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.
Opportunity
The company has a 90000 TPA caustic soda plant and the associated chlorine & hydrogen plant. It is a loss making unit currently
Valuations
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%.
Risk
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.

9 comments:

Siddharth said...

Hi Ninad,
Good to have you back. I have a few questions.

1. How did you arrive at the replacement cost of 350 Crs for the plant(the capacity is 99,000 rather than 90,ooo i suppose)??

2. The company has comfortably made 25cr+ Free cash flow during the 3yrs from 2007-09. However what was the reason for the loss in 2009?? Was it due to the recession??

3. Is the stock cheap to hold onto even if the deal doesn't go through??

Ninad Kunder said...

Hi Siddharth

1) Meghamani organics just commissioned a chlor alkali plant of 1,10,000 tonnes capacity which cost them 550 crores including power plant. I have conservatively taken Rs 350 crores assuming a depreciated plant.

2) 2009 caustic soda prices crashed and there was a lot dumping from china that took place. Also one of the key raw materials for caustic soda is power. And Punjab had severe power shortages which affects Punjab Alkalis since it doesnt have a captive power plant.

3) I m not comfortable holding the stock if the deal doent go thru primarily bcos of lack of power plant.

Cheers

Ninad

Kiran said...

Hi,

I may have hit on a speical situation but am not too sure -

The UB group bought out 54% of Pioneer Distilleries at Rs. 101 when the price was Rs. 69. According to SEBI guidelines, they are buying a further 20%, maybe at a similar price from the minority shareholders in November. The current price of the scrip is 83. That's a gain of approx 20%.
Here's what I don't understand - a) The difference in the price of PD between NSE and BSE is Rs. 20 (Rs. 63 in NSE, Rs. 83 in BSE)
b) If they are buying out in November, why Rs. 83? Why not Rs. 95-100?

Did you come across this? Can you provide us with insights?

Ninad Kunder said...

Hi Kirna

I havent analysed the Pioneer Distilleries opportunity in depth but some basic inputs.

1) I see the same price on both the BSE and NSE so I dont know from where u have different data points.

2) The open offer is for 20% of the remaining shareholding of 46%. So effectively one can assume 50% of u r holding will be accepted at Rs 100 giving u a 20% return. The imp question is what happens to the remaining 50%. At what price will the stock trade post the open offer for u r exit.

That will determine whether the opportunity is profitable or not.

Also i dont think the SEBI approval has come thru for the open offer so there could be further delay to the process.

Cheers

Ninad

Mahendra said...

Hi Ninad,
Happy Diwali . I am big fan of your value picks . Can you please give me advise on HB Portfolio Ltd .

At current price of around Rs. 42 market cap of HB Portfolio Ltd. is around 50 crores. As per annual report 2010 company has Cash & Bank Balances more that 14 crores(Precisely Rs 140643338) on consolidated balance sheet . You can access annual report from company's website.So, effective market cap after reducing cash is 36 cr. Company does not have any debt .Can you imaging how much stocks and mutual fund unit this company hold ? As on 31st march 2010 value of stock portfolio is 185 cr (Rs 185,13,13,967) and mutual fund units of 10 crores (Rs 9,98,89,044) . Company is also having unquoted investment worth 39.29 crores (Rs 392897303) in associates companies at book value. For more details refer blog http://value2wealth.blogspot.com/ .

Anonymous said...

hi mrninand kumar,
wuld u comment on zenotech labs,is it decent value pick at these level,as there is no catalyst now but wuld u rate it into decent value pick now for long term of 5-6 yr or give it a pass
regards
dr

Anonymous said...

hi ninad
whtr ur views on ramsarup industries
tnks in advance
rajesh

Smart Singh said...

Hi Ninad,
Please have a look at my blog. If you like it, plase add me to your blogroll. I'll return the favour.

Anonymous said...

Excellent work. Remain submitting posts!