Bang Overseas – Thomas Scott: A special situation investment operation that delivered excellent returns
In case you have been visiting our site for some months, then you might remember the demerger case of Bang Overseas and Thomas Scott, initiated in Aug’11.
In case you wish to know the details, refer the following link -
Don’t want to click the link: Read the brief description of the special situation opportunity below:
On December 23, 2010, the board approved the Scheme of Arrangement between Bang Overseas Limited (the listed entity) and Thomas Scott (India) Limited (the non-listed entity).
Basically the Scheme envisaged the de-merger of Retail Division of Bang Overseas Limited into Thomas Scott (India) Limited and the company had proposed a swap ratio of 1 equity share of Thomas Scott for every four equity shares held in Bang Overseas Ltd.
The opportunity appeared rewarding to us because Bang Overseas had a good retail network of Menswear and Lifestyle brand Thomas Scott. The retail division of the company was going un-noticed in the composite entity and we were thus confident of the value unlocking.
Once the company received the High Court approval, 25th Aug’11 was fixed as the record date. Before the ex-date [24th Aug'11], we could buy 5000 (used for ease of calculation} shares of Bang Overseas at an average of Rs 26.00.
On ex-date, we were able to sell off all the 5000 shares at an average of Rs 24.50 against our purchase price of Rs 26. As was expected, there wasn’t a substantial decline in the stock price on the ex-date as the market wasn’t already discounting the retail operations of Bang Overseas under Thomas Scott.
As per the Scheme, selling the shares on ex-date left us with an entitlement for 1250 shares of Thomas Scott India Ltd at a cost of Rs 6.00 per share (26*5000 – 24.50*5000 = 7500. 7500/1250 = Rs 6.00) as and when they go listed.
So, what about Thomas Scott? When will it get listed?
Well, this is to inform you that Thomas Scott got listed on 30th Jan’12 and closed at Rs 32. The scrip code for the same is 533941.
We managed to sell our 1,250 shares at an average price of Rs 28 against the cost of Rs 6.00 per share.
As in the above case, we expect decent returns from our investment operations in the Provogue India and Orient Paper and Industries as well. Both are again the cases of demerger.
The details on the two can be accessed at the below link:
Note: Risk arbitrage/special situation investment recommendations are suggested only to Alpha Plus portfolio members and made public once our members are sitting on decent gains.
Ekansh Mittal [email@example.com]
Orient Paper & Industries demerger – A special situation that has already delivered 20% since 11th Jan
We would like to bring to your notice an interesting Special situation/Arbitrage opportunity in the case of Orient Paper & Industries Ltd (NSE Code: ORIENTPPR, BSE Code: 502420) initiaited on 11th Jan’12 for all the Alpha Plus Portfolio members at Rs 50.50.
The High Court approval is still pending and we therefore believe that there’s still some upside from the current levels.
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, 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 someday 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 and can extend to many years.
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 11th Jan’12) for all the Alpha Plus Portfolio members.
- Orient belongs to a reputed business house of India
- The company has multiple business units and commands a leadership position in its Fans and electrical unit.
- On the basis of sum of parts valuation, we believe there’s a potential for 40-50% 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 Cement unit will act as a perfect trigger for the value unlocking of its various units. 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 anytime now. We expect decent returns from our investment operation in this risk arbitrage opportunity (though it has already delivered 20% since Jan’12 including Rs 1.00 per share dividend).
For complete details along with the investment and the profit booking strategy, refer the attached report.
Note: 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
In the past, we have had very good experiences with Rights issue offerings of the company.
For instance Veljan Denison proved to be a very good case with approximately 20% return in 3 months while Atul Auto was over the top with more than 250% return (refer HERE).
We like the cases wherein:
- The equity dilution is less (For instance 1:10 i.e. one share for every 10 shares)
- The valuations are reasonable
- Relatively large public holding (enables subscription in excess of entitlement)
- A decent discount to the prevailing stock price before the record date
Bhushan Steel Ltd in its announcement to exchanges has announced that Board of Directors have approved:
To create, offer and issue to the existing shareholders of the company 1,41,57,220 equity shares of face value of Rs. 2 each in the ratio of 1:15, i.e., one equity share for every 15 equity shares of the company held as on the record date at a price of Rs. 335/- per equity share.
Bhushan Steel is currently trading at around Rs 400/- per share. We like the fact that dilution would be very less and also the discount to the current price is decent at 16%.
Now before you jump the guns and start buying, the Rights issue is still some time away and therefore it would not be prudent of one to start buying the shares of Bhushan Steel at the moment (unless purely from investment perspective). There are still some regulatory approvals pending and the company is yet to announce the record date.
As far as our members are concerned, we will surely keep Alpha Plus members updated about the same and recommend the investment strategy (based on regulatory proceedings) at the right time.
Ekansh Mittal [firstname.lastname@example.org]
Sanghvi Movers recently announced its results for the quarter ending Dec’11, and we are glad to report that results are much better than our expectations.
Besides, in the recent concall the management indicated that they will be reducing the debt from Rs 750 crore at present to Rs 350-400 crore over the next 2 years. We believe it’s a step in the right direction and the same should also lead to higher re-rating of the stock, besides 15% earnings growth YOY for the next 2-3 years.
For detailed analysis on the company, refer the report at the following [LINK]
Sanghvi reported revenue growth of 41% YOY to Rs 114 crore in the Dec11 quarter, led by the current backlog and a low base of the previous year. EBITDA margins declined by 190 bps YOY to 70.2% during the Dec11 quarter. PAT reported strong growth of 53% YOY to Rs 24.5 crore on account of positive financial leverage. PAT margins improved by 160 bps YOY to 21.5%.
For the nine months ending Dec’11, the utilization stood at 86% with blended yield of 2.87% per month.
As per the management, they don’t expect much improvement in utilization from current levels of 86%. The maximum that can be attained is 88-90%. The other important point that came out from the concall is that blended yield is expected to improve from here on as the competition seems to have stabilized.
During 9MFY12, Sanghvi incurred CAPEX of Rs 190 crore and is likely to complete the guided capex of Rs 220 crore for FY12. Going forward, Sanghvi has guided for an average CAPEX of Rs 25 crore each for the next 2 years. The management clearly indicated that they have decided to reduce capital expenditure and consolidate the position by rather losing orders than enter debt trap. The company generates operating cash flows to the tune of Rs 200-225 crore annually and they will use the same to prune down debt to Rs 350 crore over the next 2 years from Rs 750 crore at present.
Besides, they have indicated 10% annual revenue growth (over the next 2 years) on account of improvement in utilization and blended yield. The reduction in debt can help the company achieve higher earnings growth of ~15% annually.
The stock is currently trading at 5 times FY 12 (E) earnings while in the past it used to trade at 8-12 times annual earnings. Reduction in debt coupled with improvement in outlook towards the entire infrastructure sector can re-rate the company to 8-10 times earnings. We expect an upside of 130-160% from the current levels, provided the company sticks to its plan of debt reduction.
Ekansh Mittal [email@example.com]
Cravatex Ltd (BSE Code – 509472) – Get exclusive distribution rights for FILA and Johnson Health Tech for Rs 130 crores
We would like to share with you an updated report on CRAVATEX LTD (BSE Code – 509472).
Note: Read the entire report and be sure of business model, prospects and concerns. In case you are already holding the stock with 4-5% allocation since initial recommendation at Rs 250-255 in Dec’10, then no need to add further, while if you haven’t already bought then please refer the allocation strategy.
Also, please do not consider investing in the stock if a shiver runs down your spine on thinking of investing in a stock beyond 3 years.
For details on the company and the investment strategy, refer the attached report.
Cravatex Ltd – (BSE Code – 509472)
As you will find us repeating in the entire report, Cravatex is basically about getting exclusive distribution rights of brand FILA and Johnson Health Tech (the third largest equipment maker in the world) in India and some other countries for just Rs 130 crores.
Yes, the above is the entire story about Cravatex, if we have to describe it in one line.
It’s all about owning exclusive distribution rights of two premier brands, while the scale of opportunity for both the brands to grow in India being humongous.
In case of Cravatex, we may not be able to justify the Margin of Safety (MOS) in conventional terms, but then it’s a case where one either gets it intuitively or does not get at all.
During the last 1 year there have been some important developments, acquiring the sub-license of FILA in Europe being one of them and we therefore felt the need of releasing an updated report on the same.
Key Investment Highlights
Exclusive distribution rights for Johnson Health Tech Fitness Equipments in India and FILA in India & some parts of Europe for just Rs 130 crore – Cravatex retains the exclusive distribution rights for Johnson Health Tech ‘s fitness equipments in India, Bangladesh and Sri Lanka till 2025. Johnson Health Tech is the leading company in Asia while the third largest in the world in the fitness equipment industry. Besides, Cravatex also holds the exclusive distribution rights for brand FILA, one of the world’s largest sportswear manufacturing companies.
Humongous scale of opportunity – In recent years, the fitness and sports industry in India is witnessing a paradigm shift with the change in middle and upper class lifestyles in small but significant ways. The average urban Indian professional is increasingly becoming health conscious and feeling the need to get into a fitness mode. Thus, the fitness industry has a huge growth potential as only 1.5% of the urban Indian population regularly practices workout.
Earning high return on shareholder’s funds – Over the longer term, the company can grow only as fast as it generates returns on the funds employed. Well, Cravatex does not have a great track record with pathetic 12-13% return on equity till 2008-09, however over the last 2 years the company has started delivering 20%+ return on equity and is on track to deliver a similar performance for FY 12.
Very attractive valuations – Cravatex is currently quoting at a market cap of Rs 115 crore, while it has net debt of Rs 14 crore (as at 30th Sep’11), thus an enterprise value of Rs 130 crore. For FY 11, Cravatex recorded a net profit of Rs 6.79 crore, while we expect the company to close the year FY 12 with a net profit of Rs 10-11 crore. Besides as mentioned above, one gets exclusive distribution rights for the two finest and leading global brands FILA and Johnson Health Tech for just Rs 130 crores, while the scale of opportunity is huge for both the brands to grow immensely in India.
CRAVATEX Ltd – Content Index
- An Introduction
- Exclusive distribution rights for FILA and Johnson Health Tech
- Investment Snapshot
- Key Investment Highlights
- Major Products
- Distribution Rights
- Main revenue streams
- Margins – Economies of scale at work
- Sports Goods sales – Overview
- Rs 125-150 crore revenue from FILA India by FY 2013
- Cravatex – Sub-licensee of FILA in UK and Ireland
- Sportswear Industry in India
- Reebok India – How is the leader performing?
- Fitness Equipment Sales – Overview
- Johnson Health Tech – Witnessing strong sales growth worldwide
- Johnson Health Tech – Eyeing growth in commercial fitness in India
- Fitness equipment industry in India
- End-User segment – Institutional segment commands 76% market share
- Proline Fitness stores
- Key drivers for the fitness equipment industry in India
- Shareholding Pattern – Incentive to drive the growth with 75% equity holding
- Promoters/Management Profile – Sports and Fitness freaks
- Low dividend payout and high return on shareholders’ funds
- Annual performance
- Quarterly Performance
- Cash flows
- Balance Sheet
Ph.: 0120-4109766, Mob: +91-9818866676
Besides tracking the business performance of the companies we track or recommend to our members, we also keep a track of the Insider’s activity.
Well, no matter how good an analyst is, one cannot beat the Promoter’s/Management when it comes to determining the fair valuation of the company and this is primarily the reason why we track the buying/selling by the Promoters.
Now before you jump the gun and reach the following conclusions, please also consider the arguments in square bracket.
- A bad sign when the Promoter sells his/her shares in the company [Not always a bad sign because an individual can always sell some shares for some personal reason. However one should look out for bulk selling and get cautious in case there's bulk selling by the insiders]
- A good sign when an insider buys shares of his/her company [Mostly a good sign, but don't base your investment decision on this factor alone as in many cases the business performance or share prices have plunged though the promoter's kept on buying]
Since we are talking about insider buying, let’s look at some cases where there’s been some purchases by the insiders lately:
Disclaimer: The stocks discussed below have been recommended to our Alpha/Alpha Plus members. Please carry out your own due diligence before buying/selling any stock discussed below or on our website.
Provogue India Ltd - This is a Risk arbitrage recommendation at Rs 21.00 (on 3rd Jan’12) for all the Alpha Plus Portfolio members [now available for all at the following LINK].
Very recently we noted that During the quarter ending Dec’11, Mr. Rakesh Jhunjhunwala increased his holding in Provogue by 6 lakh shares i.e. from 1.66% to 2.19%.
Though it would be wrong to categorize Mr. Rakesh Jhunjhunwala as an insider, however he’s no less then that. Also, we are not sure if he added due to the impending de-merger or due to some other reason, nonetheless, its a good sign.
Cera Sanitaryware Ltd – This is the Alpha Recommendation at Rs 165 (Jan’11) for all the Alpha/Alpha Plus members [now available for all at the follwing LINK].
If we go by the number of articles dedicated to any stock on our website, Cera probably has the maximum.
Over the last few days, the promoters of Cera Sanitaryware, Mr. Vikram Somany and Mr. Vidush Somany made some open market purchases. The details of which are as below:
- Mr. Vidush Somany – 4500 shares at Rs 195
- Mr. Vidush Somany – 4000 shares at Rs 183
- Mr. Vikram Somany – 8500 shares at Rs 205
Its good to note that Promoters of the company are willing to buy the shares of their own company at current rates, though they hold 55% stake in the company.
We would like to point out here that management had sought informal guidance from the SEBI regarding increasing their stake to 60% in the company.
Wimplast Ltd – This is the Alpha recommendation at Rs 200 (May’11) for all the Alpha/Alpha Plus members.
In case of Wimplast, Mr. Ghisulal Rathod, Promoter, has been buying the shares of the company for long and recently too he made some good purchases. The details of which are as below:
- On 3rd Feb’12, 4920 shares at Rs 198.7
- On 2nd Feb’12, 1125 shares at Rs 198.45
- On 16th Jan’12, 3194 shares at Rs 189.18
The stock seems to have come out of the trading range, though it remains to be seen if the current rally sustains or not. The purchases from Promoters at the current rates help our confidence.
For more interesting updates on other stock recommendations, refer the attached report:
Ph.: 0120-4109766, Mob: +91-9818866676
Provogue India demerger – Unlock land value worth more than 200 crores with this demerger opportunity
We would like to bring to your notice an interesting Demerger arbitrage opportunity on Provogue India Ltd (NSE Code – PROVOGUE) from Alpha Plus Portfolio (shared with Alpha Plus portfolio members on 3rd Jan’12 at Rs 21), with a good scope for land bank value unlocking in the form of demerger into a new unit.
Every now and then we come across an opportunity which provides scope for value unlocking of land bank.
Earlier we had worked on the demerger opportunity of TCI Ltd and TCI Developers, which resulted in a gain of more than 50% in just 6 months, while with this one we expect decent returns (already a gain of 23% as on 9th Feb’12) as the stock is already quoting at very low valuations with complete disregard for ~ 150 acres of land bank with the company. More importantly the company has already started with the process of monetization of land bank with the development of housing projects and with the view to unlock value for shareholders, is demerging the land bank along with the housing projects into a separate company.
Normally we do not like real estate companies as an investment option, nor do we believe in land bank stories, however in this case we are getting the above mentioned land bank of approx. 150 acres almost free of cost at current valuations and it is this land bank value which the company wishes to unlock by demerging Residential township unit into another listed company while the original company will continue with its existing operations. Thus, de-merger will provide the much needed trigger.
In case of demerger opportunities, it’s important to keep a track of proceedings and reduce market risk by timing the purchase of shares so that there’s less time gap between the purchase and the record date (not more than 2-3 months). The company has already received the approvals from the following:
- Board of Directors
- Secured lenders, creditors, etc.
Now, only the high court approval is pending and once this approval is received the stock should start witnessing buying interest from the informed and the smart investors, though if we go by the shareholding disclosures, the promoters have increased their stake by 3% while Mr. Rakesh Jhujhunwala, the ace investor, added 6 lakh shares during the quarter ending Dec’11.
As per our talks with the Company Secretary of the company, the approval from the High Court is expected soon.
Ph: 0120-4109766, Mob: +91-9818866676