Saturday, June 27, 2009

Gwalior Chemicals - Update

I already written about the Gwalior Chemcials deal with Lanxess and the investment opportunity. As part of the process the company has sent across the notice for the postal ballot. I am enclosing a link to the same.
The management has reiterated its decision to distribute Rs 100 crores to the shareholders in this communciation.

Wednesday, June 24, 2009

To wait or not to wait

In one of my previous post Reverend put across a query to me and i quote

“Your views on Mphasis as a potential delisting candidate? An article I came across suggests that HP has no listed subsidiaries in the 170 countries it operates and makes a case for delisting. They have cited Digital (a subsidiary of Compaq) which they delisted. Happened in 2001 or so.. Your insights please?”.

It’s a interesting question and I understand the thought process that goes behind this opportunity. I have also in the past and continue to analyse similar companies.

Lets examine the structure of evaluating such a opportunity.

Mphasis was acquired by EDS which subsequently got acquired by HP globally. HP globally doesn’t have listed subsidiaries and at some point of time would probably go in for a delisting exercise for Mphasis.

The logic is fair and there is strong likelihood of this happening. The important question is when? Next month, Next year or 5 years down the line.

This is a huge uncertainty that one has to live with. Mphasis currently quotes at about 393. In the intermittent period till the delisting happens what level could the stock go down to. This is absolutely critical which leads us to the next stage.

Would I buy Mphasis without factoring in a delisting opportunity? Am I comfortable with financials, performance, industry outlook etc of Mphasis? Is there a margin of safety in the stock without the delisting?

If the answer to these questions is yes? Then it makes sense to look at the opportunity. If intrinsically one is comfortable to hold Mphasis then a possible delisting is a added bonus.

Else one needs to factor in the possible downside in the stock, the likely timeline for a corporate action and the opportunity cost with respect to the general market.

I hold a stock where there is similar logic waiting to play out. Will write on it in my subsequent posts.

On a side note Reverend, I wouldn’t see a straight delisiting exercise in Mphasis. EDS currently holds about 60%. If they were to do this I would expect them to do it 2 stages. Phase 1 do a open offer and increase their stake to either 75% or 90% based on the listing requirements and then in Phase 2 actually go thru the delisting process.

Remembered a old Rafi and Asha song on this ….
ham intezaar karenge
ham intezaar karenge tera qayaamat tak
khudaa kare ke qayaamat ho, aur tu aaye
ham intezaar karenge …

TCS - Management Stockholding

I saw some interesting piece of information in yesterdays ET in the insider trading disclosure on TCS. The top management of TCS got alloted the following number of shares by virtue of the 1:1 bonus issue. The actual holding is double of this.

Mr Ratan Tata - 761628
Phiroz Vandrewala - 50304
N Chandrashekaran - 44264
S Ramadorai - 99560
S Mahalingam - 80840
Mrs Lalitha - 60

Came as a surprise to me that Ratan Tata owns stock in TCS in a individual capacity.

Sunday, June 21, 2009

Book Review - Market Panic

I just finished reading the book “ Market Panic” by Stephen Vines. I would say more like browsed through it. The book is ok read slightly repetitive but did have a few good things.

I liked the author’s structure on the various stages of a stockmarket cycle leading to the final panic exit that most markets demonstrate at the end of the cycle.

Listing down how the author has described the various stages of the cycle

Stage I
The cycle starts with some kind of external shock the system that creates important opportunities for atleast one sector of the economy. It could be a event like a war or new inventions like the railways or more recently the rise of the internet

Stage 2
This boom then gets enlarged largely fuelled by expansion of bank credit expanding money supply ( Greenspan being a case in point).

Stage 3
With greater liquidity in the system euphoria takes over and as “Adam Smith” put overtrading. This results in greater trading volumes and higher level of speculation and leverage that builds into the system

Stage 4
As the author quotes “There is nothing so disturbing to one’s well being and judgement to see a friend get rich”. So everyone one wants to get rich. People who haven’t thought of entering the stockmarkets suddenly start investing in the markets.

Stage 5
The real danger signals starts when the stockmarket news moves from the inner pages of non financial newspapers to the front pages. I quote the author “Illustrating this point was the alarming appearance of mutual funds as a “Playboy” cover story. When stocks replace scantily clad young ladies who are well endowed on the cover, logic has clearly taken a holiday’.

Stage 6
Not only does the stockmarkets get inundated with inexperienced participants but their very presence increases demand leading to the temptation and opportunity for many new equity issues designed to capitalise on the window of opportunity for selling all manner of assets at an inflated price. This also leads creation of new derivative products allegedly aimed at sophisticated investors increasing leverage in the system and building pressure. This starts process where lenders start calling in additional margin with central bankers stepping in to deflate the bubble.

Stage 7
As the bubble grows the markets starts losing all sense of connect with the underlying assets.

Stage 8
At this stage a number of scams and dubious investments start coming out. This is interesting as a symptom if not the cause of stockmarket panics.

Stage 9
At this stage the savvy investors sense the top and start exiting from the market. Newer players are unsure and tend to stay put resulting in brakes on the rapid upward price movement. As the “greater fool” becomes difficult to find there is increasing movement from assets into cash resulting in depressing prices leading to unwinding of leveraged positions.

Stage 10
Now the market is in full retreat and there is competition to get out or the rush thru the door. This is typically led/ followed by the dramatic failure of a bank or other institutions or a particular scam.

Stage 11
This is final stage where the very assets which were darlings of the market become the object of revulsion and there is a market wide panic that builds up invariably leading to the regulator putting on cap in terms of limits or acting as a lender of last resort to bring stability and confidence to the markets

I have personally seen about three cycles and I can say that this is a fair template of how the markets move. Of course to add to it I always hear the magical four words “ This time its different” :-).

Tuesday, June 16, 2009

IL&FS Investmart - Bingo :-)

I had earlier posted here on a special situation transaction covering IL&FS Investsmart and Dabur Pharma. I had just few days back put in a update on the status of this special situation transaction.

IL&FS Investsmart today came out with a announcement that its promoters HSBC are seeking to go in for a delisting :-) Whoopie. The link is enclosed here.

Atleast one leg of the transaction paid off and will hopefully deliver some good bottomline. Lets see how the market reacts to the news tomorrow. I expect the delisting to happen anywhere in the Rs 200 to Rs 250 band. The original price of the transaction was around Rs 84. Will come back with more updates on this as and when the transaction moves forward.

Friday, June 12, 2009

Gwalior Chemicals - Economic Times Update

I had posted earlier thru the week on a special situations case arising in the Gwalior Chemicals stock. The economic times today put out a article on similar lines and I am enclosing the link here to the article.

I am reassured that I haven’t got the numbers wrong or have missed something in my analysis because the economic times argument and numbers are in sync with what I put out in my post.

It of course is now upto the market how they want to value cash especially one which is coming tax free in the hand as opposed to letting it lie in the bush.

Dabur Pharma & IL&FS Investmart Update

I had in the month of November written a post on a potential arbitrage opportunity covering Dabur Pharma and IL& FS Investmart.

A lot of water has since flown below the bridge and due to the fact that I have been irregular on the blog I didn’t put out a update on the opportunity.

The basic premise was the fact that post their respective open offers the promoter holding on both these companies had crossed the 90% mark. The bet was that either the promoters would have to sell their residual stake and bring it below 90% or delist the company. In case a delisting was to take place then the promoters would have to offer the last open offer price to the remaining shareholders.

I m listing down what was the potential payoff matrix at that time.
Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%
IL&FS Investmart
Current Price – 84
Exit Price - 200
Delisting Return - 138%
Potential Downside - 20%
Possible scenarios
1) Both get delisted - Returns - 118% ( Too good to be true :-)) – Probabaility – 25%
2) Dabur delisted, ILFS stays listed - Return 39% - Probability – 25%
3) ILFS delisted, Dabur stays listed - Return 59% - Probability – 25%
4) Both stay listed - Return (-20%) Probability - 25%
Potential Payoff - ( 0.25*118% + 0.25*39% + 0.25*59% + .25*(-20%) )= 49%

Now the update on this arbitrage bet.

Flawed understanding
My understanding of the process was flawed in terms of what happened when promoter holding goes beyond 90%. I spoke to a investment banker who is in the capital markets domain and this is the download that I got.

Delisting happens once the public shareholding fall below the minimum level as defined in the listing agreement. This need not necessarily be 10% but could be higher at 25% also. Once the public shareholding falls below the minimum level then as per the delisting laws the exchanges will give the company one year to comply with the listing norms. The promoter in the meantime has to either dilute or make a reverse bookbuilding offer for delisting. The price that is thrown up through this is the price at which delisting will take place.

Dabur Pharma Update

Fresenius Kabi which chose to acquire Dabur Pharma chose to dilute its holding by making a preferential allotment to Atlas – Vermoegensverwaltungs at a price of Rs 44.95.

This enabled them to bring down their holding to the 90% mark and continue with listing Dabur Pharma which has now been renamed as Fresinius Kabi Oncology Ltd.

The original premise of the arbitrage didn’t play out in this case. However the current stock price of Dabur Pharma is Rs 50. A return of about 30% over the investment price of Rs 38.5.

IL&FS Investmart Update
In case of IL&FS there has been no update with HSBC not making a move either in diluting stake or a delisting offer.
However the last few days the stock has been gradually moving up on the circuit. Maybe the market is smelling some corporate action playing out. The stock is currently at the Rs 140 mark generating a return of about 66% on the invested price. Waiting to see how this arbitrage plays out.

Thursday, June 11, 2009

Gwalior Chemicals - Special Situation

Gwalior Chemicals announced on the 8th of June that it was selling its chemical business to Lanxess. The total enterprise value of the deal is Rs 536 crores with Lanxess taking over debt of Rs 156 crores. The equity value accruing to the company would be Rs 380 crores. The company would be still left with a plant at Ankhleshwar.

The management has gone on record saying that they intend to return 100 crores out of Rs 380 crores to the shareholders either thru a one time dividend or share buyback.

The current equity capital of the company is Rs 24.67 crores.

So we are saying that the shareholder will accrue a sale value of Rs 154 per share out of which the company intends to return approximately Rs 40 per share either in the form of dividend or share buyback.

The current stock price of the company is Rs 92. A classic Graham opportunity. Either the market hasn’t figured this out or there is something that I m missing here. Looks like a very attractive deal.