A few days back, we updated you on the results of Cera Sanitaryware Ltd (search “Cera” in the search box).
Its time for updates on another Alpha Recommenation, i.e. Wimplast Ltd (BSE Code – 526586).
In one of our Alpha weekly update (weekly update for Alpha and Alpha Plus members), we had mentioned that we expect many negative surprises this results season, though frankly speaking, its been a good results season till now and I am keeping fingers crossed for the companies that have not yet announced their results
Wimplast has recorded very good set of results considering both the sales turnover and profitability. At 55.37 crore, the company achieved a sales growth of 28% on YOY basis. The cost of goods sold came down (as a % of sales), while there was a major jump in other expenditures and Employee cost.
For Dec’11 quarter, company maintained its EBITDA margins at 18.72%, the same as Dec’10 quarter and thus recorded a 28% growth in EBITDA at Rs 10.37 crore.
On account of slightly lower other income and higher depreciation; the company recorded a 22.30% growth in net profit (on YOY basis) at Rs 6.52 crore.
For the nine months ending Dec’11, the company has recorded a 21.50% growth in sales turnover at Rs 141.14 crore, 22.18% growth in EBITDA at Rs 25.50 crore and 22.53% growth in net profit at Rs 15.93 crore.
Considering the growth momentum in the third quarter and the integration of the facilities bought by the company at Chennai, we expect the company to close the year with a turnover of Rs 190-195 crore and net profit of Rs 21-22 crore.
The stock is currently available at 5.3 times FY 12 (E) earnings. Considering the debt free status, free cash flows, regular dividend payments, wide-spread distribution network and management’s history of wealth creation in other group companies (Refer the case of Cello Pens), we find Wim Plast very cheaply valued at the moment.
Disclaimer: We ourselves and our members at Katalysrt Wealth are invested in Wimplast Ltd and therefore have a vested interest. Please carry out your own due diligence
Ph.: 0120-4109766, Mob: +91-9818866676
If you remember, we got some easy 12-14% return (in just 2-3 months) in the de-merger Risk arbitrage opportunity of Piramal Life and Piramal Healthcare (Search Piramal in the search box for details).
Now, do we have a similar arbitrage opportunity in the case of the proposed merger scheme of IVRCL Ltd and IVRCL Assets & Holdings Ltd.? Let’s find out
Disclaimer: The below article is based on some initial research done at our end. This should not be construed as an investment advise, nor have we advised our members of Alpha Plus portfolio until now. The finer nitty-grities are yet to be determined.
What’s the merger scheme and the swap ratio?
IVRCL has secured approval from the Competition Commission of India for the proposed restructuring of business operations, paving way for amalgamation of IVRCL Assets & Holdings Ltd, with IVRCL Ltd., and the demerger of real estate business into a new company.
Under the proposed merger scheme, the shareholders of IVRCL A&H will be entitled to 5 fully paid up equity shares of IVRCL for every 6 shares held in IVRCL A&H on the record date.
At present, IVRCL holds 75.72% of the equity capital of IVRCL A&H which will be cancelled. Also, upon the scheme becoming effective, the paid-up share capital of IVRCL would see an increase of 3.98 crore shares i.e. 14.90% dilution.
Let’s do some calculations
Current market price of IVRCL A&H (on NSE) – Rs 39.35
Current market price of IVRCL (on NSE) – Rs 52.35
As per the scheme of merger, for every six shares of IVRCL A&H, we will receive 5 shares of IVRCL.
Cost of acquisition of 6 shares of IVRCL A&H = Rs 39.35 X 6 = Rs 236.1
Cost of acquisition of 5 shares of IVRCL = Rs 52.35 x 5 = Rs 261.75.
So, we are basically getting an arbitrage opportunity of 10-11%.
Pure arbitrage offering 9% (after expenses) over the next 2-3 months
IVRCL is listed in the F&O space, so one can lock in the spread by going short on IVRCL futures and simultaneouly buying IVRCL A&H in the cash segment proportionately (6:5).
Example: The lot size of IVRCL is 8000. So, one can short 1 lot of IVRCL (Mar’12) expiry at 52.50 and simultaneously buy 9,600 shares of IVRCL A&H in the cash segment at Rs 39.35.
Over a period of 3 months i.e. by the record date, this spread should reduce from the current 10.8% to 0-1%, thus offering 9-10% return over a period of 2-3 months
Important: The scheme of de-merger has not yet been approved by High court, so if you perform the operations now and if the approval gets delayed you run yourself against mighty Market risks in the short term.
Ekansh Mittal [firstname.lastname@example.org]
As mentioned in our Alpha Weekly update for 22nd Jan’12, the results season has begun and the first company (amongst the Alpha Recommendations) to announce its results is Cera Sanitaryware Ltd (NSE Code – CERA).
The results of Cera Sanitaryware are of significant importance to us as we have suggested the highest portfolio allocation (more than 10%) and we are happy to announce that the company has performed as per our expectations.
A detailed Alpha report on Cera Sanitaryware Ltd can be accessed at the following (LINK)
As can be observed from the above illustration, Cera has recorded a sharp 38% increase in net sales on YOY basis (Dec’11 against Dec’10 quarter). Even on sequential basis (QOQ – Dec’11 against Sep’11), the company has recorded a 12.5% growth in net sales at Rs 82.48 crore. Though, the industry leader, HSIL (Hindware) has not yet announced its Dec’11 results, we don’t expect HSIL to match up 38% growth in their “Building products” sales.
As was expected, the growth in profits has not kept pace with growth in sales. The EBITDA margins of the company have suffered on account of high cost of goods sold and increase in other expenditures. During the Oct-Dec’11 quarter, Cera embarked on an aggressive Print and Electronic media campaign. The company could have easily recorded better profitability, however it’s good to see that management is thinking in terms of long term benefits by spending money on creation and sustenance of brand equity. The EBITDA margins (inclusive of other income) of the company for the quarter ending Dec’11 stand at 18.18%, against 21.61% for Dec’10 and 18.54% for Sep’11.
For the nine months ending Dec’11, the company has recorded a sales turnover of Rs 220.41 crore, thus registering a growth of 31.65% against average industry growth of 15%. The growth in net profits is slightly lower at 16.5%, with 22.49 crore net profit for the nine months ending Dec’11.
We expect the margins of the company to improve from here on, as the inflation seems to have peaked during the Oct-Dec’11 quarter. Further, the rupee has recovered slightly against the dollar and the RBI has hinted towards lower policy rates in future.
For the entire FY 2012, we expect the company to close the year with a turnover of Rs 320 crore and a net profit of Rs 31-32 crore, thus a growth of 18-20% over FY 2011. The stock is currently available at 7-7.25 times FY 12 (E) earnings, while if one is to consider the business, performance, management, etc. it comes across as one of the best companies.
We believe Cera Sanitaryware is one of the best long term investment (3-4 years and more) opportunity that can compund one’s wealth at 30%+ (considering both the earnings and PE multiple expansion) for the next many years.
Disclaimer: We ourselves and our members at Katalysrt Wealth are invested in Cera Sanitaryware and therefore have a vested interest. Please carry out your own due diligence
Ph.: 0120-4109766, Mob: +91-9818866676
Kenneth Andrade is the man behind the country’s most successful mid-cap fund, the IDFC Premier Fund.
Kenneth Andrade Profile: He has worked in the Indian mutual fund industry for more than 15 years. He picks tomorrow’s blue-chip stocks from today’s numerous mid-cap companies
Investment philosophy: He hitched his fund wagon to the theme of consumption and food inflation more than two years ago and his top picks too have remained the same over that period.
Other interests: Stays in Mumbai and is slightly partial to Toto’s, that classic of a pub in the queen of the Mumbai suburbs, Bandra.
What is your outlook for 2012?
The environment now is very challenging and I don’t expect it to change in 2012 either. Obviously, the smaller companies will face a number of challenges both in the near term and in building their businesses over a period of time.
The cost of capital is going to be a challenge for the end of this year and also the beginning of next year. Base rates today are at about 11 percent in the banking system. So your cost of capital to be in operation is anywhere between 13-15 percent.
That’s a very high cost to pay to be in business. Profitability is next to nothing.
How can an investor take advantage of this choppy environment, and do any thematic plays come to mind?
In an environment like this, markets usually consolidate. Either companies acquire additional assets or companies acquire customers. Let’s assume there’s an industry of 10 companies. Five won’t survive. The other five will double. They will take all the customers. That’s a big opportunity to tap.
You have to identify the five companies who will survive! Look at cement. Ambuja, ACC and Ultratech had 60 percent of the market share in 2000. Currently they have 30 percent and all of them are debt free. All the other companies have huge amounts of debt. These guys will go back to 60 percent.
Some more examples please…
I don’t think one should look at companies from a capitalisation point of view. One should look at where the business is. If you want a large cap company in the FMCG space you only have three or four companies to choose from. There’s no number six or seven. But the entire business is dominated by smaller players. By capitalisation they are small. India’s largest retail company is a mid-cap company. That doesn’t mean it is a small company.
Where do mid-cap companies come from? Let me give you an example. Education is a multi-billion dollar opportunity in India. The problem is that it is so fragmented. So we need one entrepreneur to only consolidate the business. From that we will get one of India’s largest companies. None of these guys will invent this space. They will only have a service offering that will consolidate the market share.
How important is it to consider scaling up as a factor for midcap companies?
We look at a fragmented space and look at one company that can scale up the space. That’s our approach. Take sugar and it is Shree Renuka Sugars. It’s a Rs. 85,000 crore industry, but you have around 360 companies in that industry. You have private sector mills then you have around 400-500 co-operative mills that are there. One guy has to come in and consolidate that entire space.
What special challenges to portfolio construction do you see in this difficult environment?
In constructing a portfolio we have two choices on how to buy. You either buy on valuation risk or you buy on solvency risk. We prefer to go with valuation risk because we don’t want our companies to die on us. Every company which is stress-free on its balance sheet is very expensive. The price earnings multiple of our portfolio is extremely high. What we have stayed away from is not to buy companies that have too much of debt. That is going to be our approach for 2012.
I think any company that can monetise its assets, i.e. put its assets into operation and can service its debt, will come out on top. The other option and opportunity is to take the assets that are there on their books and sell them in the market and reduce the cost of their balance sheet. Look at companies who are reducing the size of their balance sheets. They are the ones to buy. One parameter that I will be closely looking for, in the next financial year i.e. 2013 is any company which is going into 2013-14 with a smaller balance sheet. I think those kind of companies are going to come out on top.
In your view, is the idea of strategic consolidation relevant to financial services as well?
Today, everyone is worried about how the banks are going to manage the delinquencies in the banking system. Let’s look at 2013. If corporate India maintains the current debt-equity ratio, their banks will refuse to fund incremental stress. They’ll only lend to guys who are financially disciplined. And financially disciplined guys are people who reduce their balance sheet. It’s all about availability of capital or liquidity for the next round of growth. The guys who are completely leveraged will not get the money. This is how the equity business has behaved in the last three years; this is how the lenders will behave in the next three years because the lenders will become extremely risk averse. That’s probably my only parameter to watch in 2012-13.
You will grow, not because the sector is growing, but because you are gaining market share. The growth will not come because of incremental profitability. The cost of acquired market share will show in your margins. And in the next cycle you will show profitability.
Source: Forbes India
What if I offer your 10-12% return on your investment, over the next 3 months, on almost a risk free basis? (Well there’s nothing like risk free, even the Govt. bonds, considering the debacle in countries like Greece, however certain investment options are considered to be risk-free in nature including the Govt. backed bonds.)
Considering the fact that a lot of investors are running behind bond issues offering 8-9% annual post tax returns, I am sure most of you reading this would willingly opt for the above opportunity (who would like to miss an investment opportunity with annualized returns of 30-50%), obviously after carrying out your due diligence.
Recently National Highways Authority of India’s first sale of retail bonds received bids for nearly five times the base amount, capitalising on investors’ appetite for safe havens. Power Finance Corporation (PFCs) bond issue also witnessed a similar participation. The bonds issued by PFC carry a coupon of 8.2 per cent and 8.3 per cent for maturity periods of 10 and 15 years, respectively. NHAI had offered 8.2 per cent and 8.3 per cent for similar tenures.
Well investing in bonds (risk free to a large extent. NHAI bonds govt. backed) adds stability to your portfolio, however besides investing in bonds one can consider special situations like de-listing of a company, or other special situations because these too, are to a large extent risk free (if carefully chosen) and offer high returns to the tune of 30-40% annualized, on an average.
There’s one such interesting Risk Arbitrage opportunity, that we would like to bring to your notice:
APW President Systems Ltd (BSE Code: 590033)
APW President Systems is a case of de-listing and we believe this is a good case with very low risk profile and offers annualized returns to the tune of 35-50%.
Some insights into the Arbitrage opportunity in APW President Systems Ltd
On 26th Nov’11, APW President in its letter to Stock Exchanges informed that the company (“APW President”) received a letter from Schneider Electric South East Asia Ltd, the Promoter and the majority shareholder, informing the company of its proposal to voluntarily de-list the equity shares of APW President from all the stock exchanges by acquiring up to 1,512,006 equity shares held by the public shareholders representing 25% of the current issued and paid up share capital of the company.
The letter also stated that the Delisting proposal has been approved by the Board of Directors of the Promoters at a price not exceeding Rs 195/- per share. (CMP – Rs 185/- per share), thus effectively setting Rs 195 as the floor price.
Some important details
Earlier in Jan’11, i.e. about a year back, Schneider Electric entered into a share purchase agreement with the existing promoters of the APW President Systems Ltd for purchase of the promoter shares. The company subsequently made a mandatory Open Offer in Mar’11 to acquire 1,209,600 shares constituting 20% of the share Capital of APW President Systems Ltd at a price of Rs 195/- per share.
Interestingly the shares were tendered at Rs 195/- per share and Schneider Electric could mop up another 20%, increasing their total holding in the company to 75%.
We believe this is a very low risk profile de-listing case. Find out why?
- The Promoters i.e. Schneider Electric South East Asia hold 75% equity in the company. For the reverse book building offer to be successful, the promoters need to garner at least 15% in the process.
- In the case of APW, 15.16% equity in the company is held by persons and groups who were earlier a part of Promoter group. Since, they now belong to a group of Public shareholders, the shares tendered by them will help in the successful execution of the Reverse Book Building process.
- Before the de-listing proposal, the stock used to trade in the range of Rs 120-130, while the indicative offer price by Schneider Electric is substantially high at Rs 195.
- In the past, the stock has never surpassed Rs 200-210, so the indicative offer price of Rs 195 is a good deal for all the public shareholders.
- During the open offer in Mar’11 at Rs 195, Schneider Electric could easily garner the complete 20%, thus indicating Public shareholders willingness to tender their shares at such a price. We thus believe that even this time, the company will receive thumping approval to its delisting proposal.
Our expectations from this Risk arbitrage opportunity
In Risk arbitrage opportunities, it is important to ensure that there’s not much time gap between one’s purchase and the record date/reverse book building date, as the case may be.
APW has already received the approval from the Board of Directors. The Postal Ballot has been dispatched to shareholders for their assent/dissent to the delisting approval and the results of the same will be announced on 30th Jan’12. Though we believe that the company will receive the due approval, however we would suggest waiting till 30th Jan’12 before starting the process of accumulation.
The stock is currently trading in the range of Rs 183-187, while as mentioned above the Promoters have indicated Rs 195 as the fair price for the de-listing process. This effectively sets the floor price for the de-listing.
The important question is that what could be the Discovered price/Exit price for the de-listing.
Well, we believe and as has been observed in the past many de-listing cases, the Promoters are willing to pay up to 10% more than the fair price (Rs 195 in this case) indicated by them. In this case, we expect the price to inch up to Rs 210-215 during the reverser book building process and expect Schneider to willingly accept the same.
We derive our optimism from the following facts:
- Since Schneider’s successful open offer at Rs 195 in Mar’11, the Indian currency has depreciated by approx. 20%, thus Rs 230-235 at present is equivalent to Rs 195 (in dollar terms) they paid in Mar’11.
- Even if the currency had not depreciated, Schneider will probably not suspend the delisting for a mere sum of Rs 3 crores (15 lakh shares at Rs 215 = Rs 32.5 crore, while 15 lakh shares at Rs 195 = Rs 29.5 crore), considering the group’s annual turnover of Rs 1 lakh crore.
So, what should be the investment strategy:
- Buy in the price range of Rs 183-187 and below, post shareholders approval i.e. 30th Jan’12 (only if they approve).
- Book complete profit @ Rs 210-215 (in case the stock price attains the mentioned levels during the reverse book building process) by selling your shares in the open market.
- In case the stock does not reach the above mentioned levels, tender your shares in the reverse book building process at Rs 210. Your shares will be accepted at the exit price fixed by the company.
Post 30th Jan’12, we expect the maximum holding period for the above case to be around 3 months.
Ekansh Mittal [email@example.com]
We would like to bring to your notice an interesting Risk arbitrage opportunity from Alpha Plus Portfolio with a good scope for value unlocking to the tune of 50-70%.
Well there are many undervalued stories out there in the market, both due to depressed market conditions and market negligence. However, what is important is “The Trigger”.
Yes, as has been observed in many cases (some even shared with you), demerger is one corporate action which acts as a strong trigger for bringing forth the hidden/suppressed values (of land bank, business unit, etc.) out on the table.
Most importantly, it expedites the process and lets you know the approximate investment duration.
In any normal value unlocking story, one buys the stocks in the hope that market will some day reward the shareholders. In most of the cases, if you have done your due-diligence well, there’s a high probability that you will be rewarded in the long term, though the time span can vary.
However, at times we come across opportunities arising out of Corporate transactions such as takeovers, mergers, de-mergers, special dividends, rights issue, de-listing, etc. where one can be sure of time-line (2-3 months in most of the cases) within which the desired investment objective can be achieved. These are also to a large extent immune from the regular market risks and volatility.
Well, without diverting from the subject further, please find below the salient features of the risk arbitrage opportunity (initiated on 12th Jan’12)
- The company belongs to a reputed business house of India
- The company has multiple business units and commands a leadership position in one of its business units.
- On the basis of sum of parts valuation, we believe there’s a potential for 60-70% upside from the current valuations.
- On carrying out further sanity check, we realize that the replacement cost of the infrastructure set up by the company could be somewhere around 3 times the current market cap of the company. Also the promoters issued convertible warrants to themselves, convertible into equity shares at a price which is at 15-20% premium to the current market price.
- Most importantly the company has a very good track record and is currently available at a dividend yield of more than 3%.
We believe the demerger of one of its units will act as a perfect trigger for the value unlocking of its various units. Since the company has already received approvals from the following: Board of Directors, Shareholders, Secured Creditors, lenders, etc, only the High Court approval is pending.
As per our talks with the Company Secretary, the High Court approval is expected by late Jan’12 and we thus believe that this is the perfect time for one to start with the gradual accumulation of the stock, because once the company announces the approval from the High Court, there could be a deluge of stock purchases from the informed and the smart investors.
We expect decent returns from our investment operation in this risk arbitrage opportunity and expect the maximum holding period of 2-3 months.
For complete details along with the investment and the profit booking strategy, refer the below link:
Note: Please stick to the portfolio allocation strategy. Unlike de-listing opportunities, de-merger arbitrage opportunities are susceptible to market risks and can be highly volatile before the High court approval.
Ph.: 0120-4109766, Mob: +91-9818866676
I am sure you all might be well aware of Pragati Maidan. If not, no issues. Check out the venue of Auto Expo 2012 and you will get to know about Pragati Maidan.
Just to share a few details, Pragati Maidan is a venue for large exhibitions and conventions in New Delhi, and with 774,720 sq. ft. of exhibition space, it is presently Delhi’s largest exhibition centre. It is owned and managed by Indian Trade Promotion Organisation (ITPO), the premier trade promotion agency of the Ministry of Commerce and Industry, Govt. of India.
Pragati Maidan hosts over 70 national and international exhibitions annually, with the largest being the India International Trade Fair which attracts over 10,000 exhibitors and over 30,00,000 visitors.It also houses five permanent exhibitions which include the Nehru Pavalion, Atomic Energy and Defense Pavilion. Some of the events held in Pragati Maidan are the India International Trade Fair, World Book Fair and the Auto Expo.
The global trade exhibition business is a multibillion dollar market in which India presently has just a 0.7% stake while China has 13%. However, one cannot deny the fact that India is fast emerging as a preferred destination and its share in the trade exhibition business is growing faster than appear.
Now, how can one gain from the burgeoing share of India in the global trade exhibition business. Pragati Maidan, obviously doesn’t serve the purpose.
Well, luckily we have a listed company by the name of NESCO Ltd which owns an exhibition centre, Bombay Convention and Exhibition Centre (BCEC) in the financial capital of the coutry, Mumbai.
Today, BCEC is the only place in Mumbai where large scale exhibitions can be held. The next biggest competitor — Nehru Center — has only 25,000 square feet of space, whereas BCEC has 450,000 square feet, second only to Pragati Maidan.
More importantly the Global exhibition companies find the current state of infrastructure adequate. Thus, NESCO is planning to increase its exhibition space from 450,000 square feet to 1 million square feet. Besides owning a large space (a pre-requisite for holding an international standard trade exhibition), the company enjoys locational advantages as its located on a national highway and is just a 10-15 minutes drive from Mumbai Airport. Moreover a Railway station has been proposed which would be located right behind the NESCO complex. All these add to the competitive advantage of the company.
For FY 11, BCEC income was Rs 65.62 crore compared to Rs 54.04 crore in FY 10, an increase of 21%. Over 105 conventions and exhibitions were held at BCEC.
IT Park and Realty
This was about BCEC, however NESCO is sitting on a land parcel of 70 acres i.e. approx. 30 lakh sq. ft of space. and the management is utilizing every bit of it efficiently. Besides BCEC, NESCO has another important division i.e. IT Park and Realty, consisting of three IT buildings. IT 1 and IT 2 have a combined total space of 300,000 square feet, leased out to major IT companies. The construction of IT 3 building completed recently and the company has already started with the marketing of the same. The space under IT 3 is 6,60,000 sq. ft. The company had leased out 1,50,000 sq feet by Nov’11 and they expected to complete the MoUs for the all the remaining space before end of Dec’11.
So for FY 13, the revenue from IT Park division can more than double to Rs 130 crore from Rs 51.61 crore in FY 11. Also the company has already finalized the Design for IT building 4 and the construction work is expected to start any time soon. The CAPEX for the same should be around Rs 200 crore, as per the management guidance.
Growth drivers & Valuations
Though NESCO has recorded a phenomenal growth during the last 5 years, we believe there’s enough visibility for the next 3-4 years, largely because they still have much un-utilized space:
- Construction and leasing out of IT building 4
- Simultaneous expansion of BCEC from 450,000 sq. ft. to 1,000,000 sq. ft.
- Year on Year increase in rents of IT Buildings and rates charged for hosting exhibitions
Normally for such a company one would expect a debt-laden balance sheet, like any other real estate company. However NESCO is a debt-free company with extraordinary operating profit margins of 75% and net profit margins of 50%. Besides being debt free, company is holding liquid investments and cash balances worth Rs 170 crore. The business model of a company ensures adequate liquidity and cheap source of funding as the licensees and exhibition companies pay it in advance for the booking of the space.
So, we are getting 3 IT buildings with approx. 1,000,000 sq. ft. space (avg. value of Rs 13,000 per sq. ft., considering the location), an exhibition centre with a space of 450,000 sq. ft., 70 acres of land (worth Rs 2,500 crore +) and liquid investments worth Rs 170 crore for just Rs 800 crore (Read: the current market cap of the company).
The good thing about this company is that it is generating great cash flows that enables it to carry out construction and expansion of both the IT Buildings and BCEC, without resorting to debt, as they still have about 40-50% space unutilized.
Ekansh Mittal [firstname.lastname@example.org]