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.
1)      The articles that are posted on this blog either stock specific or otherwise should not be construed as investment advice to buy/ sell stocks. These are sharing of my thoughts for discussions.
2)      As a analyst and investor I may have positions in stocks discussed on the blog and may exit these positions without intimation.
3)      Please do not base your buy/sell decision purely based on the articles in the blog. Do carry out your own diligence before your base your decisions.


Anonymous said...

Nice analysis and thanks for sharing the tracking info.

However I have a question. You seem to imply that the parent co demerged this co to potentially sell it. You also feel that a significant premium to market value will be achieved when the M&A happens. If this is so, why did the promoters let the public hold 51% in this co? Is it because of the 1:1 ratio of demerger? Even so, promoters in India normally extract more value/disproportionate benefit for themselves when demergers happen. What is your take on this?

Ninad Kunder said...

Hi Anon

I have not implied that the parent did the demerger to sell it. We don't know that yet. That was the thought that crossed my mind and hence became the starting point for digging deep. There is a another company where a similar exercise is underway and that also gets me wondering.

I agree that a lot of promoters would have used the scheme of arrangement not thru the demerger process but thru a amalgamation process by merging in some privately help company at some insane valuation to increase their valuation. Well the promoters havent done that and you will agree I cant be complaining about that :-).


Ninad Kunder

Anil Kumar Tulsiram said...

Hi Ninad

Excellent analysis. Based on your post, I did my analysis and have posted it here Would love you have your feedback.

Another thing, apart from Tata refractories acquisition by • Krosaki Harima Corporation, I could not locate any other acquisition details. Can you please help with details on other global M&A, if any.


Ninad Kunder said...

Hi Anil

Thanks. Would go thru your post on valuepickr.

There is the Carborundum acquistion of a RHI asset in South Africa RHI Isithebe though i dont think the valuations are in the public domain.

You can check the 2008 acquisition of LWB by Mangnesia which happenned at 8.8 EV / Ebidta.




I am just amazed at the rate of economic progress in countries like India and china. Western europe and the united states are not yet fully aware of the rapidly changing balance of economic power taking place right now.