Investment Advisory Service

Saturday, 28 August 2010

Sakuma & Network 18- Updates

My earlier post about Sakuma Exports and Network 18 is here.

Sakuma Exports declared a dividend of Rs 5 /- for the year 2009-10 on the preference shares. Read here
I believe the company is on its way to redeem the preference shares in February 2011 or may be earlier if it wishes to.

In Network 18, my worst fears turned out to be true. The company came out with a postal ballot and sought to waive the voting powers on the preference shares which would have accrued since the dividend has remained unpaid on the preference shares for 2 years. The Network 18 group is never short of aces up its sleeves when it comes to dealing with the minority shareholders.

You can read the postal ballot here.

Tuesday, 1 June 2010

Pantaloon DVR - What an arrangement !

Pantaloon issued DVR (Differential Voting Rights) shares as bonus shares to the equity shareholders of the company in July 2008.

The DVR shares have the following terms :

  1. One DVR share carries 1/10th of the voting rights of an equity share.
  2. The DVR share is entitled to a 5% extra dividend on the face value as compared to an equity share.

The DVR share (CMP 275) is trading at a discount of 30% to that of the equity share (CMP 390). The discount may be because of variety of reasons : lesser voting rights, low liquidity etc.

I wish to highlight an anomaly which exists in the scheme of arrangement filed by Pantaloon India. Pantaloon India plans to de merge the Mall management and Project Management undertaking to Future Mall Management Ltd (FMML) and continue Pantaloon India as a pure retail play.


Interesting part of the scheme is this :

Both classes of shareholders : Equity shares and DVR shares (Class B shares) are entitled to the same number of the equity shares of the new company. There is no difference in the classes of shares issued to the equity shareholders and DVR shareholders. The equal treatment of DVR shares with equity shares should be one reason for a part of the existing discount to narrow.

The scheme doesn't elaborate on the revenues and asset/liabilities of the divisions de-merging into FMML. Reading the Pantaloon Annual report also doesn't offer much clues. 

There are trades which one could have worked upon provided there is some sanity check for the value of FMML.

  1. We could create cheaper shares of FMML by buying Pantaloon DVR shares in spot and selling Pantaloon equity shares in the futures. This would have entitled us to the same number of FMML shares but at a much cheaper acquisition cost. The selling of Pantaloon equity shares in futures will take out the market risk with regards to Pantaloon.
  2. Long term equity shareholders of Pantaloon could sell their shares and convert them into DVR shares. Once they get the entitlement of FMML shares through DVR route (30% higher number of shares), they could switch back to equity shares of Pantaloon.

However, both the above strategies might eat up most of expected profit in trading costs. Also there is a risk of the discount widening post the demerger.

Given the absence of information on FMML, I would stay away from these trades. This post is aimed at exhibiting the anomaly in the scheme of arrangement and how in this scheme , DVR shares have not been treated any differently.

Saturday, 8 May 2010

Comparison of 2 quasi equity securities

Preference shares are quasi equity instruments which behave partly like equity shares and partly like debt instruments. They behave like debt instruments as they carry fixed dividend rates and the dividend is paid before any dividend can be paid to the equity shareholders.

They behave like equity instruments as the dividend is to be paid only out of distributable profits of the company and the dividend is not an obligation on the company unlike a debt instrument. Also, the preference shares carry the voting rights only in certain circumstances viz. non-payment of dividend.

Network 18 Media Investments Limited is a media conglomerate which has interests in CNBC TV 18, CNN IBN, Infomedia etc. The company issued NCCPS (Non Convertible Cumulative Preference Shares) in 2008 with the following terms.

Face Value : 150
Annual Dividend : 5%
Redemption Date : May 2013

This instrument offers 7.50 bucks of dividend every year and a redemption value of Rs 150. Currently it is trading at Rs 100. The annualized yield (including dividends) at this price works out to be 27% per annum for the next 4 years. Looks very attractive given the risk-reward ratio at the current market levels.

Where is the catch ? The company has been in red for the last several years. From 2005 till 2009, the company made profit  only in one year. For the current year too, the PAT has been negative for the last 3 quarters and the way it has been going , the business doesn't seem to be breaking even any time soon. This has made the company skip the dividend for the preference shares last year and most likely the dividend will be skipped this year too. The dividends are cumulative  in nature which means that any unpaid dividends need to be paid in the subsequent years.

But the absence of profits in the company puts the dividends and the redemption, both in jeopardy. Also, given that the Network 18 group knows the nuts and bolts of financial engineering very well, the risk of change in the terms of the preference shares can't be ruled out.

With these kinds of odds against the investment , sound sleep would be the first casualty.

Let's compare that with a relatively unknown company:

Sakuma Exports is a Mumbai based export house involved in the export of various products, especially agricultural commodities. 

The company issued CRPS ( Cumulative Redeemable Preference Shares) in 2006 with the following terms :

Face Value : 100

Annual Dividend : 5%

Redemption Date: Feb 2011

This instrument offers 5 bucks  of dividend every year and a redemption value of Rs 100. Currently it is trading at Rs 90. The annualized yield (including 2 dividends which are to be paid) at this price works out to be absolute 22% return in the next 10 months. That is an annualized yield of 26%.

The company is selling at an enterprise value of 34 crs and has cash and mutual funds of 60 crs. It's a cash bargain and the debt security of the same is available at 26% annualized yield. The total amount required for the redemption of the outstanding preference shares is 10 crs. Thus, 60 crs of cash equivalents amply cover the redemption of preference shares. In the past 3 years, the company has kept its promise of paying the dividends on time.

Moreover, look at this , this and this. The promoters' are buying the preference shares from the open market . This provides a lot of comfort for the impending redemption.

Variation in terms of the preference shares is a risk but given that the promoters' are buying it themselves, I would consider it very unlikely. Another risk could be the company going into losses in the coming quarters but that also seems hedged with the amount of cash the company has.

I would be very happy putting money in this security which not only provides good chances of the return on my capital but also return of my capital.