Healthy future

Zenotech Labs is a specialty generic injectables company with a strong expertise in the area of bio-technology. Its predominantly high value injectables product portfolios serve niche therapy areas such as oncology and anaesthesiology. It is a subsidiary of Ranbaxy Labs and hence now of Daiichi Sankyo (DS) which bought out Ranbaxy in 2008. In January ’08, Ranbaxy had acquired nearly 47% in Zenotech @160/share. But in June ’08, Ranbaxy itself got acquired by DS. As per SEBI rules, DS made an open offer for Zenotech @ 113.62/share as per the prevailing rules of the highest of the 6 month or 2 week price following the announcement. Currently, Ranbaxy holds nearly 47% and DS holds the 20% it acquired in the open offer following Ranbaxy’s acquisition. The founders (Jayaram Chigurupati and his family) still hold nearly 26% in the company. The point to note is that the floating stock in the market is just about 10% (or even below it) and is below the acceptable limit of public shareholding. This also means that they will have to either delist the company or lower their stake by at least 15% or more, which is a significant amount in terms of number of shares as well as the cost.

This company has been in the news for all the wrong reasons over the last few years since Ranbaxy’s takeover. The main reason for this state of affairs is the dispute between Mr. Jayaram Chigurupati (JC), the founder and erstwhile promoter of Zenotech Labs, and DS regarding the open offer price. Zenotech and its founder challenged the open offer price with the argument that since Ranbaxy is now a subsidiary of Daiichi and by definition the 2 are Persons acting in Concert, the PAC definition can be applied retrospectively to the time when Ranbaxy acquired Zenotech. And since at that time Ranbaxy paid 160/share, 160 becomes the applicable price for Daiichi's open offer for Zenotech. Zenotech's argument won in the Securities Appellate Tribunal (SAT) in October 2009, much to the surprise of India’s legal & M&A community. However, DS appealed in the Supreme Court who overturned SAT ruling and cleared the open offer. 

However, last year, in a new twist to Ranbaxy-Zenotech takeover dispute, Zenotech Labs founder JC moved the Company Law Board (CLB) seeking permission to buy back shares from Ranbaxy and its Japanese owner Daiichi Sankyo. JC said he was willing to pay about Rs 130/share to take back Zenotech, which has been in rough weather after being acquired by Ranbaxy in 2007.

In July ‘12, JC filed a petition in the Andhra Pradesh High Court challenging the FIPB approval allowing Daiichi to acquire 20 per cent stake from Zenotech’s public shareholders. According to the petition, the FIPB failed in complying with the rule book by not seeking the Board resolution of Zenotech for foreign collaboration coming in the form of Daiichi. The FIPB approval had also allowed Daiichi to acquire another 20% stake of Zenotech through an offer to the public shareholders. In the current petition, Chigurupati is seeking setting aside of the approval and restraining Daiichi from exercising its voting rights in Zenotech, in addition to stopping the foreign company from making any structural changes to the ownership of Zenotech. He also accused Daiichi of mismanagement and non-payment of salaries forcing its 200-odd employees to quit.

In the latest development, Dr. Jayaram Chigurupati has ceased to be the MD of the Company upon completion of his term on September 30, 2012.

Looking at the above factors, this case bears a distinct resemblance to another company called DISA whose shares were also held up in court over a dispute regarding the open offer. Post the court decision, their shareholding increased to about 86.5% currently. So they also need to decide soon how they plan to stick to the 25% public shareholding norms.

Considering a strong parent in the form of Ranbaxy/DS and the low public shareholding, this should give good returns over a longer timeframe. There are 3 scenarios:

1.  The CLB/Ranbaxy/DS accept JC’s proposal to acquire the shares @130/share and delist the company. The current price is about 35. Huge windfall for the public shareholders as everybody will get this price and the company will be delisted.

2.   Court accepts JC’s petition that the 20% acquired by DS was wrong and he wins the case. In which case, what happens to the 20% that DS acquired is still unclear.

a.  If it is extinguished, Ranbaxy will end up having about 59% stake with the founder JC holding about 29% and the rest with the public, in the new shareholding structure.

b.  If the court asks DS to return the shares to the original holders from whom they were acquired, it would be similar to the option above. But then the question would be what happens to the money that DS paid to these shareholders for the 20% stake? No shareholder would be either willing or happy to return the money and get the shares back. There may be further litigations on this count unless the court takes a holistic view and lays down clear rules regarding handling of all possible options arising out of its decision.

c.  If it is bought by JC, he and Ranbaxy will become nearly equal shareholders with each holding about 45%.

d.  If it is bought by Ranbaxy, Ranbaxy will end up with 67% and JC’s share will remain the same i.e. about 26%.

In any of the above cases, they will then have to reduce their shareholding to stick to the 25% public holding norm. Again the price at which they do so will be a crucial factor.

e.  Or one may buy the other out. In that case, the price would be interesting since JC has already offered 130/share to buy Ranbaxy/DS share. Even if this looks farfetched and may not materialize, the price may well be at a premium to the current price. And as is seen in open offers, the price tends to shoot up immediately after the announcement and settled down close to the offer price.

3.   Court as well as CLB rejects JC’s proposal and upholds Ranbaxy/DS version. It will again be similar to the second option above whereby they will have to reduce their shareholding to stick to the 25% public holding norm.

In both options 2 and 3 above, if it boils down to either or both of the majority stakeholders reducing their holding, the price may be the clinching factor and this is where it gets risky. For, if everybody plays by the book, the price may not be attractive going by the average price over the last year or so.

However, over the longer term, once these issues are resolved, and Zenotech Labs gets back on track to doing what it does best (assuming it remains listed with either Ranbaxy/DS combine or JC at the helm), it would be back to its glory days a la Wockhardt. The only question is how long the longer term will stretch. The jury is still out at this point.

Once thing though, looks certain. Things can’t continue as they are now with public shareholding close to 10% and the June ’13 deadline not too far away. It is a question of who blinks first.

Colorful future

Kokuyo Camlin (formerly Camlin), owner of the well-known Camel and Camlin brands, is one of India's leading stationery companies with a wide product range and strong pan-India distribution network. Established in 1931 by D. P. Dandekar with a single product (ink powder), today it is a company manufacturing over 2000 products, including variants. Its wide distribution reach and quality products have made it household name in school and education stationery products. Camlin’s products have been used for generations and enjoy strong brand loyalty. It is a market leader in art materials product segment like crayons, sketch pens, water colors, oil pastels etc. besides school education products such as pencils, gel pens, erasers, sharpeners, maths sets/compass boxes and notebooks among others. It is also present in the office stationary segment (stamp pads, ink etc but primarily markers) as well as fine art and hobby products segment (glass colors, fabric colors etc). The company was the first to launch the Hobby Range of colors in India, and introduced color categories such as fine art colors, hobby colors and fashion colors. It has 4 manufacturing units, 3 in Maharashtra (Tarapur, Taloja & Vasai) and 1 in Jammu where the goods produced enjoy excise exemption leading to competitive pricing and higher profitability.

The company has ventured into pre-school business from the year 2009 and has commenced 3 pre-schools till date in and around Mumbai. The schools, branded as Alpha Kids, have received good response, in terms of number of enrolments. How they scale up this business remains to be seen.

Last year around this time of the year, Camlin promoters, the Dandekar family, sold a major part of their stake (20.3% out of the total 38%) crore to Kokuyo S & T Co Ltd., a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution having an annual turnover US$ 3.2 Billion. This was followed by an open offer to the other minority shareholders @110/share. Post the stake buy, the foreign promoter Kokuyo holds nearly 51% in the company and the erstwhile promoters the Dandekar family holds nearly 13%. So the promoter holding in the company is a robust 64% which gives a great comfort as an investor.

However, as in any business catering to a wide market, there are challenges. The company operates in an extremely competitive environment, wherein the size of the unorganized market is supposed to be about 40%-45%. The company faces tough competition from both the organized and the unorganized segments of the industry. The company’s business is also cyclical to a certain extent with Q1 (when the schools and colleges open) being the strongest and Q4 (when they close) being the weakest. However, as the company gets into the expansion mode with the financial and technology backing of its Japanese parent, it is poised to exploit several new opportunities and create & maintain its competitive edge in many of the new as well as existing products. Kokuyo may introduce own products such as Campus notebooks (where it is a strong player in Japan), Airofit scissors, Dotliner adhesive dispensers and its furniture line, as these will either be new products or brand diversifications. There are many high-growth areas such as schoolbags and notebooks where Camlin is not present and Kokuyo’s know-how is expected to help. At $2.2 billion or roughly Rs 10,000 crore, the Indian stationery market is big.  That the company has its task cut out is clear. The space has evolved over the last few years with the entry of new players like writing majors Cello, Reynolds, Linc and Luxor at one end and ITC with its Classmate brand of notebooks and allied products at the other. International brands, like Faber Castle and 3M, are also consolidating their presence here. Acquisitions of domestic companies by global brands are also on a rise: Societe BIC of France had acquired 40 per cent stake in Cello in 2009, the same year when Japan's Mitsubishi formed a joint venture with Linc Pens, and recently bought a stake in it. So it may not be a cakewalk for Camlin, its strong brand equity notwithstanding.

Rising disposable income, growth of the private sector and increasing government spending on primary education would increase the consumption of quality stationery products. The education and literacy drive of Government of India is creating the platform for growth in the stationery business. The biggest boost in the education sector has been the historic "Right of Children to Free and Compulsory Education Act, 2009". Camlin is all set to align its resources to gain advantage of various government initiatives on education such as 'Sarva Shiksha Abhiyaan'.

Camlin @38 is available right now at 33% (nearly 1/3^rd) of what the foreign promoter actually offered for the company. What the promoter bid for 54% odd levels of the total market-cap right now is available for 30%. M-cap/sales for the company is at a paltry 0.6x while most FMCG companies command it in excess of 2x+. So there is some catching up to do yet. Some time back, PE fund New Vernon is said to have picked up a small stake through open market deals. So here is a company with a strong Japanese promoter who brings in vast technological expertise to the table, and is looking to integrate its operational strength with the company's strength, where the balance-sheet clean up is already done. Things can only look up from here though short term challenges due to the deteriorating economic conditions remain. This provides an opportunity to accumulate the stock at attractive levels and wait for a turnaround.

Japanese firms appear to have finally learned their lessons in the Indian consumer market. After Sony and Panasonic were laid low by the Korean onslaught of LG and Samsung, they have quietly regrouped themselves and are now giving the Koreans a run. Similar is the case with Ranbaxy. A few years back, Dai Ichi Sankyo paid what then was thought to be an astronomical sum for buying out Singh brothers’ stake. However, they believed in the company’s core strength and did not mind the expensive buy. All was not rosy along the way, though. There were many regulatory issues faced by the company with the US drug authorities which affected them significantly resulting in the share price crashing from 600 levels to around 200. In the last year or so, it has slowly clawed back to around 500. A similar thing could happen with Camlin. It is in fact at the same level it was before the stake sale happened. From here on, an investor who has got patience and has a longer timeframe has hardly anything to lose because the insider himself is paying a very high premium valuation because they know what they will do with the company in the longer timeframe.

Interestingly poised

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