Hey ! Manoj…this blog on Resurgere Mines and Minerals is on your request…..and it’s in  Red,some bold, for obvious reasons……..

What’s happening is that the Share Price is free falling ad racing downhill in Resurgence Mines & Minerals…..Ridiculous Situation….it’s rattling the Markets and destroying Investors and Traders

But this was always a Suspect Scrip right from Listing two years ago….One simply should not have flirted with it ever…devil in disguise!?

Headed by Subhash and Amit Sharma,Resurgere had its IPO in August 2008 in the Price band of Rs 263 to Rs 272 and the Price was fixed at Rs 270….FV is Rs 10….IPO Size was Rs 120 crs with issuance of 44.50 lakh shares….It got listed on BSE and NSE on September 1,2008 and was clearly manipulated to zoom to close at Rs 524…next day it zoomed again to Rs 626…then dropped on the third day,fourth and fifth day to Rs 500,Rs 400 and Rs 300 respectively….and thus inside five days of Listing the IPO Investor Returns Story ended !….it’s been downhill since then and touched a woeful Rs 36 on March 9,2009….it was issued just six months earlier at Rs 270!

Resurgere is simply poisoning all those who are drinking it…it’s like being lured to vist those tempting ‘Girlie Bars’ only to get drunk and realise,a bit too late, on getting sober that you’ve been stripped and robbed after your drink was spiked ! 

Resurgere seems to be simply digging Mines to extract ore and dump and bury it’s Investors in !  

I normally do not cover such companies that

• Appear as a strong recommendation in repeated unsolicited SMSes
• Appear regularly in Bulk Deals….Tool to rig volumes and prices to show false hyper activity
• Auditors have been changed inside months of listing….Resurgere did so in June 2009
• Earn well but skip dividends…creating doubt if earnings are truly genuine  
• New Non Executive & Independent Directors enter and exit the Board inside a year of the IPO as if it’s some Garden Party and they are merely Guests…have a look below

Directors who have exited

Pradeep Bishnoi…Appointed Whole Time Director post IPO on 16/10/2008….Resigned  in  eight months 19/6/2009

Aditya Singh…..Appointed Non Executive Independent Director on 16/10/2008…Resigned inside seven months on 8/5/2009

Suresh Kumar Singh….Appointed Non Executive Independent Director on 16/10/2008…Resigned inside eight months on 10/6/2009

I D Agarwal and Burzin Somandy…both  Non Executive Independent Directors resigned in August 2010

Non Executive and Independent Directors just appointed in August 2010

Ashwin Shankar Iyer and Ajay Sethi

It is High time that SEBI must make it mandatory for resigning Directors to specify the real reason that they are resigning…and that too within months of being appointed  

Post IPO GDR Issue,Conversion of Warrants and Announcement of Liberal Bonus and Split

On July 27,2010,Resurgere announced a liberal Bonus of 2:1 and Split in Face Value of the Equity Share from Rs 10 to Rs 1!…Price surged to Rs 146 and closed at Rs 140 on that day

Post IPO Capital was Rs 28.54 crs…Then In June 2010 it announced that it has successfully placed 5208333 GDRs @ US $ 10.32 each aggregating US $ 53.75 Million representing 31249998 Equity Shares at Rs 75…that’s a Rs 234 crs Issue…..in fact more than doubled the Equity !….On August 26,2010 it announced that 65 lakh Equity warrants will be converted to similar number of shares…..(This has been considered at Rs 75) Thus Equity Capital is now to be Rs 66.29 crs of FV Rs 10….With Bonus this will jump to Rs 198.87 crs !

The Reserves that were Rs 357 crs at March 31,2010 were boosted by an incremental Rs 203 crs to Rs 560 crs because of the GDR issue….This Issue also took the networth to Rs 620 crs….Book Value was adjusted from Rs 135 at March 31,2010 to Rs 103 on this issue and Rs 100 on conversion of warrants…it will further adjust to Rs 3.50 after the Bonus and Split and an assumption of Rs 30 crs PAT for the Current year…Reserves would be close to Rs 500 crs

Today the Share Price closed at Rs 69 cum bonus and cum split after hitting a 52 week low of Rs 62 on NSE…if you adjust for this the ex bonus and ex split price computes to just Rs 2.30  for  share of FV Rs 1!…Such Corporate Actions simply serve no purpose other than facilitating Price manipulation on the Bourses

In 2010 it earned Rs 27.50 crs and an EPS of near Rs 10…yet it failed to issue a Dividend….It’s latest quarter earnings at June 30,2010 are just above Rs 12 crs

Mines over 320 acres in Jharkhand has been reclaimed by the State Government from the leaseholder and Resurgere,who had taken a sub lease after paying a security deposit of Rs 10 crs and Advance Royalty of Rs 15 crs is unable to mine iron ore from these mines

So what will Resurgere earn in the coming year or two ?….I have assumed it will  continue to record atleast Rs 30 crs PAT….may show higher to seduce new ‘bakra’ investors 

As Corporate Governance issues surface,I’m sure SEBI,BSE and NSE will take this company to task…..wonder what’s taking them so long!

Nothing to Cheer about Resurgere…remember Austral Coke !…you can search it on this blog….Investors were destroyed there too after SEBI allowed the IPO despite significant controversies being raised

Sad…….

One of the major objectives of my Blog is to warn Investors to stay away from or reconsider the risks assumed in their Investment in certain Companies….the two ‘Cs’,Cranes Software and Compact Disc were covered earlier in my blog to serve this objective 

Thanks Saif for reminding me about Cranes Software…It has sunk to below Rs 7…I had warned about it on December 31,2009…..In reply to your response I think you can write this Investment off as a bad experience and a part of a learning curve  

Cranes Software at 52 week low of Rs 28…was Rs 100 just over a year ago…Waste or Worth ?

Thursday, December 31st, 2009

Thanks Ashish Pathak for your response on Compact Disc….It remains at Rs 65 even today…and you’ve been married to it for four long years !…I had reviewed it in detail on March 25,2010 and was not impressed with Corporate Governance and Liquidity Position of the Company….my position remains unchanged even today…but you seem to have more conviction here than I do…Live it if you’re sure and comfortable with the risks that you have assumed…otherwise look to switch

Compact Disc at Rs 87.20…Fantastic Surge past few days…is it sustainable?

Thursday, March 25th, 2010

Cheers !

How should one now view and play Sesa Goa and Cairns India ?

Markets have been excited for a few days by the Vedanta Group buying out the controlling stake in Cairns India from a subsidiary of Cairns Energy….. Cairns India had raced away to a new High of Rs 368 yesterday morning….. then came the press release by the Vedanta Group announcing this takeover in detail

My initial reaction was one of anger and worry that, as feared, Anil Agarwal of Vedanta was using Sesa Goa Cash for the Group

The Markets reacted sharply and Sesa Goa dropped over 8% to Rs 321 while Cairns India dropped over 6% to Rs 333

The takeover is by the Vedanta Group in this manner

• Vedanta Resources plc will acquire 51% Equity Stake in Cairns India from a subsidiary of Cairns Energy at Rs 355/share + Rs 50/share as Non Compete Fee for Three Years
• Sesa Goa, a Vedanta Group Company will tender for 20 % Equity Stake from the remaining Cairns India Shareholders at Rs 355/share… this is the mandatory Open Offer
• In case Sesa Goa receives less than 20% then Vedanta will make up the difference at cost… that’s Rs 405/share

My immediate concern is what will be the Impact on Sesa Goa as it has been my pet recommendation for several years now and recently very strongly from July 2008 cum bonus and cum split at Rs 3200 (that’s Rs 160 ex)…. On April 8, 2010, Sesa Goa zoomed to an all time high of Rs 494 for a FV Rs 1 Share as Iron Ore Prices crossed US $ 140/t

This acqusition will cost over US $ 9 Billion of which Sesa Goa will be investing from it’s cash resources US $ 3 Billion for a 20% stake…. it does not even have this on it’s Balance Sheet currently !….. The Drop in Share Prices of both Sesa Goa and Cairn India reflect the concerns that Investors have on Vedanta’s Corporate Governance and Credibility

Let’s have a quick look at whether such a reaction is a precursor to a further drop in the share prices of both

This is not an overnight acqusition….. negotiations must have commenced months ago with Cairns Group…. connect this with the uptick in Cairns India’s Share Price…. it moved from a range of Rs 150-Rs 200 a year ago, to Rs 200-250 and then from Rs 250-Rs 300 and yesterday zoomed to a High of Rs 368 before reacting to close at Rs 333

So what is Sesa Goa’s role in this Acquisition

Vedanta simply wants US $ 3 Billion from Sesa Goa….it would have created a ruckus to simply borrow all of this inter group…so part of the acquisition of Cairns India to the extent of 20% of the Equity Capital of Cairns India that,’coincidentally’ amounts to US $ 3 billion is to be shown as an Investment in the Books of Sesa Goa

Cairns India has a Share Capital (FV Rs 10)of Rs 1897.34 crs…. 20% of this is Rs 379.5 crs thats 37.95 crs number of Shares… to be exact 379496447 shares…. at Rs 355 that’s Rs 13471 crs…. at the agreed Exchange rate of US $ 1=Rs 46.765 that’s US $ 2.88 Billion…. This is expected to come in from the mandatory open offer of 20% that needs to be made to remaining shareholders….. any shortfall will be purchased from Vedanta’s 51% acquisition… but at a higher price of Rs 405, that’s Vedanta’s cost

So Sesa Goa’s Balance Sheet will merely reflect a movement on the Assets side from Cash to Investments after cashing out on existing Investments to fund this Stake

But the standalone Balance Sheet of Sesa Goa at March 31, 2010 does not support US $ 3 Billion!

Here’s how Sesa Goa looks at March 31,2010

Networth : Rs 7209 crs = Equity Rs 83 crs + Reserves Rs 7126 crs

Represented by : Rs 580 crs Fixed Assets + Rs 5479 crs Investments + Rs 3076 crs Net Current Assets - Rs 1926 crs Loans = Rs 7209 crs

Where is the US $ 3 Billion Cash or @ Rs 13500 crs on the Books of Sesa Goa ! ?….. It’s Balance Sheet Size for total Capital employed is Rs 9135 crs ! (Networth + Loans) !

The Deal is expected to be done by early Fy 2011

So it’s clear that even FY 11 Cash accruals will be used for the Investment and maybe Sesa Goa may raise fresh debt… in 2009/10 it already has issued 5000 5% Coupon Rate FCCBs and raised US $ 500 M… at March 31, 2010, 755 FCCBs had been converted at the prescribed Rs 346.88 per share at a fixed rate of Rs 48 to One US Dollar…. Funds received from the FCCBs are reflected in Fixed Deposits of Rs 2350 crs reflected in Current Assets

So I extrapolated Sesa Goa Balance Sheet at March 31, 2011… To fund the Investment of Rs 13500 crs in Cairns from Cash Reserves, Sesa Goa’s Networth has to climb from Rs 7209 crs to atleast Rs 15000 crs…. This would be through a combination of FCCB Conversion of @ Rs 1900 crs (Unsecured Loans) and Profits near Rs 6000 crs in the year…. The Assets Side would reflect Fixed Assets of Rs 600 crs + Investments of Rs 13500 crs atleast + Net Current Assets of Rs 1000 crs

And the MD of Sesa Goa, P K Muherjee claims that Sesa Goa Capex will not be affected ! and that the Board of Sesa Goa feels this Investment in Cairns India will be beneficial to Sesa Goa Shareholders and will be immediately EPS accretive !

One Interesting way of Looking at this is that if we assume that Sesa Goa will continue to generate atleast US $ 1 Billion ever year in Cash Profits, this Investment in Cairns India is Three Years of Cash Profits.

The Moot evaluation here is to see how this Investment of US $ 3 Billion will bear fruit for Sesa Goa….. This Evaluation is Interesting as I studied the Potential Earnings Capabilities of Cairns India and it’s Dividend Policy and Potential in the future….. The actual cash inflow as returns to Sesa Goa will be through Dividends from Cairns India… as this being a strategic long term Investment it is unlikely to be sold for Gains in the near future

Cairns India has a current production of @ 45000 barrels of Oil per day (boepd)… it plans to raise this to 125000  boepd and then  to 240000 boepd…. at this level of 240000 it will be 25% of India’s Oil Production…. Now One barrel is @ 42 gallons or 159 litres…. thus this would mean 72 Million barrels a year, assuming 300 days of Production… In Q 1 FY 11,the realisation by Cairns was US $ 67/barrel…. taking this realistion, the Annual Revenues for 72 Million Barrels would be US $ 4.8 billion or Rs 23000 crs…. with low production and operating costs Cairns India can be expected to show a Bottomline exceeding US $ One Billion, or near Rs 5000 crs in a few years time…. That’s an EPS Level of over Rs 25…. Dividend Payout should be atleast 20% of this if not more… that’s Rs 5 /share atleast in a few years time

Sesa Goa will hold 37.95 crs shares being 20% of Cairns India’s Equity…. thus it will receive Rs 190 crs as Dividend assuming Rs 5/share Dividend by Cairns…. It has Invested atleast @ Rs 13500 crs ( more if it buys Cairns India shares at Rs 405 from Vedanta)… so the return on Investment is a paltry 1.40% being the Dividend Yeild!…. Of course it will benefit if Cairns India Share Price moves up strongly from the Rs 355 Cost to Sesa Goa…. but this would merely remain a notional gain and cannot reflect in the books….. But will Cairns India move up strongly ?….. If EPS is Rs 25 a few years down the line then on a 15 multiple the Share Price would be Rs 375… and Rs 500 on a 20 multiple

Alternatively Sesa Goa could have used it’s Cash Reserves to generate higher ROI to benefit Shareholders and reward it’s Shareholders with a High Dividend and a higher Valuation for the Company and therefore a Higher Share Price

These Options are now no longer open in the short to medium term as all Monies are to be used for Investment in Cairns India

So how will this affect the Share Price of Sesa Goa !…. I would think in the short term there would be an adverse impact and the share Price could drop below Rs 300

But just hold this thought… even if Other Income figures would not be significant,the PAT from Operations itself could cross Rs 4000 crs atleast…. that’s an EPS of near Rs 45 on Equity of Rs 90 crs (once FCCB’s convert)… Sesa Goa has reacted to Rs 320…. this is just Seven times  FY 11 Projected EPS of Rs 45…. and even a lower multiple if the PAT crosses Rs 6000 crs !….. so the downside in Sesa Goa may be limited as long as the profitability levels from Iron Ore Mining and Exports is sustained… albeit on higher volumes and lower margins

So one can hold on to Sesa Goa at current levels of Rs 320 and Cairns India at Rs 333, but keep monitoring developments and Company Performance

Cheers !

I’ve been asked to Value newly listed Emami Infrastructure Ltd (EIL) after it’s Price Acrobatics displayed on the first day of Listing,on Wednesday last week!  

I needed a ‘Saridon’ at the end of the Interesting and quite revealing Valuation exercise !…there should be a law against the number of companies that a Real Estate Player opens in the Group !…you will understand once you go through this blog

Emami Infrastructure Ltd listed on Wednesday,July 28,2010 and Price swings were crazy…opening at Rs 250 on NSE and then touching  heights of Rs 598.80 and lows of Rs 86 and closing at Rs 104.8…closed lower at Rs 101 on BSE…and today it’s Rs 91

On the first day of Listing,there are no Circuit Breakers…so price mischief through volatile swings is easily facilitated…seems Emami Infrastructure too is a prey to this Game…SEBI is planning to investigate Listing Day swings…also have a look at the Bulk deals on that day on BSE (source bse website)

BULK DEALS ON BSE ON THE FIRST DAY OF LISTING OF EMAMI INFRASTRUCTURE LTD

Scrip Code:533218   Date : Wednesday ,July 28,2010

Except for one,all have squared off at marginal profits…the only genuine sale is by an FII, T Rowe…they were in the Top Ten Shareholders list at the time of the Scheme of Arrangement…..clearly these are synchronised bulk trades to create volumes on the bourse…they do not serve the purpose of efficient price discovery,or genuine,credible and authentic trading……it’s a rampant misuse of the Bulk Trade Window….but why does this misuse continue !?……no prizes for guessing !….a lot of people,part of a nexus, should be brought to book for destroying the sanctity of our markets

Let’s turn to the Valuation of Emami Infrastructure Ltd….but before I do that,let’s revist how Emami took over Zandu in 2008  

An Ambitious Emami Group wins a Hostile Bid for Zandu

Remember how in 2008 for Rs 700 crs the Agarwals of Emami Group took over Zandu Pharmaceuticals from the Parikhs (no relations of mine!) in a hostile takeover battle…with more than a little help from the Anand Rathi Group…a lot of Coincidences here that surround the Birla Group….Emami Promoters are ex Birla Group Managers from the 1970s…Anand Rathi too headed the Finance Function in a leading Birla Company….Birla Financial Companies were aggressively buying Zandu in 2007/8 before the takeover bid….A Zandu share of FV Rs 100  was available below Rs 1000….the hostile takeover took it to Rs 20000 !…Friday,Zandu share was quoted at Rs 3100…..but effectively yet near Rs 16000 as a Zandu Shareholder was given 14 free shares of flagship, Emami Ltd of FV Rs 2 for every one share of FV Rs 100 held in Zandu under the Scheme of Arrangement of 2009..last week Emami split the FV from Rs 2 to Rs 1 and is quoted now at Rs 457 for a FV Rs 1 Share 

So what’s this great Scheme of Arrangement ? and what led to it ?

The answer lies in Zandu Pharmaceuticals…… it is headquartered in Dadar,a prime area in midtown Mumbai…it has 2.4 acres here…..Today’s papers report that a 2.39 acre property of NTC’s Poddar Mills at Worli Naka,also midtown Mumbai, was sold for a whopping Rs 474 crs in a winning e-bid by Indiabulls Real Estate,one of the eight bidders against a reserve price of Rs 250 crs…Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

This brings to the fore my first curiousity …. why has Emami reduced it’s holdings from 72.80 % to 35.51 % in Zandu Realty Ltd ? …Oh Yes,Zandu Pharmaceuticals ,after demergering the FMCG Business to Emami,has been renamed Zandu Realty Ltd……or has Emami merely sold partial stake to known people not forming part of Promoter or Promoter Group ?  

In 2009,Emami,probably working on it’s Zandu takeover gameplan, decided to demerge it’s Realty Business from it’s FMCG Business….even for Zandu

A scheme of Arrangement was arrived at with even help from a Big Four Firm,E & Y….in fact interestingly Emami Infrastructure Ltd boasts of just a 26 year old as one of it’s Directors…his address,interestingly also happens to be in the same building in Mumbai where my office is located !…actually that caught my eye first!…the Information memorandum released by the company http://www.emamiltd.in/press/eil.pdf profiles him as “he possesses  extensive knowledge and experience as Lead Advisory and Transaction Advisory Services in Ernst & Young India Ltd”  ….Wow! all at the young age of 26 !

The Gist of the Scheme of Arrangement is as below

• Zandu Pharmaceuticals will demerge it’s FMCG Business to Emami Ltd and it will be renamed Zandu Realty Ltd to reflect it’s continuing business….Every Shareholder of Zandu will retain his existing holding in Zandu and in addition will get 14 equity Shares of Emami Ltd of FV Rs 2 for every One Share of Zandu held of FV Rs 100…Emami has just split it’s FV further to Rs 1…thus effectively the Zandu Shareholder gets 28 Emami Shares of FV Rs 1 for every share he holds in Zandu  
• Simultaneously,Emami Ltd will demerge it’s Realty Business to Emami Infrastructure Ltd (EIL)….Every shareholder of Emami Ltd will get One Equity Share of EIL of FV Rs 2 for every Three Equity Shares of FV Rs 2 held in Emami Ltd…The Share Capital of Emami will stand as it is…so the Emami Shareholder will continue to hold his Emami shares + hold free entitled shares in EIL…the Realty Business transferred to EIL consists basically of two Investments….Rs 9.8 crs through  20 lakh shares or 100% holding in Emami Realty Ltd and Rs 165.3 crs through 555636 Shares or 68.9% holding in Zandu….A Zandu Shareholder entitled for Emami Shares will not be entitled for Shares in EIL through the new Emami Holding
• EIL will be listed seperately on BSE,NSE and KSE

An updated Information memorandum filed in July 2010 just before Listing of EIL provides the latest Financials as of March 31,2010….the earlier Information Memorandum of 2009 showed Financials as of September 30,2009

There is a huge difference in both….In the six months between September 30,2009 and March 31,2010,EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

This Rs 211 crs received by EIL has been applied as below as inferred from Financials of September 30,2009 and March 31,2010

• Repayment of Unsecured Loan  : Rs 144 crs…..Rounded of Difference between Unsecured loans of Rs 156.72 crs and Rs 12.55 crs at 30/9/2009 and 31/3/2010 respectively
• Donation : Rs 10 crs……clubbed under  Administration and Other Expenses in the P & L A/c
• Interest  : Rs 23 crs…..shown in the P/L A/c at 31/3/2010
• Rs 34 crs given as Loans and Advances : This is the addition to the Current Assets at 31/3/2010

EIL’s Equity Capital  (FV Rs 2) is Rs 4.86 crs……At March 31,2010,the Profit on Sale of Zandu Shares is Rs 45.34 crs…but after adjusting Rs 23 crs for Interest and Rs 10 crs for Donation and Rs 2.25 crs for Tax and normal expenses,the Net Profit  is Rs 10.68 crs…This gives an EPS of Rs 4.4 and on Share Price of Rs 91,a  Multiple of 20…..However the Auditor has taken 5289250 shares as the weighted avergae shares in the denominator to show an EPS of Rs 20.20….Perhaps this may have been the misunderstanding that led to a crazy near Rs 600 Share Price on Listing Day…The Actual Number of Shares of FV Rs 2 existing for EIL is 24298392

EIL’s Networth at March 31,2010 is Rs 38.97 crs giving a Book Value per share of Rs 16…that’s a near 6 Book Multiple…Reserves are Rs 34.10 crs of which the Capital Reserves are Rs 23.42 crs   

The Balance Sheet at March 31,2010 also interestingly shows a Lower Unsecured Loan amount of Rs 12.55 crs…there are no Fixed Assets and the only Investment is Rs 9.8 crs in wholly owened subsidiary ERL…it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value…Why keep Unsecured Loans Pending and dole out Loans & Advances ! ?

The Structure of EIL

EIL has a wholly owned Subsidary Emami Realty Ltd (ERL)….ERL in turn has several subsidiaries as below

100% Holding

Emami Ashiana Pvt Ltd

Emami Rainbow Niketan Pvt Ltd….owns 286329 shares or 35.51%  in Zandu Realty at March 31,2010…From 4/2/2010 Zandu Realty ceased to be a Subsidiary and from 31/3/2010 is an Associate Company in the Emami Group….I wonder though,if Emami will continue to consolidate Zandu in their Accounts the way they do for a Subsidiary as they will yet have control over the Board and Operations  

Nathvar Triacam Pvt Ltd…ceased to be a subsidiary from 28/1/2010

Octagon BPO Pvt Ltd…developing an IT Park over 0.64 acres at Rajarhat

80% Holding

Emami Constructions Pvt Ltd…..is developing jointly with Anand Rathi Realty Fund a Residential Complex of 510 Apartments over 4.46 acres in Kukatpally

60% Holding

New Age Realty Pvt Ltd

55% Holding

Delta PV Pvt Ltd…..is developing an IT Park over One Acre at Salt Lake Sector in joint venture with Anant Rathi Realty Fund and CD Equi Finance Pvt Ltd

Land Reserve

The Memorandum states that Wholly Owned Subsidiary of EIL,ERL OWNS a Land Reserve of 103.12 acres…..Projects are not directly in EIL,but in step down subsidiaries…..They are all at early stages of Planning and Revenues from them will not flow till 2013 atleast….This makes EIL merely a Holding Company….it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value

Reduction of Promoter Shareholding in ZANDU Realty  

Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

Now only Emami Rainbow Niketan Pvt Ltd holds 286329 shares or 35.51 % in Zandu Realty….This moots the Question….Did ERNPL pick up these shares from EIL when EIL disposed it’s full holdings in Zandu for Rs 211 crs ?…Assuming it did,then the ERNPL Balance Sheet would show this Investment at a Cost of @ Rs 109 crs…How was this Funded ?…were  Unsecured Loans of similar amount merely transfered by EIL to ERNPL….this means the Profit Entry created in one group company,EIL on Sale of Zandu Shares, is negated by atleast half by mark to market loss in the Books of step down subsidiary, ERNPL…. Was this Profit created merely to provide some Earnings basis of Valuation to EIL to justify a High Price on Listing ?….EIL is unlikely to repeat this Profit unless it sells of Investments in ERL !….also Funding an Investment through an Unsecured Interest bearing loan brings into Focus the Rationality of doing this…as significant Interest is paid out…Rs 23 crs,because of Interest on Unsecured Loans shown at Rs 156 crs at September 30,2009 ,were knocked out from EIL profit…..Juggling Real Estate Assets,Loans,Loss and Profits in Group Entities ? 

Zandu Realty Shareholding Pattern reveals this….

• On September 30,2009,it had 11518 Shareholders,including Six Promoter Group Shareholders led by flagship company,Emami Ltd who held 587055 shares or  72.80 % of the Equity 
• On December 31,2010,it had 25303 Shareholders,including only One New Promoter Group Shareholder ,Emami Infrastructure Ltd who held 425502 shares or 52.77% of the Equity….so EIL has already started selling Zandu Realty Shares
• On March 31,2010,it had 39855 shareholders,including only one and a new one too,Promoter Shareholder,Emami Rainbow Niketan Pvt Ltd,who held 286329 Shares or 35.51 % of the Equity

No Non Promoter Shareholder holds more than 1% of the Equity on all three dates

Why would Promoter Emami Group reduce it’s holding in Zandu Realty from 72.80% to 35.51 % ?….of the 587055 shares it sold,assuming 286329 are now in ERNPL,then who has brought 300726 shares !?…The Jump in Shareholders from 30/9/2010 to 31/3/2010 is 28337…this implies an average Holding of 10 or 11 shares for the incremental shareholders !…SEBI needs to investigate this angle…more so what was the the need for Emami to reduce their stake in Zandu ?….Zandu’s current Price of Rs 3100 gives a market Cap of @ Rs 250 crs..Zandu’s Networth including FMCG Business at March 31,2008 was Rs 78 crs….after FMCG Business has been transfered to Emami,only the 2.4 acres Land remains as an Asset in Zandu Realty and it’s Networth dropped to Rs 23 crs at March 31,2009…..this 2.4 acres would be worth atleast Rs 500 crs in undeveloped state,if one takes this morning’s paper headlines as the benchmark…. NTC had sold their 2.4 acre Poddar Mill Plot at Worli,in Mumbai…a liitle distance from Zandu’s Dadar base…for Rs 474 crs…Indiabulls Real Estate was the winning e-bidder among eight that were contesting…If developed the Value is significantly much more,probably Rs 1000 crs….Emami held 72.80% of this at 30/9/2009….and Zandu was their subsidiary….now they hold just 35.51%…this makes Zandu just an Associate…have the Sold Shares gone to Promoter known Hands who do not form part of the Promoter Group on Paper ?

FIIs and MF Holding in EIL   

HSBC Global Investment Funds held 1265338 shares or 5.21% of EIL…..T Rowe Price International INC (T Rowe Price New Asia Fund) held 1098655 shares or 4.52% of EIl…HDFC Equity Fund held 400000 shares or 1.65% of EIL….these would have resulted under the Scheme of Arrangement because of their Emami Ltd Shareholding…..The Bulk Deals above show that T Rowe commenced disposing of their holding on the First day of Listing itself  

Now T Rowe should be assumed as an Intelligent FII…..

Conclusion

EIL is quoted at Rs 91…it’s Book Value is Rs 16….it is unlikely to repeat Rs 10 crs + FY 10 Profits anytime soon….it’s Real Value lies in the Projects and Land Reserves that are reflected in the books of it’s subsidiaries and step down subsidiaries….how much of it will flow back to EIL in the years ahead is a question mark…..moreover in my view the Promoters Emami Group have raised a Corporate Governance and ‘We could not care less for EIL Minority Shareholders’ Issues in showing full sale of EIL’s Zandu Investment (68.90 % of Zandu Equity) at Rs 211 crs by transfering ostensibly 35.51 %  from now listed EIL to it’s stepdown subsidiary ERNPL (Subsidiary of ERL) and selling of the rest to outside the Promoters Group

EIL shareholders would have benefited directly and substantially more in the years ahead if the Emami Group had retained the full (68.90% of Zandu’s Equity) Zandu Investments in now listed EIL itself and not shown 35.51 % in ERNPL and sold off the rest outside the group….I read it as a Ploy to Privatise Huge Profits that Zandu Realty may throw up in the Future on developing it’s 2.4 acres…..Today’s Winning Bid of Rs 474 crs for a similar acreage in a nearby plot in Mumbai is a clear indication of this….There was no need to reduce the Emami Group Stake in Zandu from 72.80% to 35.51%….because Zandu Realty Shareholders will surely reap the Bonanza in the years ahead from development of Zandu’s 2.4 acres….Zandu Market Cap is @ Rs 250 crs….it’s Property is worth atleast Rs 500 crs undeveloped and in all probability Rs 1000 crs when developed….EIL’s Selling price computes to Rs 3791 per Zandu Share….even at this Price the Market Cap of Zandu would have been just Rs 300+ crs….way below it’s true value

EIL Shareholders seem to have been shorted   

I daresay the Emami Group will not be winning too many friends any soon unless they are part of the gameplan  

Neither my Clients nor me hold shares in any Emami Group companies as of date

Zandu Realty Ltd at Rs 3100 though looks interesting !…apparently Emami Group does not share my view…they’ve reduced their Holding !

Cheers ! 

I’ve been told by blog regulars that Galada Power (FV Rs 10),BSE Code : 504697 was being recommended a few days ago by some  at Rs 6/7 as a multibagger

Just know this…..It has been declared sick by BIFR but as the Board is of the View that a viable rehabiltation package can be arrived at,the Accounts have been prepared on a’Going Concern ‘Basis

Ten Days ago Galada Power  was Rs 6/7…then several vested Bulk Deals have been taking place and Price moved to Rs 13/14

Those advising to buy are justifying on the basis of Real Estate Value of over Rs 40 crs of Factory Land and Office Building and One Time Settlement of Dues with Financial Institutions…..Company make no specific mention of this when declaring it’s March 31,2010 results end June 2010 

Be Careful….As at March 31,2010,Galada Power has accumulated Loss of Rs 153 crs,Non Provision of Interest of Rs 120 crs and Non Provision of additional Interest and liquidated damages payable to Financial Institutions of Rs 214 crs (it has sought waiver on this in it’s Rehabilitation Proposal) above the actual Outstandings due as on it’s Balance Sheet

 Reproduced below is the Company Declared Results as at March 31,2010 and as uploaded on the BSE site

 Know the Risks before you go Gaga or Glad on Galada……the Losses and Loans and Non Provisions are overwhelming as of now….

I have two Primary Issues…and several related ones….. with this SKS Microfinance Primary Issue

• Microfinance Industry emerged to alleviate Poverty by providing access of basic financial services like Loans and microinsurance to the poor…..I am frowning at this attempt to commercialise this Industry through an IPO at such a High Premium
• I am not going to contribute to the Profits of Pre IPO Shareholders…especially Sequoia Capital…. who are offering for Sale their Shares in this SKS Microfinance IPO that has opened today !

  16.79 Million Shares are on offer in the price band Rs 850 to Rs 985 !….of which only 7.45 million shares are Fresh Issue with IPO proceeds going to the Company while 9.34 Million Shares are Offer for Sale by Existing Investors…In fact Sequoia Capital,termed as a Promoter, is offloading 3.99 million shares in this IPO of their 9.1 million shares and will bring down their holding from 14.1 % Pre IPO Equity of Rs 64.52 crs to 7.1 % of Post IPO Equity of Rs 71.97 crs….Their average acquisition cost is Rs 61.18 only and they have been allotted shares in 2007 and 2008 in three tranches at Rs 49.77,Rs 70.67 and Rs 103.91….Just Imagine….Sequoia paid just under Rs 56 crs for their 9.1 million shares….If Rs 985 Top end Price is fixed for this IPO,the 3.99 million shares they are offering on sale will fetch them Rs 393 crs !…so they make a whopping near Rs 337 crs over their aggregate cost  for shares held for just  two to three years and yet have 5.1 million shares remaining with them !…reminds me of a similar ploy by Citigroup and Chrys Capital in the Suzlon issue a few years ago ! (Search my blog for this)                                                                                                                   There is something not right in Promoters enriching themselves handsomely by part cashing out in the IPO or pre IPO….In fact the Chief Promoter,Vikram Akula sold 9.45 lakh of his Shares just this year in February 2010 to Tree Line Asia Master Fund (Singapore) for US $ 12.92 million (works out to @ Rs 637)…In fact several top Employees also sold part of their Esop shareholdings to Tree Line for Rs 636.72….Encashing Profits of Crores like this just before the IPO brings into question Promoter and Top Management Committment to the Company….Maybe Legal…but….Feels like they are itching to exit at Rs 985 as they may not get this price again!….and inside a year Shareholders have been allotted Shares even at Rs 300….from here to the Gains are over 200%….Even after the IPO,the Pre IPO Shareholders will hold nearly 77% of the Post IPO Equity….This would entitle them to 77% of the Networth….which would have been substantially built by the Public who are paying Rs 985 per share in the IPO !…Nah !…now why would the Public do this ! ?…they are merely looking at one side of the Equation that they will benefit from the Share Price above Rs 985….they fail to see that their Rs 985 is creating Huge Assets of which they will merely own 23%…..while 77% will be owned by Pre IPO Shareholders who have contributed in the past one to three years just an average acquisition price of  Rs 24.54 to Rs 137.53 (Promoters) and upto just Rs 300 for Non Promoters     

While contending with my emotions on the above two issues, the High,near obscene IPO Price Band of Rs 850 to Rs 985 makes it easier for me to say ‘No’ to this Issue

One pays such high Premiums for a Rs 10 Face Value Share only if excited on massive non linear growth in Profits coming up in the near future and significant scalability of Operations…..but when over half of the Shares on Offer are actually Offer for Sale by existing Shareholders,one needs to be on alert and say “Hey ! Hold On ! Let’s have a better look at this !”

At Top end Rs 985 the IPO Size is Rs 1650 + crs of which only Rs 734 crs will go to the Company…..Market Cap will cross Rs 7200 crs if listing is around these levels

In my humble Opinion,Rs 850 to Rs 985 is simply too high a Price to pay right now for SKS Microfinance,despite the scalability potential…have a look at the past five years selected financials

 Now the Post IPO Equity will be Rs 71.97 crs and at Rs 985 Top end the Net IPO Proceeds that will accrue to the Company will be Rs 734 crs…thus Networth will move from Rs 950 crs at March 31,2010 to Rs 1730  + crs post IPO assuming Q1 Profits of Rs 50 crs…that’s a Book Value of Rs 240….this is a 4 Book Multiple of Top End Price of Rs 985

What SKS Microfinance is attempting to do with such a High Premium IPO is what Reliance Power and even Future Capital Holdings did in the past in 2008 !…Create High Networth through Obscene Premiums and Minimum Equity Dilution ….and both are quoted horribly below IPO Pricing….In fact Biyani’s Future Capital Holdings came at Rs 765 in January 2008…It’s Rs 247 today !…. 

However SKS Microfinance may not quote horribly below IPO Pricing because of scalability potential….in fact Rs 50 is the grey market Premium currently….Optimists can look at it this way…At March 31,2010 it showed  a Networth of Rs 950 crs and a PAT of Rs 175 crs…At March 31,2011 it will surely show a Networth of near Rs 2000 crs and a possible PAT of Rs 250 crs….that’s yet a high 28 multiple on a Possible FY 11 EPS of Rs 35 at Rs 985 IPO Price…now if it’s a straight double networth and double profits that means a PAT of Rs 350 crs,an EPS of Rs 49 and a Earnings Multiple of 20 !

I’m not recommending this Issue…but if you want to contribute to the Profits of Sequoia…be my guest !

An ABBA songs comes to my mind ” Money ! Money ! Money !…it’s a Rich Man’s World !”

Intentions of Promoters and Pre IPO Shareholders may be Noble….but Actions are clearly Profit Motivated and not singularly Selfless

Cheers !

Piggery : A Farm or Enclosure where Pigs are Kept

…so if you ride Piggy Back on RJ,GS,JP,CLSA,CG etc,the Movers & Shakers in our Stock Markets,does that make our Stock Exchanges Piggeries ! ?….Enclosures for Thousands of Stocks that Stink ! 

Cheers to a Chuckle !….Oink ! Oink !

Expected this… a fabulous Q1 FY 11 for Sesa Goa… It’s best first quarter in history.. a consolidated net Profit of Rs 1302 crs giving an EPS of over Rs 15 on an Equity of Rs 85.97 crs (FV Rs1)… this was achieved due to higher Iron Ore Prices in the Quarter and good offtake by China and consolidation of Dempo Companies acquired in June 2009

So what’s prompted many leading FIIs to call a ‘Sell’ on Sesa Goa ?….. Prices have eased off and China is expected to slowdown offtake…. moreover it is widely expected that the Government will introduce a Special Tax on Windfall Profits just as has been proposed in Australia or may raise royalty rates…. and may even take an extreme step of curtailing or banning exports of iron ore…. Moreover Sesa Group is facing an investigation from the Serious Fraud Investigation Office for mismanagement, malpractices, financial and other irregularities ….. there is also the question of the pending amalgamation from April 1, 2005 of subsidiary Sesa Industries with Sesa Goa.. Sesa Group has moved the Supreme Court after the High Court had overturned an earlier order in it’s favour and the validity of the scheme has been extended to October 31, 2010…. an aggrieved shareholder had filed the case and Sesa suspects that this shareholder too is behind  the SFIO Investigation

In light of all of this the key question is whether  profits can be sustained at these levels in the rest of FY 11 to create a net of over Rs 4500 crs and take FY 11 EPS past Rs 50 or are we going to witness a cramped three quarters remaining in FY 11 where the aggregate profits of Q2 to Q4 would equal Q1 Profits and give a total net of just Rs 2500 crs thereabouts and an EPS of nearer Rs 30 ?

So we have a probable EPS range of Rs 30 to Rs 50 + to contend with in FY 11… At the current Rs 350 Share Price we then get a Forward FY 11 Multiple of 7 to 12 to live within…. taking a fairly conservative multiple of 10  we then get a Share Price range of Rs 300 (EPS 30) and Rs 500 (EPS 50)…. so we can say that there should be a limited downside from here… and there is a strong case for upside given such a strong Q 1 FY 11 and strong Current Consolidated Reserves of over Rs 9136 crs ( Rs 7834 at March 31, 2010 + Q 1 FY 11 PAT Rs 1302 crs) at June 30, 2010 giving a Book Value of Rs 106 that should cross Rs 120 this year as Reserves march past Rs 10000 crs… that’s a Book Multiple of under 3

One FII has just made a positive call with a  target of Rs 440 for Sesa Goa

Profits are real… and Cash Flow is strong… We yet continue our exposure to Sesa Goa…I t has rewarded clients splendidly in the past two years from cum bonus and split levels of Rs 3200 in July 2008… that’s a cost of Rs 160 ex bonus and ex split…. it had scaled near Rs 500 after hitting depths of Rs 60 last year… it ’s retracted on above concerns to current levels of Rs 350

Interesting FY 11 for Sesa Group… Real Windfall Profits and Real Concerns…. Interesting Play

Cheers !

Should we give up on Reliance Power at Rs 177 and therefore even RNRL at Rs 45 ?

Heart is soft and tells me to be hopeful and have faith and be patient…and hold

Head is hard and tells me that the markets are being too kind to both…rationally and logically you should sell…markets are irrational here…so sell

They tell us not to get Emotional where Investments and Stock Markets are concerned…..But do Emotions come from the Heart or from the Mind ! ?

Anil Ambani has been facing the ire of Reliance Power allotee shareholders for over two years now…..The shares were allotted in the IPO at Rs 427.50…a 5% Discount for Retail Investors at the finalised IPO Price of Rs 450….Listing was hyped up to be at over Rs 700…QIBs Portion was oversubscribed 100 times and they got just a 1% allocation…..this was clearly an orchestrated application game….Why?…these QIBs were ready to pounce on Reliance Power at Rs 450…but on listing they simply shied away from the Scrip,not buying at even Rs 350 to Rs 375 levels !

So to appease allotees,Reliance Power declared a Bonus of 3: 5 just after the IPO in January/February 2008…this brought down the Holding cost to just over Rs 267….Reliance Power is currently quoted at Rs 175-Rs 180 range…it has had a 52 Week low of Rs 130….after the recent announcement of the RNRL Merger with Reliance Power in a 4: 1 ratio,big players have strongly suggested to Sell Reliance Power….one has a target of Rs 119 and another has Rs 128…..so will Reliance Power go even lower than it’s 52 week low of Rs 130 ?

I was trying to find some justification for being contrarion here….but Fundamental Insight gives me a sense that Reliance Power will fall from Rs 177 to lower levels…probably even it’s 52 Week Low of Rs 130…before it climbs back again

Direct Comparison with NTPC strengthens this conviction and sense…..judge for yourself from some parameters between the two below

RELIANCE POWER v/s NTPC

Now why would a Rational Investor pay Rs 177 for a FV Share of Rs 10 for Reliance Power when it’s yet 3 years to 5 years from building similar Capacity of 30000 + MW that NTPC has now! ?….when the share Price of a similar FV of Rs 10 of NTPC itself is just Rs 23 away at Rs 200 ?….Is it because  of the Lower Equity of Rs 2396 crs that Reliance Power has because it collected a vulgar premium in January 2008 pricing it’s IPO at Rs 450! ?….and had to give in appeasement a Bonus of 3:5 immediately to bring down holding cost to Rs 267 as pointed out earlier…?

To be fair,Reliance Power is probably the only Company in the whole of the Reliance Groups of both Brothers where Allottee Shareholders are losing value with their holding cost at Rs 267 and current Share Price at Rs 177

Anyway…another angle to look at in considering whether to BUY,yes BUY !,HOLD or SELL Reliance Power is to compare it with risk free returns over 3 years and 5 years…have a look below

So the Question is WILL Reliance Power cross Rs 300 and move towards Rs 500 in a 3 years to 5 years time frame ?…only then would it be worth taking the risk against the opportunity of a risk free 8% CAGR from a Bank Deposit…because only then would one get a CAGR range of 15% to 25% over 3 years to 5 years

This would then depend on Earnings in years 2014 to 2017…this in turn would depend on operating margins then and no delays in implementation…..If NTPC is currently earning @ Rs 8500 crs on MW capacity of over 30000 MW,what would Reliance Power earn on similar Capacity 5 years down the line?….that is the question !….With the Gas dispute behind them,it yet means that Gas,if allocated to them from the KG basin will come only at a price in excess of US $ 4/mmscmd and not the earlier MOU price of US $ 2.34…Immediate Dilution of Equity is Rs 408 crs on merger of RNRL…therefore New Equity will be Rs 2805 crs…assuming Reliance Power,with poorer margins than NTPC,earns Rs 5000 crs on generating over 200 BU earliest in 2015/16,the EPS on new adjusted post merger current equity will be @ Rs 18…at 20 Multiples (similar to NTPC getting now,the Share Price would be @ Rs 360…as this would happen closer to 2015,the above table shows this to give a 15% CAGR over 5 years…..the visible big risks to contend with remain margins,fuel security and delays in implementation

Of course one could switch from Reliance Power at Rs 177 to let’s say NTPC at Rs 200 or even JSW Energy at Rs 125 to remain invested in the same sector…. or even switch sectors….Now if NTPC generates 75000 MW by FY 2016/17,it’s profits would move towards Rs 20000 crs…that’s an EPS of Rs 23 on current equity and a projected share price of Rs 460 on 20 multiples…that’s a CAGR of near 20% in five years….and NTPC has better Fuel Security too…a critical evaluation parameter

As I said, my sense is that Reliance Power is a Long Term Play and it’s Share Price will go down before it goes up !….It’s too early to ascertain what would be the earnings and valuations of Reliance Power’s & RNRL’s  forays into Shipping,Cement and Coal Bed Methane blocks…so why is this merger of RNRL with RePower happening ?…probably to avoid an awkward and embarrasing situation if the Government does not allocate KG Basin Gas for Trading or passing on (RNRL) but will allocate it only to a direct user (RePower)

So if you are an ADAG loyalist,you would not be selling..maybe even buying at lower levels !….otherwise Selling now is a rational option….atleast half your holdings,if not all, in both scrips Reliance Power and RNRL…you would not be irrational if you do so…and not reinvesting the sales proceeds till you get a good or even great Investment Opportunity too would be prudent

To conclude,fall back on a time tested Mantra ‘ When in Doubt,Stay Out or Get Out !’

Reliance Power has nearly 3.6 million shareholders while RNRL boasts of over 2.5 Million Shareholders….you may be one of them…so some food for thought to chew over this weekend

Cheers ! 

‘Raajneeti’

Many liked the movie…but not me !…Lousy….characters simply not build up properly….senseless violence…family hangups in local politics…ungripping storyline…predictable ploys….not a single powerful performance…hackneyed election speeches…bloody waste of money…Naseeruddin Shah was wasted…probably was smart and walked out of the movie in the early scenes itself !……actually a whole Star cast wasted !…..Oh! and the women always get pregnant in one shot !

Cheers !