Thursday, April 5, 2012

Thursday tidbits

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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.

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