plugging in all numbers since the time I have been investing (6 years). This included stocks, debt (this is a combo of debt mutual funds+cash – not loans), equity mutual funds, one ULIP (yes, I had one ULIP). I didn’t consider PF. Over the past 6 years, my CAGR is 18.2% as of today’s closing prices. And here I was, thinking that I was doing 30-35%.
A few facts upfront, before I dive into details:
i) My broad portfolio as of today is 39% in Stocks, 23% in Debt and 39% in Real Estate. The real estate consists of my home back in my hometown. Technically, it is an asset (I have already paid off the entire loan) but my parents live there and I don’t think I’d be selling the house ever (unless, a massive black swan strikes).
ii) I have not included Gold in the portfolio calculations. Gold is an asset, inflation hedge etc., but we Indians never sell Gold unless and until it’s an emergency. So, again, technically, it is an asset but not really. If I include Gold in the total assets ratio, it’d be 34:20:34:12 (S:D:R:G).
iii) In general, I have tried investing as carefully as possible (one of the prime reasons being, if I fail, I don’t have a inter-generational wealth to back me and pick me up again). This also included taking max. term insurance to protect my family from black swan.
iv) Although I am invested in stocks since 2007, active investing was only since the last couple of years. Before that, it was a combination of pure luck for gains, and pure speculation for losses. The last couple of years have been pretty good in terms of % gains, but not very high in absolute numbers.
Alright, that story done, let me dive into a few details.
a) Let me put the 18% CAGR in perspective. 18% handily beats all ‘Large&Midcap’ and ‘Midcap&Smallcap’ funds. However, my target has always been atleast 25% (else, not worth the effort). My aim is to hit 25% p.a on average till I hit atleast a 8-figure number on the Stock+Debt portfolio. So, 18% did come as a big bummer. Here I was, thinking I could easily beat the markets, value the business, discuss and argue cogently with hallowed investors and then there was this number that stared me in the face (I double checked the numbers, just to ensure I have not under-performed, willingly).
b) The last 2 years of active investing has been pretty good, but so has the record of the midcap/smallcap market in the past 2 years. If I eliminate the first 4 years of my passive investing, the last 2 years CAGR came to about 40% p.a. This again, is due to a combination of extreme luck (forums like valuepickr/theequitydesk in no small measure), effort (constant lurking on wonderful blogs like I mentioned before) and a bit of reading (which helped me avoid the dumbest mistakes). However, since there were a host of factors like paying off my home loan, wedding expenses (oh my!) etc., the lack of sufficient capital led to not much of absolute capital appreciation. I hope I can sustain this luck and learning for a long time so that my capital grows too.
c) Drilling down to the details. HDFC Bank is a clear winner, not much in % terms (it’s like 5x in 6 years) but I put in a quite a lot of capital. In fact, I would boil this down to luck too. I accrued ESOPs since I worked for HDFC Bank, and I bought all ESOPs that got accrued when I left the Bank (split-adjusted price of Rs.125/-). In fact, I had taken a personal loan to buy all the options. Thankfully, Mr. Puri is carrying the Bank along well. A combination of extreme luck (working for the bank and hence ESOPs) and monstrous stupidity (taking a personal loan to buy stocks) – but it is now an anchor stock and has served me well. Too bad, I didn’t buy this one yet again in the 2009 bear market.
d) Out of the 38% in stocks, 10% of it is in a venture. When I mean, venture, I mean an unlisted company. There is this very good friend of mine who had an aeronautical spare parts company. He was committed to his company and grew it by leaps and bounds. He then got an opportunity to tie-up with a major company and asked me if I’d invest. I knew this guy to be honest&committed, he was putting in a lot of his personal stake, and the major company also put in 50% of the total capital. I saw a large scope of opportunity and committed management and invested 10% of the stock capital in it last year. Thankfully, it is going well. Of course, if and when the company goes for an IPO, I am committed to write a glowing IPO note to pump the stock :). Let’s see how far this goes. Yet again, outlier event, extreme luck of having him as a friend, and he asking me if I’d be interested in investing.
e) In the last 2 years of active investing, forums, blogs and books galore. Inspite of major undervaluations in very good stocks shared by one and sundry, I had the heart to commit major capital to only two stocks – Mayur Uniquoters and Atul Auto. Of course, I have exposures to Astral Poly, Kaveri Seed, Muthoot Capital, PEL etc., but even if they go 3x, at the current capital allocation level, they are not going to make much of a difference to overall wealth. Inspite of multiple people urging me that ‘Pharma’ was simple, it was simply my laziness and lack of interest that I didn’t dig through the story of Ajanta Pharma/Unichem etc. Ajanta Pharma, in hindsight of course, was a major miss. This 40% p.a return in 2 years, I would admit, involved a lot of effort, apart from luck. Effort in reading up valuepickr/theequitydesk every day and see if I can invest in a stock or not.
f) In essence, if you remove my top 4 stocks – HDFC Bank, Venture investment, Mayur Uniquoters and Atul Auto, my portfolio % returns is okish, but the absolute capital is very meager. It is surprising how Buffett’s rule (top 25% stocks make most returns) is discrimination-less even for an amateur investor like me.
g) Of course, contrary to Buffett’s rule, I have made far more than 20 purchases (20 punch-holes). And in most of them, the returns are less and some are even negative. I should have just stuck to buying more of the success stocks rather than diversifying into many and multiple.
h) As I was doing the analysis all of today afternoon (I had to pull out 6 years worth of reports etc.), the experience was very taxing and liberating at the same time. I understood some of the mistakes I made, some of the portfolio allocation decisions I took, portfolio sizing problems that I encountered and will encounter in the future etc. So to say, it was a meditative experience. Till, I hit the ‘Enter’ button on the XIRR formula. After that, everything came crashing to the ground, which is currently leading me to deep questioning and introspection. I don’t know what will come out of it though.
Not sure if this post helped you in any way. Not sure if 3 facts and 8 ramblings made the post long and/or boring. The key takeaway though is I needed extreme luck and constant lurking on different forums to make any of my gains 🙂
I look forward to interactions with any senior investors reading this – a) Were you in this situation before? b) How do you go about correcting flaws in thinking/approach? and any other tips/tricks to help me survive and grow in the market.
P.S: If you are a novice/amateur investor, and haven’t done the exercise of pooling in all the stock&debt portfolio at one place (I recommend Google finance, simply for the reason that excel sheets tend to get lost in nested-nested-nested folders with the same names), please do so. I can assure you, even if the XIRR value is not too exciting, the very fact of putting down those numbers is tremendously educative.
DISCLOSURE: The stocks that I mentioned or referred ARE NOT be taken as recommendations for a Buy or a Sell. Please do your own due diligence before investing.
These guys were also known as Brescon Corporate Advisors till a few months ago (just in case you’d like to check on brokerage reports of the past – if there are any).
I will evaluate this special situation combining the principles/questions outlined by the Prof in this post (which, needless to say, is a must read for anyone who wants to do risk arb and the complexity is getting complexier and complexier 🙂 ) along with the analysis I had done for Tata Sponge Iron/Tinplate company in my previous post.
This open offer was brought to my notice by my friend Ashish Kila today morning. Also, at today’s closing CMP, there is no trade that can be done in this open offer on a profitable basis. This post is only for analysis (which reminds me, I need to come up with a mindmap kind of thing for open offers after the Prof’s complete post on the risk arb problem).
Anyway, Nusarwar Merchants Pvt. Ltd. (NMPL) has come up with an open offer to buy 26% of Brescon at a price of Rs. 123/-. Today’s current CMP is Rs. 113/-. The genesis of this offer was a 33.75% buyout from certain sellers (looks like a part of the promoter group, also called ‘persons acting in concert’ in the latest AR) in Brescon on 29/Sep/2012 and hence this open offer is a triggered offer. Here’s the link to the open offer.
Let’s go through the Prof’s questions to analyze this then (and given that all regulatory approvals are through and the chances of any regulatory surprises are close to nil, the relevant template would be template #2).
a) What’s the expected return of this operation?
Ans. The current CMP is Rs. 113/-. The offer price is Rs. 123/-. Payment would be done by Dec 25th, 2012 according to the schedule (2 months from current date). Since 33.75% has been acquired, theoretically, 66.25% can tender. Theoretical acceptance ratio would be 26/66.25 = 39.24% (approx to 39%). Let’s say I buy 100 shares and I expect the price after the open offer closes to be Rs. 100/-.
Investment = Rs. 113 * 100 = Rs,11,300/-
39 shares would be accepted at Rs.123/-. 39*123 = Rs. 4797 (Rs. 390/- would be the gain, on which 30% marginal tax would be applied since STT wouldn’t be applicable while tendering, but I’ll ignore this for now)
Remaining 61 shares would be sold at Rs.100/-. 61*100 = Rs. 6100/-.(a loss of Rs.793/- can be used to offset short term capital gains, if any)
Total return = 6100+4797 = Rs. 10897/-
That is, Investment > Total return, resulting in a loss, assuming a theoretical acceptance ratio.
b) Should you look at fundamentals of the target company? Why or why not?
We should certainly look at the fundamentals of the company since there is a chance that we can acquire shares of a good company at a very low cost. However, in case of Brescon, after looking at the fundamentals over the last 2-3 years and this slump sale arrangement (where they sold Brescon Corporate advisory business to their own subsidiary company on a slump sale basis citing some convoluted logic, read Item No. 3 on Page 6 of that arrangement for starters), I am not too comfortable in acquiring shares of this company for the long term.
c) What is the likely acceptance ratio i.e. how many of your shares are likely to get accepted under the offer (theoretical vs. practical) and what key factors will govern that ratio?
The theoretical acceptance ratio is 39% as stated in a). The practical acceptance ratio might be different. Given that only one part of the promoter group has sold out, the remaining promoter group has approx. 24% of the shareholding. Since this looks like a voluntary sellout by one part of the promoter group, the rest of the promoter group may not participate in the open offer. However, the chances of the promoter participating is non-zero. The retail shareholding is close to 20%. On a historical basis, not all retail investors have tendered for various reasons. Let’s assume 5% brain dead investors then. Let’s look at the two different scenarios then (am assuming the rest will tender) –
|1||Promoter group doesn’t tender; 5% brain dead investors||71%||Highly likely||70%|
|2||Promoter group tenders; 5% brain dead investors||43%||Probably not||30%|
A few calculations summarized in the table below –
|No of shares||100|
|Price post open offer||100|
|Acceptance ratio 71%||333|
|Acceptance ratio 43%||-311|
|Expected value per share based on probabilities above||1.40|
|Gain% on expected value on an annualized basis||7.50%|
Therefore, we’ll have a gain of 7.5% on an annualized basis without considering the effect of taxes, service tax, cess etc. This is poorer than the return if we invest the same money in a liquid plus mutual fund for 2 months. Hence, this opportunity is a pass.
d) How can you use the “inversion” (invert, always invert) trick to estimate market’s assessment of the acceptance ratio?
Ans. Let’s assume that the market cost of capital is 12%. That is, 2% for 2 months of money.
CMP is Rs. 113/-. At the end of 2 months, at the market cost of capital, the money should have been Rs.115.26. We can find the market’s expected acceptance ratio by
Rs. 115.26 = Offer price * Accepted shares + Remaining shares * Resultant share price after open offer.
Plugging in the values,
Rs. 115.26 = 123*x+(1-x)*100 and solving for x, we get an acceptance ratio of 66.34%. That is, the market is pricing to almost close to the best case scenario (refer table above) where the rest of the promoter group doesn’t tender and there are 5% brain dead investors. This is clearly very optimistic and hence the chances of a substantial upside is close to nil.
e) Should you borrow money to do this operation? Should you have done it in Template 1? Why or why not?
Ans. With the expected value of 7.5% p.a, and being a retail investor, I cannot borrow at less than 12%, if not more. This clearly is a losing operation for me. Hence, I wouldn’t borrow for executing this operation.
a) There is certainly a price at which this operation can deliver a lot of value. Between now and 11 December 2012, if the market price of Brescon falls below say Rs. 100/-, this operation will have a quite a bit of value. It is not profitable just right now.
b) I have not considered the scalper syndrome scenario where you buy at Rs. 113/- and say if the market shoots up and if the price goes to Rs.118/- by end of next week, you can make some returns in quick time. However, then I would be speculating than evaluating.
Disclosure: No position in this open offer. This post is only for analysis and not for investment purposes.
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.
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).
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.
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.