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.
Wednesday, 19 December 2012
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.
- Receive 1 equity share of Wipro Enterprises for every 5 equity shares of Wipro Limited
- 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
- 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.
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.
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.
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.
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.
Friday, 19 October 2012
J B Chemicals- Corporate Disclosures
Aaron Levenstein said “ Statistics are like a bikini. What they reveal is interesting, but what they conceal is vital.”
Reading the following announcement provides an uncanny familiarity to the above quote.
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Please check the announcement here as well.
In the JB Chemicals- Johnson & Johnson deal, the release of the money kept in the escrow account has been challenged by the buyer; Johnson & Johnson. That’s informative but the announcement is silent on the amount of money kept in the escrow account. And how much claim has the company received from Johnson and Johnson ? Silence again. The announcement is plain English language and has no element of God’s language “Mathematics” in it which is what the shareholders would be very interested in. That leads me to a slightly modified quote of Levenstein that what the announcement has revealed is interesting but what it had concealed is vital.
In the JB Chemicals- Johnson & Johnson deal, the release of the money kept in the escrow account has been challenged by the buyer; Johnson & Johnson. That’s informative but the announcement is silent on the amount of money kept in the escrow account. And how much claim has the company received from Johnson and Johnson ? Silence again. The announcement is plain English language and has no element of God’s language “Mathematics” in it which is what the shareholders would be very interested in. That leads me to a slightly modified quote of Levenstein that what the announcement has revealed is interesting but what it had concealed is vital.
JB Chemicals had sold its Russian OTC business to a subsidiary of Johnson and Johnson in July 2011. The total sale consideration was 738 crs plus $35 mil to be paid for the inventory and receivables of the said division. Despite being an important part of the transaction, the amount kept in the escrow account was never voluntarily revealed in the public domain and it was only on checking with the company that a figure of 175 crs was mentioned as being kept in the escrow account.
It is very important for the companies to leave opacity behind and lay bare the facts as transparently as possible; obviously without jeopardising the business interests. The lesson for the investors is to be very cautious of the money kept in the escrow account. In the recent times, many a deals like Gwalior Chemicals (now Gee Cee Ventures) had money in the escrow account which never reached the treasury and pockets of the shareholders.
Contrast the above announcement of JB Chemicals with that of announcements made by Ashiana Housing Limited here and here.
On both the occasions, negative developments surfaced with respect to the business of the company. Not only did the company promptly informed the stock exchanges, it also informed the shareholders about the monetary impact and the total amount invested in the projects impacted by the negative developments. That speaks highly about the quality of the corporate disclosures.
To be fair to the promoters of JB Chemicals, let me state that there is no act of dishonesty which I came across in my research on the company. There has been no incident of corporate misgovernance either. But it is imperative that the companies raise the bar of corporate disclosures a bit higher with every passing day. Shareholders would highly appreciate the effort without keeping any part of their love in the escrow account.
Saturday, 14 July 2012
Imran and Vijay
Have a look at the above gold auction cum invitation notice posted in the Business Standard today by ICICI Bank. One Mohd Imran of Najibabad (Uttar Pradesh) had pledged gold ornaments and availed a loan against it. Failing to repay the loan, the bank has taken the step of auctioning the collateral. Nothing wrong on part of the bank. But look at the triviality of things. The gross weight of the pledged gold ornaments is 15.5 gms which going by the last closing price of gold (Rs 29,600 per 10 gm)is Rs 45,880. Let's keep aside the arguments about the net weight of gold in the gold ornaments or the price of gold when Imran would have availed the loan. Intuitively, either of the above or both combined would surely lower the value of the collateral. But let's stick to the figure of 45,880. Going by the gold loan scheme, the loan provided is around 75-80% of the market value of the collateral. Thus, the loan which Imran would have taken couldn’t have been more than Rs 35,000.
I am sure ICICI Bank would be spending much more than 35,000 in the costs related to the auction process; which includes advertising in the newspapers. Thus the Net Present Value of this auction process is negative and hence any sensible banker would simply write off the loan. But any such write off by the bank would lead to an avalanche of moral hazard and there would be scores of Imrans and Ankurs who would willingly default on the loans knowing well that the bank wouldn’t even bother them in the event of non-repayment.
Compare Imran with one Vijay Mallaya. This man has defaulted on 7500 crs of loan (21 lakh times the loan availed by Imran) taken from the banks to give wings to his idiosyncrasy called Kingfisher Airlines. Nothing much came out of the airline except that the Kingfisher bird would have lost its reputation in the bird kingdom on being associated with the airline. By now, the bird would have even applied for a name change through an affidavit filed in the birds’ court.
The banks and the financial institutions find them completely helpless in extracting even one single rupee out of the collateral. Though the banks have started talking about the sale of the planes and the Kingfisher villa; I am ready to bet that the bankers wouldn’t be able to even attend the pool parties at Kingfisher villa ; forget about auctioning the villa. Why is it that time and again, financial institutions are helpless and hopeless in recovering their dues from the large borrowers ? The single biggest factor to my mind is nexus between politicians and large businessmen. Both of them like Siamese twins are joined at the hip. Businessman help the politicians during the elections to buy out votes and post the elections to buy out legislators and members of Parliament. Once in power, politicians control the banks and the bankers. And the two ends meet when the businessman is able to lay his hands on the money in the bank and refuses to pay up. And then this vicious cycle goes on.
This problem can be solved if we have iron handed legislature (very unlikely) and iron handed judiciary (very likely) which forces the defaulters to pay up.
There is one example which is noteworthy. QVT Financial is an international hedge fund which invested in the FCCBs of some Indian companies. Companies which ran out of money and luck; couldn’t convert these FCCBs and opted for restructuring of these FCCBs. Wockhardt being the early mover in the recent debt restructuring mela proposed to settle the FCCBs at a 75% discount to their redemption value. Finding it unpalatable, QVT approached the Bombay High Court for a winding up petition against Wockhardt. Wockhardt tried a bit to sob but the learned judges wouldn’t take any of it and ordered the winding up of the company in the event FCCBs remain unpaid. A tight rap on the knuckles can bring a lot of rouge elements in line. Since then Wockhardt has coughed up money and the FCCBs have been settled. QVT has now turned the heat on Zenith Computers and KSL Limited (promoted by Tayal group. Ex promoter of Bank of Rajasthan). Taking a cue from the Wockhardt case, a lot of companies like Hotel Leela, Subex Limited, 3i Infotech etc have redeemed the FCCBs or settled with the FCCB holders at mutually agreeable terms.
QVT example shows that no new laws are required to tackle this menace. What we want is a bunch of tough lenders and a tougher judiciary.
Post Script : I am not sure if Business Standard reaches Najibabad, a small town 170 kms from Delhi. If that is true, Imran wouldn't be able to read the ICICI Bank notice.
Thursday, 10 May 2012
Delhi Diary
Where would one normally find bouncers ? Usually discotheques.
But the place I went to recently had a different setting. It neither had neon lights nor did it looked like a disco. However, more than the numberof ordinary people in the room, there were bouncers or should I say pehelwans. I read the banner carefully and verified with the gentleman sitting next to me. It was indeed the venue of the AGM of R Systems International Limited.
It baffled me that why does a company need bouncers ? Sure we have heard and seen shareholders baying for each other's blood for a box of Haldiram's sweets. But never did any company had to employ bouncers to solve such crises. The crisis in R Systems is much graver than that. This company is facing a hostile take over bid from one, Mr Bhavook Tripathi. I had earlier written about it here and here.
In the agenda items of the AGM, the management had proposed a special resolution which envisaged alterations in the articles of association of the company. The proposed amendments were that nobody except the promoter group can take any decision regarding merger, liquidation of any asset, providing any loan to any other entity, special dividend , removal of executive directors etc. Basically all the ingredients of making the company unattractive for any hostile takeover bidder. But the defeat of this special resolution was a forgone conclusion as Mr Tripathi holds 32% stake in the company and the special resolution would have been vetoed out. Sensibly, the company decided to withdraw the special resolution before the AGM to save face.
Meanwhile SEBI has not processed the open offer made by Bhavook Tripathi and even the committee of independent directors of R Systems has not come out with the recommendations on the open offer.
Though on the face of it the promoters of R Systems own 49% in the company and it is difficult to dislodge them but the discomfort in the behaviour of the company and the promoters seems to tell a different story.
Even Ravana (original character, not Abhishek Bachchan) used to think he is invincible till his younger brother Vibhashana revealed the secret of of his death to Rama. Who knows what secret about R Systems does Bhavook Tripathi has up his sleeve ?
Disclaimer : This does not constitute investment advice and I don't have any position in this stock on the date of posting this entry.
Monday, 7 May 2012
Picking pennies in front of a steam roller ?
At any given point of time, I like to keep around 10-15% of my portfolio in special situations which are not linked to the gyrations of the market. There are triple benefits which I see in process : the tendency to immediately use all of the cash to buy equities is perturbed, the regret of seeing severe draw downs of portfolio in case of a severe market crash is also lesser and thirdly and most importantly I get excitement, happiness and pure joy of spotting an arbitrage and working it out. (There are other workouts like Sudoku and Rubik's cube but I don't find them exciting as I am unable to solve them and also there is no money to be made)
Over the last few years, my thinking has evolved over working on a limited number of special sits and not spreading too thin on a number of them. The criterion which helps me select is that the opportunity should provide at least an annual IRR of 15%, it should have very low correlation to the market, it should have minimal risk and it should be good enough to put a minimum of 3% of my portfolio. If any of these criteria is unmet, I give the idea a pass and wait for the next one to pop on my screen. One source of such ideas is the BSE announcements. I religiously read all the BSE announcements and if I miss it someday, my calendar reminds of those dates which appear as a backlog.
One interesting announcement came on April 26th, 2012 about the NCDs (Non Convertible Debentures) of Jyoti Structures Limited. Jyoti Structures, a company into the business of telecom infrastructure had come out with a rights issue of 1.02 cr NCDs in Feb 2011. The NCDs had a face value of Rs 120 and carried a coupon rate of 7% to be paid quarterly from the date of allotment till the date of redemption which was 15 months from the date of allotment. Accordingly the date of redemption is May 14, 2012. Between Feb 2011 and now, the NCDs traded in the range of 100-110 bucks thus implying an IRR of more than 20% at different periods of time but the financial position of the company didn't excite me much. The risk of interest not being paid and the possibility of a default on redemption made me stay away from the issue.
On April 26th, the company announced the record date (May 6th, later revised to May 10th, 2012) for the redemption of debentures along with the final payment of interest. The interest along with the redemption amount total up to Rs 122.10 per NCD. The total amount required for payment is 124 crs. One look at the Sep 2011 balance sheet shows that the company had around 580 crs of loan (most of it working capital) and around 1000 crs of net current assets. Apart from it, the company has around 70 crs of investments. Overall, it should not be difficult for the company to raise additional working capital loan of 124 crs against the current assets and redeem the debentures. Additionally, the company has kept up with all the quarterly interest payments on the debentures. It seems that the company is both able and willing to redeem the debentures.
The market price of Jyoti Structures N1 is 120.50. The redemption date is May 14, 2012. Buying an NCD now at 120.50 will yield 122.10 with an average holding period of about 7 days. That's an absolute return of little over 1%.
I see little risk of the payment not being made as the record date has already been announced. But there is never a sure thing. So I am keeping this limited to 4% of the portfolio.
Do you spot a steam roller in sight while I am busy picking up pennies?
Disclaimer : This is not an investment advice. My opinions and views are more or less always biased. If I see some steam roller in any of my ideas, I will surely run away and blog about it later, if at all.
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