Tuesday thoughts

Cox & Kings (CK) has been hitting new lows everyday without any particular reason, which therefore can be attributed to the general pessimism in the market given the adverse news flows and policy decisions of the government. 

Sir John Templeton’s, the founder of the Templeton Group (which was later acquired by Franklin Templeton Investments), was a great investor of the 20th century, and believed in investing with a bargain hunter's discipline. He would say that the time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. I, for one, am a firm believer in Sir John Templeton’s philosophy. If someone had bought Wockhardt in early ’09 when it was close to Rs 100, you can imagine where the person would be today when it is quoting around 700. And that was the time when the market didn’t want to touch Wockhardt with a bargepole.

The same theory can be applied to Cox & Kings. One swallow doesn’t make a summer and one or two bad results should not be the basis for shunning a stock which used to command investor fancy not too far back. There can’t be a unidirectional movement in any stock, however good it may be and there will be occasional blips which would provide the opportunity to get in. CK is probably going thru a similar phase. While I can’t say for certain whether it will fall further or not, I do believe that now is as good a time as ay to buy it. If it dips further, buy more and wait for the rollercoaster to change trajectory and start the ride up!

Areva T&D's global business was acquired by a consortium of Alstom and Schneider Electric in June 2010. Following the buyout, Alstom & Schneider Electric in December last year said they had assumed operational control of Areva T&D India. Alstom in India is mainly into power generation equipment while Areva T&D India is a leading transmission & distribution player. To reflect this parentage, Areva T&D renamed itself as Alstom T&D. Further, under a scheme of demerger, it demerged its distribution business to Schneider Electric Infrastructure leaving the high-voltage transmission, power electronics and automation business operations under the control of Alstom. The name of the remaining company may yet change to reflect the changed business profile. I had commented on this development last April and the script is still shaping up.

Following the above corporate development, Scheider Electric finally listed around 65 on the exchanges in March ’12 and currently quotes around 90. Now that this has finally happened, there are 2 separately listed companies each having a different owner and my thinking is that this could play out in 3 ways:

1.  Alstom may not want 2 separately listed companies in India, merges the transmission business company (Alstom T&D India) with itself and either buys out the minority shareholders in it or allots its own shares after a valuation process. In this case, the shareholders of the company will get either money (and I guess quite a bit as Indian shareholders are not know to let go easily) or shares in Alstom Projects India (which itself may not be a bad thing considering its standing).

2.   Schneider may choose to delist its listed Indian arm, since it has no listed presence in India of its own and may not want it now. Again there would be a buy-out of the minority shareholders.

3.  Both companies remain listed, majority owned by their global MNC parents. In this case, each company would be valued separately and find its own level which may be significantly higher considering the niche positions each parent enjoys in the power space globally.

Chances of options 1 and 2 happening appear brighter considering that it has been a forced listing for Schneider and while it is present in India and growing, it is not listed. Alstom on the other hand has been present in India in a listed form for quite some time now, and may also consider consolidating its operations into a single entity.

Wednesday wares

After the delisting of Atlas Copco at a fantastic price of Rs 2750/- @P/E of 35 which was way over market expectations, spotlight may well shift to its MNC twin Ingersoll Rand (India), whose parent is US-based. There is nothing in the air at the moment regarding its delisting and neither is it in the desperate-75 bracket. However, such things happen fast and once the market gets a whiff of it, the stock just zooms out of grip.

Consider the facts:

Ø  it is in the same business as Atlas Copco that of making air compressors;

Ø  at about Rs 525, quotes @ ttm P/E of about 20.6;

Ø  it is debt-free and has cash of about 600 cr. on its books which alone gives a value of 190/share on an equity of 31.6 cr. So the real operating P/E is only about 13-14.

Ø  Their new factory is not fully operational yet; once it does, it should boost its bottom-line further leading to an even attractive valuation

Ø  Promotes hold 74% in the company, so it is not in the desperate-75 bracket.

Considering all of the above, it should give a steady growth in times ahead. If there is any development on the delisting front, that will be a bonus.

INOX Leisure became the promoter of Fame multiplex when they acquired a 50% stake after fighting a bloody battle with Reliance Capital. Fame recently came out with a rights issue. Before this rights issue, Inox held 50% and Reliance Capital 33% stake in the company. But post the recently concluded rights issue of Fame, they have been able to raise their stake in the company to 68.35%.

Inox is promoted by Gujarat Fluorochemicals which is a cash rich company with decent cash earnings every year, which they deemed fit to invest in the consumer–oriented multiplex business since their own business isn’t really a cash guzzler (it may be an interesting exercise to study the cash flow/operating model of GF, but that’s a separate exercise). Usual all multiplex companies generally go for the lease model but in case of Inox many of their properties are company owned. This would give them dual benefit – low/discounted lease rentals as well as appreciation of the properties owned.

While Fame has moved from 45 to 55 (about 25%) in recent times, this increase in its share price is not reflected in the price of Inox though they hold 68% stake. As per recent reports, Cinepolis, the world's fifth largest Mexican multiplex operator with more than 2,500 screens, is in talk with Reliance to either take a meaningful stake in the BIG Cinemas or buy out some of the latter’s cinema halls. And not too long back, Disney bought out UTV from Ronnie Screwalla & family. So this industry has started to attract the attention of global biggies. Gujarat Fluorochemicals may not necessarily view their stake in Inox as a strategic business and down the line once they reach a critical mass may not be averse to exiting it. So it might be a good time to log into Inox at this time and wait for either a sell off by the promoters at an attractive price or as most analysts are gung-ho about, the great Indian consumption story to play out. Besides Inox/Fame, other significant players in the multiplex business are Cinemax, BIG Cinemas and PVR with an all-India presence.

Focussed entertainment

Prime Focus is a company focused on providing creative and technical services to the visual entertainment industry covering films, broadcasting and advertising. The services they provide include post-production services as well as visual effects to movies, feature films and commercials.

In 2005, to provide the commercials industry with a boutique facility, with infrastructure and interiors at par with international studios, they setup a studio in Lower Parel, Mumbai and a facility in Chennai was commissioned to cater to the South Indian Film market. They also have a facility in London which offers visual effects services for film and television clients, and another in Mohali near Chandigarh focusing on 2D- 3D conversion.

In 2006, it acquired the GBP 20 million, UK-based media service company of VTR Group. This has given it a footprint in the UK and European markets where outsourcing of services for visual effects as well as post production is a growing trend. As the visual effects-based films become more and more popular, the percentage of spend in the films in Bollywood is ramping up to the levels of about 30% to 40% of the budget, in certain cases. And, this has led to growth for the business in which Prime Focus operates.

It came out with an IPO in May ’06 at a price of about 42 (price adjusted for stock split in Nov ’10 to fv 1 from 10  earlier) and in the next 2 years went on to scale highs of 127 before the 2008 crash when it came down to as low as 10-12. However, considering its unique position in the industry and growing scope of services, it again bounced back four-fold to levels of about 40 in the next 2 years and is currently quoting around the 50 mark.

Notable among its works is Avatar where it did work worth $5 million with a 35% margin. Post this success they had large orders from Hollywood studios for converting a lot of their 2D films to 3D. Major successes in their portfolio are the films Clash of Titans and Harry Potter & the Deathly Hallows where they provided these services. Continuing this trend, last year they were selected by the US-based Lucasfilm to work on conversion of Star Wars: Episode I The Phantom Menace into 3D for theatre release. They also delivered three big movies for the US market - Green Lantern, Transformers - 3, and Harry Potter 7B.

Closer home, last year they signed a multi-film deal with leading movie studio UTV Motion Pictures, to service the entire production and post production requirement of a slate of the latter's films. This would include visual effects, sound and lab services, as well as provision of cameras lenses and more. In addition, Eros International Media tied up with the company for digitising and cataloguing its entire library of movies. The company also won was selected by Star TV to upgrade its content operations infrastructure.

Promoters hold close to 50% of the equity capital while FIIs hold about 10%. Rakesh Jhunjunwala holds slightly more than 6% stake in the company. A key development to note is that a few days back they allotted close to 1 crore shares to the promoters @55/share leading to increase in their stake by about 2%.So close to 70% of the equity is in strong hands lending enough confidence in the long term prospects of the company.

Currently 35-38% of its revenue comes from US, about 35% from UK and around 30% from India, leading to a fairly balanced distribution across local and global markets.

A focussed approach towards a niche domain and sound global infrastructure for servicing their clients, quite a few of them reputed names in the global film world, makes this a unique play in the media and entertainment sector, though a bit expensive on the valuation front which may be justified by their niche position.

Check out their site http://www.primefocusworld.com/

Thursday tidbits

Dhanalaxmi Bank has lately been in the news for all the wrong reasons. First it was the employee union vs. management in Sept. ’11 where the management was charged with financial mismanagement. Then RBI frowned upon such goings on and ordered an inspection in its books wherein it found discrepancies in certain accounting practices. For instance, it has already booked income from certain businesses that should have been done over a period of time.

The bank had also proposed to place about 20% of its equity with FIIs, a deal which also fell thru as one of the proposed investors, US-based Customers Bancorp Inc. backed off from the deal after failing to secure the local regulator’s approval. This was a setback for the cash strapped bank as it was looking to improve its financial ratios thru this funding.

The bank till some time back was headed by the high profile Amitabh Chaturvedi, an ex-Reliance Cap head, who the conservative bank folks considered too aggressive. He apparently spent a lot of money on hiring people (bankers and execs from private banks) and expanding the branch network, but income did not grow to that extent. This led to the bank board losing faith in him and him moving out. An old timer has since been at the helm of the bank.

While all has not been hunky dory at the bank over the last few months, it is still managed by some eminent people from the financial world - G.N. Bajpai, former chairman of SEBI, is chairman of the bank and the board consists of the reputed CA Shailesh Haribhakti along with an ex-SBI MD.

Considering the shaky situation the bank finds itself in, it may sooner than later find itself as an M&A candidate, voluntarily or otherwise. And RBI may only be too willing to lend a helping hand if someone credible comes along. With its deep reach in the south (esp. Kerala), there would surely be enough takers were this to happen. After the hullabaloo created by the employees union and later RBI, the stock had taken a beating to below 60. Over the last few days it has soared by nearly 25% and surely looks set for more. This may be accelerated if the above starts taking shape. It used to quote way above 100 not too long back.

Lloyds Steel, a steel making company of the Lloyds group, was till last April (2011), a sick company under BIFR fold. It had announced allotment of shares to ARCIL last year and to SBI this year against a part of the debt it owed. The company has an iron plant in Wardha, Maharashtra, which incidentally is the mining district in the state. The plant is fully integrated with iron ore mines in Garhchiroli, which were allotted to it. Also, the plant is close to the coal mines of Wardha and sources its requirements from the local mines.

The lenders to the bank were actively scouting for buyers of their stake to recover their dues when Miglanis of Uttam Galva Steels apparently showed interest, and finally in early Feb. 2012, picked up a 24% stake in it. This was not done thru the publicly listed company but thru their own private companies. Uttam Galva Metallics Ltd., the unlisted arm of Miglanis, operates a pig-iron plant at Wardha and Lloyds Steel sources 80% of its raw materials from this plant. This move will obviously bring a great deal of synergy to both the companies leading to great cost savings. Lloyds Steel promoters will continue to hold over 30% stake in the company after the stake sale. Lloyds Steel is also in the process of demerging its engineering division.

Reportedly, Miglanis are keen to increase their stake further in Lloyds Steel. Since they are already close to the threshold of 25% (under the new SEBI guidelines), it will result in an open offer once this limit is crossed. Lloyds Steel currently quoting around 11 is quite close to its yearly low of 7, while the yearly high is about 23. The risk reward ratio thus appears quite favorable at this point. Again this being a takeover case, things may move at their own pace over the next few months.