Investment Advisory Service

Wednesday, 19 December 2012

Wipro - Demerger Update

Wipro is moving quite quickly on the demerger scheme. The merchant bankers deserve a compliment for the same. The High court of Karnataka has directed a meeting of the shareholders to approve the scheme. The meeting will be held on December 28, 2012.

The information statement can be checked here and the scheme of arrangement here.

Court Convened Meeting on Dec 28, 2012
18 Dec 2012 11:05
Wipro Ltd has informed BSE that, by an order made on the November 26, 2012, the Hon'ble High Court of Karnataka at Bangalore, has directed that a meeting of the Shareholders of Wipro Ltd ("the Applicant / Demerged Company") will be held on December 28, 2012, at 04:00 P.M. for the purpose of considering and, if thought fit, approving, with or without modification the Scheme of Arrangement between Wipro Ltd (Demerged Company), Azim Premji Custodial Services Private Limited (Resulting Company) and Wipro Trademarks Holding Limited (Trademark Company).

Monday, 17 December 2012

Wipro Limited- Scheme of Demerger

The Demerger Scheme

Wipro Limited has announced the plan to demerge its non-IT business into a separate company ; Wipro Enterprises Limited. The non-IT business consists of :

A)  Consumer Care, Lighting and Furniture Business
B)  Infrastructure Business (Hydraulics and Water)
C)  Medical Diagnostic and Service Business

The new company will be an unlisted entity and the shareholders have been provided with 3 options to choose from in lieu of the non-IT business which will get hived off.

  1. Receive 1 equity share of Wipro Enterprises for every 5 equity shares of Wipro Limited
  2. Receive one 7% Redeemable Preference share (Face Value Rs 50) in Wipro Enterprises for every 5 equity shares held in Wipro Limited. The preference share shall have a maturity of 12 months and shall be redeemed at a value of Rs 235.20
  3. Exchange the shares of Wipro Enterprises with shares of Wipro Limited (pure IT company post the scheme of arrangement) held by the promoter. 1 share of Wipro Limited can be opted for every 1.65 shares of Wipro Enterprises.
NRI shareholders can either choose for option 1 or option 3. However, the ADR holders will compulsorily be given option 3.

The demerger will make Wipro Limited a pure IT company and will also assist Wipro Limited in increasing the public float for the purpose of meeting the minimum public shareholding requirements. The promoter owns 78.31% stake in the company as of Sep 30,2012. Since ADR holders hold 1.73% stake in the company as on Sep 30, 2012 ; the stake of the promoter will definitely come down by this much and more from the action of Resident Indian and NRI shareholders who opt for option 3.

SEBI has approved the proposal to reduce the promoters’ holding by way of the demerger and subsequent exchange of shares in order to comply with the minimum public shareholding norms.

In March 2012, in an attempt to bring down the promoters’ shareholding in the company; Azim Premji Trust had done an “offer for sale” and offered to sell 3.5 crs which was around 1.5% of the outstanding equity. The issue remained partially subscribed and the trust was able to sell only 1.78 cr shares which was 51% of the quantity offered. The sale happened at a price of 421 while the current price is 375.

How good and large is the non-IT Business ?
  
For the year ended March 31,2012 Wipro Limited had a consolidated top line of  about 37,000 crs. The IT Business contributed about 32,000 crs which was 86% of the turnover. The non-IT business contributed 14% or roughly 5,000 crs which looks small when compared to the IT revenues but is large enough in its own right.

In consumer care space, Wipro has brands like Santoor soap, Chandrika soap, Aramusk, Yardley, Safe wash etc. In indoor lighting, Wipro shares No 1 position with Philips; in commercial lighting Wipro is No 3 and in the furniture business, it is No 2 after Godrej. Wipro Infrastructure Engineering is world’s largest independent hydraulics cylinder manufacturer in the world with a 70% market share in India.

The management has been very active in growing the consumer care business inorganically. In the last few years, host of acquisitions have been done like Glucovita (2003), Chandrika (2004), North West Switches (2006), Unza Holdings (2007) and Yardley in 2009. The latest one being the acquisition of LD Waxsons (2012).

Of the non-IT business, the consumer care and lighting business is the largest piece which generated a turnover of around 3300 crs and generated ROCE of 18-20% in FY 12. In the current half year, this division has notched sales of about 2000 crs. Annualising the revenues to 4000 crs and going by the peer valuations, this piece could easily sell for 2-3 times its revenues if it were to list separately. Thus the consumer care division can be valued between 8000-12000 crs.

Other businesses like infrastructure and medical diagnostic businesses are relatively small and currently earn far lower margins and ROCE than the consumer care business. In the current half year, this division has notched sales of about 750 crs. The annualised revenues would be about 1500 crs. Difficult to value this piece in light of the poor margins right now. However, just to put a range of values to it, if it were to sell between 0.5-1 times revenues, this piece could be valued between 750-1500 crs.

The management of Wipro has indicated in the latest concall that the non-IT business would have debt of 200 crs and cash of around 1500 crs. So net cash of 1300 crs is going to come along with the non-IT business.

The sum of the parts for the 2 pieces plus the cash thus ranges between 10000 crs-14800 crs. Wipro Limited has 246 cr shares outstanding. Since for  every 5 shares of Wipro Limited, 1 share of Wipro Enterprises would be issued; Wipro Enterprises would have 49.2 cr shares. Thus, according to my workings, the per share intrinsic value of the non-IT piece of Wipro Limited ranges between 203 and 300 bucks. The average of the 2 figures is around 250.

Is the demerger fair to the shareholders ?

Point 1. The shareholders of Wipro have not been given an option to remain invested in the non-IT business. The option to retain shares of Wipro Enterprises is a dead option with no sight of listing. -1 to Scheme.

Point 2. But are the shareholders of Wipro actually invested in Wipro for the non-IT part ? People might come up with all sorts of arguments but the fact is that with 86% of the turnover and 95% of the profits coming from the IT division, the weight of evidence is heavily tilted in favour that for the current shareholders, Wipro is an IT company. Period.

Point 3. What is the scheme offering in lieu of the non-IT business ? Option 1 is a dead option and Option 3 is in the realm of speculation because Wipro shares price is a moving target and we don’t know what price one would get for the Wipro Limited (pure IT company) shares when they are sold. Option 2 of taking the preference share is a more concrete benchmark to find out what the shareholders are receiving for the non-IT business. The present value of the preference share at 10% discount is Rs 217 which is close to my average intrinsic value working of 250 of the non-IT piece. Thus, in my view the shareholders are being offered a fair price for the non-IT business. +1 to the Scheme.

Point 4. The promoters had tried to reduce their shareholding through an offer for sale but it didn’t succeed. With the deadline for complying with the public listing norms approaching, the promoters had the option to either opt for delisting or to try again and sell shares through offer for sale. Reverse book building for a 92,000 cr market cap company is not a joke and the promoters might not have the liquidity of 20,000 crs plus required to buy out the minority shareholders. Offer for sale might have proved disastrous as the stock price might have slided massively thus hurting the very shareholders of Wipro. +1 to the Scheme.

Overall to me it seems that the promoters have been pragmatic and have hit 2 birds with a single stone by offering this demerger and the exchange of shares scheme. In spirit of the Wipro’s concept of “Applying Thought” ; a lot of thought seems to have gone behind this demerger scheme too.

What option should the current shareholders of Wipro Limited choose ?

If a current shareholder of Wipro has a much better understanding of the non-IT business and has a much higher intrinsic value figure in his mind, he should definitely choose Option #1 of retaining the shares of Wipro Enterprises. But be prepared for a long ride with no dividends and no quotes on the stock for very many years. I am quite confident that the money is in safe hands and the consumer care business of Wipro would grow handsomely from here but the waiting period might easily stretch into a decade. This option is for people who have a mentality of an art collector. People who can buy a Picasso and sit patiently for decades.

If a shareholder is of the kinds who wishes to update his portfolio on a regular basis and likes the regular stream of dividends, he has to choose from Option #2 or Option #3. With Option 2, one can take his money and if interested buy other consumer care businesses listed in the market. If somebody is interested in only the technology part, he can simply opt for Option #3.

I am currently not a shareholder of Wipro Limited and any shareholder of Wipro reading this post should make his own judgement about the option he wishes to choose.

Is there any opportunity to make money in this deal ?

There is nothing I could think of as of now. But it’s a large company; with an impending demerger; stock is in F&O and the promoter is ethical. It would be interesting to watch and a possibility of making money might come at some later point of time.

-END-

Saturday, 1 December 2012

The Ugly Indian

TN Ninan of the Business Standard has written a very crisp and thought provoking column concerning the case of Male Airport and similar contracts which were entered in the past and had Governments, Indian or foreign, as one of the parties to the contract. 

These contracts seem to put the Governments in positions where by if the revenue projections of a particular project are not met (which is almost always the case),
the successive compensations by the Governments follow the case of mating rabbits and the payments end up getting spiralled in a Fibonacci sequence.

What choices do the Governments have apart from either scrapping the contracts altogether or to renegotiate them ?

The issue closely resonates with concerns raised by Neeraj Marathe in his blog about Noida Toll Bridge.