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.
13 comments:
Hi Ninad,
Seems a good opportunity to me. However, there is a time lag of 3-4 months between now & the actual consummation of the deal. What are the possible scenarios that could play out in between to make the deal more/less attractive?
Amit
Hi Amit
I typically like deals where this a certain amount of time lag because markets tend to lose interest and hence create better opportunity in terms of mispricing.
The biggest risk that i can perceive is the management going back on its word and not distributing the 100 crores. To be honest I would ascribe a low probability to it as in the first place as they didnt have to go on records stating that they intended to distribute the money to shareholders.
The biggest upside is if management chooses to distribute a significant chunk of this money thru a share buyback which they have stated would be directed towards minority shareholders. So effectively 100 crores will get distributed to 40% of the stakeholders as opposed to the scenario where dividend is announced.
Cheers
Ninad
Hey Ninad
this looks like a typical grahamian opportunity alright!!
Its an all cash deal.. But what are the payment time frames going to be. The deal if completed, will be by 30september right? There is a bit of debt restructuring to do here so timing of payments will be crucial to the benefits accruing in our favour.
Do you have any inkling as to the amount of topline and bottomline deterioration after the sale... Coz once the sale goes through the company wont have much to do apart from sitting on cash. And Indian management especially are not generally known as great asset allocators!!
Thanks in advance
Cheers
from what I have been able to find out Gwalior employs 400 permanant staff.330 of which are at the Nagda site. Extrapolating that into topline we can look at 50 to 60 crores annually. Margins might go up slightly coz interest coverage will go down dramatically. say 9 to 10 % net?
Hi Rev
The outside time limit on the deal closure is 30th Sept so the money's should flow in by then. I would assume a quarter more for the special dividend/ share buyback to fall in place.
My assumption on the Ankhleshwar plant in on simialr lines. About 60-70 crores with a 9-10 % bottom line. So thats about rs 4 of EPS from the residual plant.
The key is the RS 100 crore distribution that the management is talking about.
Cureent market cap about 220 cores - 100 crores leaving a residual market cap of 120 crores against which we have about 280 crores of cash and the ankleshwar plant.
My point is that even the management destroys value by poor capital allocation of siphoning out some money. There is still a lot buffer available.
Cheers
Ninad
Hi ninad
the biggest unknown here is how the market will price the stock after the special dividend/ buyback.
in case of the other arbitrage situations like ILFS which you mentioned, the unknown was delisting, but price was fixed by the law and hence the downside was limited.
in case of gwalior, the downside risk may be higher. there are several companies in the market (some i hold too) where the mcap is less than cash , and they have a profitable business to boot ..so the market is pricing the profitable business at a negative ..
rgds
rohit
Hi Rohit
One trigger point as I discussed in our mail exchange is when the share buyback/ dividend happens. The market could actually provide you a exit at that point itself.
In my analysis i havent factored in he tax cover that is available bcos of the dividend. So the stock could move up bcos of dividend stripping.
If one hangs on to the stock post dividend like a mentioned earlier at a market cap of 120 crores there is 280 crores of cash and a small profitable business.
I agree that there are stocks that are available at discuount to cash. The reason you are holding them Rohit and so do I is because we beleive that the market at some point will reprice like it did with HTMT.
It is not a risk free transaction but the dice is loaded in our favour.
Cheers
Ninad
Hi ninad
i agree, the odds are good here
hey Ninad
everything looks good. barring a black swan we ll just have to bide our time now, eh
tc...great call on il&fs!!
Hi Rohit
Lets see how it plays out. I am sure I will have some new learning at the end of this transaction.
Hi Rev
Yeah there is always the promotor risk. Gotta bide team and see.
IL&FS played out :-)
@Ninad,
so should I take the plunge, seems a good opportunity, I piggyback on your analysis?
Did I miss the train?
Hi Maverick
Missed u r comment earlier so failed to respond. I dont know what price point u were looking at.
Cheers
Ninad
Post a Comment