Wendt (India), a cash rich MNC from the capital goods space, is a global abrasives and precision component maker. Another global giant in the same area, Grindwell Norton, has a smaller presence in the super abrasives segments. Bosch, Hero Motors and SKF India are some of Wendt India's large clients.
Wendt (India) was incorporated in 1980 as a JV between Wendt GmbH and The House of Khataus. In 1991, Carborundum Universal Ltd (CUMI), a $3 Billion Murugappa Group Company acquired the Khatau’s stake in the business. Since then, WIL has been a 40-40 Joint Venture between Wendt GmbH and CUMI. The point to be considered is that it has a tiny equity component of just 2 Cr. (20 lakh shares), of which the public holds the balance 20% equity or 40 lakhs i.e. 4 lakh shares.
Wendt India makes super abrasives. While conventional abrasives can also be used for grinding or polishing work, super abrasives, made from industrial and synthetic diamonds with cubic boron nitride, derive extreme hardness. This provides them longer life and ‘super' performance. To ensure that the company does not become too dependent on the super abrasives business, Wendt India has renewed its focus on one other segment, grinding machines and precision components. These components are used in almost all manufacturing units.
Wendt India imports over 50 per cent of its raw materials and is, therefore, exposed to currency fluctuations, especially during periods of rupee depreciation. However, this is partly hedged by its export revenue which account for a fifth of sales.
It is currently quoted around 1600 with a TTM of 91 giving a P/E of about 18, quite low for an MNC with such a pedigree. Its listed parent 3M is quoting @3700 with a similar valuation. Even assuming the vast difference in the businesses of the 2 companies, the valuation of Wendt looks on the lower side.
In Dec ’10, US-based diversified innovative technology devices manufacturer 3M acquired precision grinding tool major Swiss-based Winterthur Technologies AG--which is the parent of Wendt (India). As per regulations due to change in promoter, 3M made an open offer @1366/share when the share was quoting @1626, which is incidentally close to the current price 6 months down the line. When the news broke out the share crossed 2000; its lifetime high is 2065. The interesting part is what happened afterwards.
Wendt’s other promoter CUMI, contested the open offer stating that it has the right of first refusal. The matter is with the CLB and the offer postponed indefinitely. As and when the matter is decided, it could result in a windfall.
So this is somewhat similar to the case of DISA where patience would pay. It certainly makes for a potent combination – low equity, high promoter holding hence low floating stock and the prospect of a good offer price as and when it comes. An added bonus is its high dividend payout in line with other MNCs (last year it paid 25/share). Even otherwise, being a niche MNC stock, it would show steady growth in the years to come
A year and a half later, this stock has lost 60% of its value, is still awaiting the status of the open offer and is quoting at about the same PE of 20 (compared to 18 then). However, it must be said that the stock did scale close to 2000 (giving a 25% upside to people who cashed out then) during the year during the delisting frenzy and has since halved when there was no move on delisting as was widely expected.
ReplyDeleteSo where do things stand now? Some of my thoughts are as below:
1. Nothing other than the price (which has crumbled 60%) has changed much. And that provides an even better opportunity for an investor to lock into this. If it was good at 1600, it is excellent 60% lower at 1025.
2. Though the delisting angle is no longer present, at least in the near term, the status of open offer still hangs in the balance. It would also pay to remember that the open offer was at 1366/share which is still 35% from the current price. And there may be an interest component to the offer also, as has happened in some cases. However, whether it applies in this case and whether the shareholders who buy it now will also be eligible for the interest if it is given, are questions for which there are no answers as of now.
3. The similarity with DISA (prior to its court decision) still holds good in that the promoter holding is still 80% and the equity is very low at 2 cr.
4. The last time it gave a bonus was in 2003 and currently its reserves stand at 67 cr. against an equity of just 2 cr. So there is a good chance of a bonus.
5. The liberal dividend policy continues. After 25/share last year, this year they have paid 15/year which is generous by any standards.
6. Economy is at its lowest point currently. Any improvement in this will only boost Wendt’s business prospects. With this being an election year, chances of the government going ahead with reforms and infra push can be termed quite reasonable.
All in all, for a long term investor, this still merits a look with lot of positives yet to play out.