Tuesday, October 26, 2010

Punjab Alkalis - Divestment

I’ve had a long break from the blog. Part work pressure part inactivity to do with the current market activity level. Posting on a spl situation opportunity.
Punjab Alkalis - Divestment
CMP - Rs 42
Punjab Alkali is a PSU owned by the Punjab government. The government has initiated a divestment process by which they intend to sell their stake in the company. The government had called for bids for their stake and Aug 16th was the last date for submitting bids. On completion of the process the divestment will trigger a open offer.
News report from the Business Standard - August 16th
Fourteen companies, including Jai Prakash Associates, Nirma, Grasim Industries today submitted bids for buying stake in the Punjab government-owned Punjab Alkalies & Chemicals (PACL).
"We have received 14 bids from the companies for the disinvestment of PACL," Punjab Directorate of Disinvestment Director V.K. Singh told reporters here today.
Other companies which submitted their bids were Surya Pharmaceuticals, KUDOs Resources, Amtek Auto, Nectar Lifesciences, Goyal MG Gases, DCM Shriram Credit & Investment, KLJ Resources, Panoli Intermediates (India), Lords Chloro Alkali, Jay Polychem (India) and Bhushan Power & Steel
Some serious players like Grasim, Nirma and a bunch of players who I have no clue what they are upto.
The company has a 90000 TPA caustic soda plant and the associated chlorine & hydrogen plant. It is a loss making unit currently
Market Cap - 86 crores
Debt - 83 crores
Total EV - 169 cores
Replacement cost of this plant
On a conservative estimate setting up a 90000 TPA capacity would cost Rs 350 crores including power plant. Since Punjab Alkalis doesn’t have a power plant and which was the key reason for its losses, we can pare down the replacement cost to around Rs 250 crores.
Factor in additional cost for VRS and transactional costs we can expect conservatively bidding should be around the Rs 225 crores EV minus Debt 83 crores = Equity value of Rs 142 crores as opposed to current market cap of Rs 86 crores resulting in a spread of about 65%.
Like all divestment programs, there is always the risk of delay. To a certain extent the delay has already taken place. Of the 14 bidders, 12 qualified the technical round to put in the financial bids. The Divestment dept in the Punjab government has put the bids of the remaining 2 bidders to the ministerial committee. Post the ministerial committee meeting the approval for the remaining bidders will come thru and the financial bids called in.
Disclosure: I could have a position in the stock and I recommend readers to do their own analysis before investing in the stock.