Wednesday, December 12, 2012

Orient Refractories - The heat is on.

Orient Refractories has a interesting past and a interesting future. It was born by demerging itself from Orient Abrasives which is a part of the Rajgarhia group. Orient Abrasives initiated a scheme of demerger through which for every one share of Orient Abrasives the shareholder received one share of Orient Refractories. The company got listed in March 2012 and had a interesting first few weeks in terms of price movements.
It was a demerger that I had tracked but didn’t see any potential value unlocking by virtue of the demerger transaction. What however piqued my interest was trying to understand the potential driving variable behind the demerger process. The refractories business was a great business with high ROE versus the Abrasives business which had poor financial ratios. The thought that crossed my mind was that the management was looking at selling off one of the businesses though it was tough to ascertain which one.
Fast forwarding in the month of May 12 there was a news article in the economic times talking about German group RHI being interested in buying Orient Refractories, The link is attached here. The stock of course rose on the back of this news and started trading in the 32 – 38 trading band as there were periodic news of this takeover. This made it interesting to dig deep into the company.
Some reading up on RHI and the concall + presentation for the June 12 quarter mentioned the fact that they were looking at a acquisition in India and the same would be closed by the end of the year. Parallely, Orient Refractories also initiated a VRS scheme, expenses for which were booked in the June 12 quarter. With the resultant time delay the market lost interest in the stock and stock drifted down to the 29- 30 levels where the position was built into the counter. 
The month of Oct and Nov saw flurry of activity again as the news of the takeover started surfacing again. Here’s a link to a new story in the Economic times.
Though there were standard denials from the company, what is really interesting is the current investor concall of RHI for Sept 12 - Link. The CFO  in the concall in response to a question explicitly mentions that they are talking to Orient Refractories and of course a few other players :-). Of course the deal horizon has got pushed back. The market in the meantime has pushed up the stock in the 38-40 range.
The market has anchored itself to the price point mentioned in the ET article of Rs 42 for the deal though I would be surprised if the deal was to happen at this price point. Factoring in valuations and precedents on some global deals coupled with control premium my expectation would be that the deal ( if it takes place :-)) should happen in the Rs 55-60 price range.  It would be a interesting next couple of months to check if things are heating up.
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