Tuesday, September 25, 2012

Strictly for the punters

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I came across an interesting case brewing up in SC which could result in a windfall to Goldstone Infra investors, irrespective as to which shareholders will be eligible to participate in the open offer – the ones holding the shares at the time of the event or even the current ones who may have bought them much later. Some amount of digging revealed an interesting situation.

The case is as follows:

On January 25, 2007 the Board of Directors (BOD) of Goldstone Infratech (GI) passed a resolution to convene an EGM for seeking the approval of its shareholders for issue of 1.5 crore share Warrants to Goldstone Exports (GE), who already held 9.51% in GI, on preferential basis. Accordingly, on February 24, 2007, the shareholders of the GI approved the preferential allotment and on April 30, 2007, the BOD allotted the share warrants to GE on preferential basis. Thereafter, on Oct 29, 2008, the BODs of GI allotted 1.5 crore Equity Shares to GE pursuant to the conversion of warrants, thereby, increasing the shareholding of GE from 9.51% to 47.19% resulting in the triggering of open offer under SEBI regulations then. Accordingly, GE made the public announcement to the shareholders of GI in terms of SEBI (SAST) Regulations, 1997 at a price of Rs.23 per share taking the date of Board meeting i.e. January 25, 2007 as reference date. However, on examining the letter of offer, SEBI directed GE to revise the offer price taking the date on which BODs authorized the preferential allotment of Shares i.e. Oct 29, 2008 as reference date which comes to be Rs. 43 per share. GE filed an appeal in SAT against this order of SEBI. SAT upheld the SEBI order, that for the purpose of determination of offer price, the date on which the BODs authorized the preferential allotment of equity shares to GE upon conversion of warrants, should be considered as reference date and not the date of Board meeting in which they approved the issue of share warrants as no voting rights accrued on that date. Then GE moved the SC against this order of SEBI/SAT. This case has been going on for last 4 years and the final outcome is now awaited on Oct.’ 10.

The current price of GI is about 17. Now let us look at a few scenarios:

1.     Promoters (GE) win the case and Court considers 23 as the open offer price:

a.  Investors at the time of the event i.e. holding shares in 2007 will be eligible to participate in the open offer, never mind when they bought the shares (even if they were to buy them today @17, the would still get the offer letter wherein they could tender these shares @23).
b.  All investors (pre and post the event) can participate in the open offer which means there will be a scramble for the shares considering the attractive differential. It is a fact that public is often blinded by the differential value and ignores the acceptance ratio, the ratio of shares accepted to those tendered which is fundamental to the profitability or otherwise of the open offer, to their own peril. This fact alone will give enough returns, even if the market price doesn’t actually reach the offer price.

2.  Promoters lose the case and Court asks them to make the offer at 43+ (including the interest for the delayed period since then)/share:

The same scenarios as above will play out but on a much larger scale with the gains being proportionately and significantly higher than the earlier case. In fact in this case, both categories of investors stand to gain handsomely and part b more so since the price will be much closer to the offer price and people who may have bought post the event in 20s or below can still sell at a handsome price which may be in late 30s if not actually 43+.

Considering SEBI’s investor-friendly track record, as well as SAT’s upholding of SEBI’s stand, the chances of the promoters (GE) losing the case appear to be higher, in which case as mentioned above, there is a windfall waiting to happen. In the worst case too, investors buying now will get anywhere close to 20% in a couple of months time (considering the current price of 17) even assuming that the offer price is fixed at 23 and only old investors are eligible, for the price then will settle around 20.

However, as in all cases, there is no free lunch. There are some risks associated with this event.
  1. While going thru the shareholding pattern, I saw that under Public shareholders in the Non-institutional category, there is a column Bodies Corporate which has a 22.77% stake mentioned against it. But the identity of this group with such a significant shareholding as not been mentioned anywhere in the public domain. This group could very well tilt the acceptance ratio one way or the other.
  2. The court may yet again postpone its verdict (though they have said that this will be the final outcome), in which case the delay would erode the gains in the first scenario depending upon the period of the delay - anything beyond say 2 years (till that time you could still get 10% annualized returns) while the second scenario would still bring in good profits.

Monday, September 24, 2012

Power traders

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In the recent spate of policy announcements, one of the major items which has probably been overlooked is the allowing of 49% foreign investment in power exchanges - 26% via FDI and the rest via FII. FII purchases are, however, restricted to the secondary market and no single entity is allowed to hold more than 5% stake.

I see 2 listed companies benefiting from this move by the government – PTC India (not the Financial services arm) and Financial Technologies. The rationale is as below.

At present, in India, there are only 2 operational power trading exchanges – Indian Energy Exchange (IEX) and Power Exchange India (PXI). PXI’s equity holders include NSE, NCDEX, PFC, Governments of Gujarat, Madhya Pradesh and West Bengal, JSW, GMR and Tata Power Trading while IEX’s stakeholders include Financial Technologies, PTC India, Rural Electrification Corporation, IDFC. In fact, IEX was the first national power exchange in India co-promoted by PTC India through its subsidiary, PTC India Financial Services in the year 2008. 

Currently, there is no specific dispensation under FDI policy for power trading exchanges. These exchanges are engaged in day-ahead market and await regulatory approvals for future and derivative products. Two power exchanges — National Power Exchange and Marquis Energy Exchange — are being planned. The equity holders of National Power Exchange, which is yet to begin operations, are NTPC, NHPC and PFC (collectively 50%) and Meenakshi Power, IFCI and DPSC, West Bengal.

PTC India is among the most credible player in bilateral market as well as on the power exchanges. PTC plays a key role on IEX as it has the biggest portfolio of trading power on the exchange through traders. A number of captive power producers (CPPs) avail PTC services to trade power on the exchange as clients of the company. It is the pioneer in implementing the power trading concept in India and has successfully demonstrated its efficacy in optimally utilizing the existing infrastructure within the country to the benefit of all.
PTC has maintained No. 1 position in electricity trading since sustained trading began in 2000-01. It seeks to provide holistic services in the power trading market, including intermediation for long-term supply of power from identified domestic IPPs and cross-border power projects, financial services like providing equity and debt support to projects in the energy value chain through its subsidiary PTC India Financial Services (www.ptcfinancial.com), fuel intermediation/ aggregation for cross-border power plants through PTC Energy Ltd. and advisory services among others. It thus plays the unique role of a Complete Energy Solutions Provider.

Of the two power exchanges in India, Financial Technologies has co-promoted IEX along with PTC India Financial Services (PFS), an arm of PTC India. FT’s 33 per cent holding in IEX, considered the key beneficiary of the reform in the sector, is worth Rs 500 crore, based on the last deal where PFS sold 14.01 per cent (in IEX) for Rs 70.76 crore. However, thereafter the valuations have gone up as a result of higher profits.

Value unlocking in both the above scrips (PTCI and FT) could happen thru a stake sale in case of IEX (with both FT and PTCI as the beneficiaries) as well as thru the introduction of advanced power trading products which the foreign partner may bring leading to increased trading volumes on the exchange. The 2 exchanges are trading about 2% of the 800 billion units generated in the country today, so there is ample scope for expansion in volumes traded on these exchanges. However, it must be remembered that this will be a long drawn game and the actual benefits would flow in much later for a power hungry country like India, when not only appropriate products but also the necessary infrastructure would be in place. But when this happens, the results could be multi-fold (PTC came out with an IPO in March 2004 @16 and currently has given more than 300% returns in 8-1/2 years multiplying more than 4 times in this 8-1/2 year period). FT appears to have an edge here being a private player and thus free to take expeditious decisions as compared to PTC which being a PSU is firmly under the control of government with all its attendant delays in decision-making.

Tuesday, September 4, 2012

Cementing profits

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HeidelbergCement India, formerly known as Mysore Cement, is a midcap cement stock. Manufacturer of the “Mycem” branded cement in the country, it has two cement plants and three grinding facilities in Karnataka, MP, UP and Maharashtra. Following the stake sale by the S. K. Birla group in 2006, it now belongs to a subsidiary of Danish cement company Cementrum I.B.V, itself a wholly-owned subsidiary of HeidelbergCement AG, one of the world's five largest cement entities.

In recent times, cement stocks have been doing very well. On the operational front also cement companies are seeing good activity. The demand scenario and their pricing power continue to be good. Heidelberg Cement also came out with strong set of numbers on the back of improved realizations and better cost control measures.

Heidelberg is on the verge of doubling its capacity from current 3.08 million ton during the course of this financial year. This capacity is in MP and UP, which service the fairly lucrative high priced Central India regions. The impact of that doubling capacity is of course the volume growth and a cost reduction but this is not yet reflected in the current price. Given the government’s thrust on infrastructure and the start of the festive season following the end of monsoon when the construction activity starts picking up, there should be adequate demand for cement in the coming months.

On the valuations side, @43, the stock is trading at about 12.5 times estimated 2013 earnings. However, this is likely to change significantly going ahead, given the above factors, making it attractively valued.