Thursday Thoughts

IVRCL group was in the news a few weeks back and after a lot of hullabaloo and posturing everything has gone dead quiet like a deflated balloon. And the group stocks have come down to their pre-euphoria abysmal levels. The main reason for the thing going dead appears to be Essel group’s public reassurance that they are not looking at a hostile takeover and are merely an active investor with close to 12.3% stake in IVRCL. So what happens now?

I, for one, don’t believe that Essel group would be satisfied with just being a financial investor. They have of course said that with their holding, they will scrutinize the decisions taken by the company’s board, which effectively means they do want control. Why else would they have spent so much money for the 12.3% stake and yet haven’t asked for a board seat? Surely not for the dividends. And significantly, they hold more stake than the original promoters themselves (11.2%), This is something which just doesn’t jell right. A view in the market is that the Essel group may steadily increase its stake to 25% – the open offer trigger limit – before launching an offer to public shareholders for a further 26%, as stipulated by the Takeover code. My guess is that Essel group is just biding its time and waiting for an opportune moment to assert its superiority. If they don’t find something the company does to their liking, they may well exercise their superior stake and get their way. They may also ask for support from other investors, not all of whom may deny it to them. Institutions hold 43% in IVRCL, corporate bodies 21 % and the rest is with the public. FIIs now seem to hold the trump card in this battle, with a 37% stake. So it looks an interesting situation to be in if you are an IVRCL shareholder. The latest book value of the company is Rs 74.32 per share and they are quoting way below that. At pre-60 levels there is very little that can go wrong here.

To add to the above consider the following:

Ø  They hold about 55% stake in Hindustan Dorr Oliver which is an excellent engineering company. It was expected that they were looking to sell this company and various names ranging from a Pirmala to a foreign company were doing the round a few months back. Apparently the deal fell thru on valuations. The promoters of IVRCL apparently wanted something in the rage of 90-100 which no prospective buyer was willing to give. It appears that they have decided to wait for better times before making any further moves in this direction.

Ø  They are planning to merge IVRCL Assets & Holdings, which is essentially their BOT arm into themselves. The latter is an infrastructure developer, with a portfolio of nine toll roads, three of which are operational. The planned merger, if implemented, will bring the toll road business into the IVRCL fold and allow them to monetize their land bank and PPP projects, which will be housed in a separate unlisted subsidiary as a part of the scheme of arrangement. This will allow them to substantially reduce their debt from the current levels, which is the main reason for their current state. Not only this, their total stake in the merged entity will go to 13.6% which will be higher than that of Essel.

All in all, Essel or no Essel, no better time than now to board IVRCL and/or its associated companies (IVRCL Assets & Holdings and HDO) which will move in tandem with it.