Punjab Alkalis Update

I had earlier written on the opportunity arising out of the possible disinvestment of Punjab Alkalis by the Punjab state government.
The opportunity seems to have taken a ominous turn with an update that I read on the website which states that no bids have been received before the due date. The link is enclosed below
http://www.pbdisinvest.nic.in/html/approver_current_status_PSU.htm
Though I cant make out whether this is a old update when initial interest for the disinvestment was called for or a fresh update for the financial bids. Part of it could originate from the floor price that the government has defined or structure of the deal.
There could be fresh round of bids called with some concession from the government, I would rather err on the side of caution. Considering there is no valuation comfort, it makes sense to exit the situation without having to live thru the risk.

Humour in Results

It is my honest belief that there is a lot of humour all around us if we look at things with a slightly open mind.

As I was browsing through announcements on the BSE site, I came across a interesting announcement made by Gujarat Alkalies and Chemicals ltd regarding their results.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Gujarat_Alkalies_and_Chemicals_Ltd_140211.pdf

In the Press release Shri Guruprasad Mohapatra, IAS, MD of the company announced that financial ratios have improved significantly at the end of the third quarter as compared to year end March 10

1) Price Earning Ratio - 13.15 times from 5.37 times

2) Current Ratio - 1.68 times to 1.56 times

3) Debt Equity Ratio - 0.13 times to 0.17:1 times

4) Book Value - Rs 193 from Rs 185

Now you would wonder what magic did the management did to improve PE ratio. It is news to me that management’s are now beginning to be judged by how well they can talk to the markets and improve their PE ratios.

Coming down to the magic that the management did to improve this PE ratio. It was a goal that they achieved by reducing the nine months profits of the company from 86 crores to 58 crores. Forget the price just reduce the earnings. I m waiting for the day they bring down the profits to zero and increase the PE ratio to infinity :-).

Midday / Nirma Update

Midday

I had initially written about the midday demerger opportunity and followed it up with a subsequent post when I exited the trade. Links to the post are enclosed below

1) http://investingvalues.blogspot.com/2011/01/take-midday-break.html

2) http://investingvalues.blogspot.com/2011/01/midday-update.html

The stock went Ex on the 20th and the market finally valued the radio business at Rs 8.60 per share on the closing of the day. This was in sync with my estimates of Rs 8-10 per share with 10 bucks on the outside.

Nirma

I had written earlier on the Nirma Delisting opportunity and the structure of the transaction. Link of the post is enclosed below

http://investingvalues.blogspot.com/2011/01/nirma-delisting.html

The reverse bookbuilding closed and the company has garnered enough shares to make the delisting successful at a price of Rs260. The management has till Feb 02nd to announce its acceptance / rejection of this discovered price.

There is a side trade that can be done now that the book has closed. Typically in the event of the management accepting the price, the stock will move towards the Rs 255 mark with the arbitrageurs sealing the gap. At the current price of Rs 248 there is Rs 6-7 bucks on the table in a 10 day period. However in case the management decides otherwise and rejects the offer then the stock could settle 25% lower from here. To quote Buffett/Munger this is the classic “Picking pennies in front of the roadroller” :-) and I for sure don’t have the appetite for it.

Nirma - Delisting

The promoters of Nirma in their announcement on 11th of October stated their intent to take the company private and de-list it form the exchanges. I have in the past invested in multiple delisting opportunities and had also put out a guest post on my friend Rohit blog detailing out the framework that we follow while evaluating a delisting opportunity. The link to that post is here
Using that framework let me quickly run thru the thought process in evaluating this special situation opportunity. In any delisting opportunity and the same framework can broadly be applied across other special opportunities, there are 3 risk points in the transaction


1) Time Risk
2) Price Risk
3) Deal Risk

Let me address each of these risks with respect to the Nirma opportunity.
1) Time Risk - The entry point for the transaction was timed post the shareholder approval. Post which filing is done with the exchanges. By monitoring various milestones in the deal, Time risk was constantly tracked.
2) Deal Risk – The promoters owned 77% stake in the company. For the reverse bookbuilding to succeed the promoters had to garner atleast 13% in the process.
Analysis of the shareholding structure indicated that institutions held about 2.56% shares and 42 individuals owned about 14.97% shares in the company. Clearly the company had to manage these shareholder to ensure that the delisting takes place.
3) Price Risk - This is where the opportunity really opened up. The promoters in their communication indicated Rs 235 as the fair prices for the delisting process. This effectively set the floor for the delisting.

Transaction Details
As stated earlier the floor price on the transaction was effectively set at Rs 235 as the promoters had indicated that they were comfortable with this price. I entered the trade around the last week of November in the price range of Rs 222 - 225. Surprisingly inspite of the Rs 235 floor set, the market was effectively paying me option money to take up this position.

The reverse bookbuilding started on the 17th of Jan and is on till the 20th which is tomorrow. I exited the position today in the range of Rs 245-247 on the exchanges. The trade gave me a return of 10% on capital in a span of 2 months.

There could be more return on the table as the book appears to be closing in the 250 -260 range but I m comfortable taking my money home without having to live thru the risk.

Midday - Update

I had posted yesterday on the small position that I had created in Midday at Rs 38.2 as part of the merger process. I promptly exited the position today at Rs 40.2. A gain of about 5% in 15 days. Might not sound too exciting for most ppl but I like trades like this. If I can do just 5 -6 trades like this in a year on assigned capital, i would be more than happy. Attaching the payoff matrix. Will continue to track the situation to see how it finally progresses.

Take a Midday break

One of the resolutions that I made this year was to be regular on the blog both in terms of posting as well as responding to queries. It has of course taken me 17 days in the new year to move on this resolution. It is not really the best of starts but the intent is to be more regular this year in terms of posting on the various special situation transactions that I look at and also in terms of long term value picks.

I have been tracking a special situation case covering the acquisition of Midday’s print business by Jagran Prakash.

Midday as a company can be broken up into 2 pieces the relatively valuable print business with a good franchise and the cash guzzling radio business.

Structure of the deal

Under the scheme of arrangement Jagran Prakash will acquire the print business on a slump sale basis. As part of the arrangement the Midday shareholder will get compensation with shares issued by Jagran Prakash. The ratio proposed under the scheme of arrangement is 2 shares of Jagran Prakash for every 7 shares of Midday.

The residual Midday will consist of the radio business which did a topline of about 30 crores and a loss of 15 crores last year. Clearly this business is in its investment phase of building up the franchise in terms of radio property.

I have been tracking the deal for sometime and have been registering the price of the residual shares of Midday at every milestone in the life of the transaction. Considering the nature of the radio business and the timelines involved, I had refrained from building a position the stock and the intent was to do it very close to the actual record date.

I took up a small position on the 3^rd of Jan at Rs 38.2 once the announcement had got made for the board meeting for deciding the record date.  The reason for the small position was more a combination of having a learning process coupled with not too much comfort in terms of underlying valuations for the radio business. I would value the radio business on the outside at Rs 10 per share.

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.