Sterlite Tech upwardly mobile @ Rs 104+ on the Digital India & Demerging Power Story

Sterlite Tech closed strongly upwardly mobile @ Rs 104+

It clearly continues to benefit from Government’s scaling up the National Optical Fiber Network (NOFN) Initiative and the ‘Digital India’ Story unfolding

However an interesting development announced in May was the demerging of it’s capital intensive and yet to contribute to profits Power Segment

The Power Segment is being demerged as of April 15,2015 into a separate company Sterlite Power Transmission Ltd which will remain unlisted

Each Shareholder will get an option to remain invested also in the Power Co or exit it.For every 5 shares held in Sterlite Tech,the Shareholder will get the options of 1 share valued at Rs 112.30 (FV Rs 2) or 1 redeemable preference share for the same value which will be redeemed within 30 days.

The demerged entity will be worth Rs 885 crs after considering debt allocation.This would compute to a Value of Rs 22.46 per Share of Sterlite Tech

Chairman Anil Agarwal states that Sterlite Technologies is at a unique inflection point

When I did the Segment Analysis ,observed that while the FY 15 Topline of @ Rs 3000 crs is more or less evenly split between Telecom & Power,76% of the Segment EBITA of Rs 327 crs comes from Telecom (Rs 249 crs)

Importantly after the demerger of the Power Segnent ,Sterlite Tech will retain just Rs 674 crs  consolidated net debt from the pre-re-structuring consolidated net debt of Rs 4881 crs

With Equity at Rs 79 crs (FV Rs 2) and with the capacity expansion plans one should expect surge in profitability which was being dragged down in the near term by the Power Segment …EBITA over Rs 300 crs for the Telecom Business in FY 16 is on the cards

There is an enabling resolution proposed for Borrowings up to Rs 1000 crs

At Rs 104,the ex demerger price works out to under Rs 82 if opting for exiting the Power business though there’s a few months to go before the demerger is effected

My sense is that whenever the record date is announced in FY 16 for the demerger  and trading switches to an ex demerger  basis just a few days prior,the ex demerger share price will quickly climb back to the cum demerger share price

Though I have had serious reservations on Corporate Governance issues with the Vedanta Group  whenever they have restructured through merging group entitities ,I quite agree with the Chairman,Anil Agarwal that Sterlite Technologies is at an inflection point …and ironically it involves not a merger but a demerger situation !

So will it be  a 3 Digit % Gains Story in the medium term  on the Digital India & Demerger  Story ?

Disclaimer : Have an interest in Sterlite Tech  

Continuing Thought Stream on Saturday,July 18,2015

Anurag makes an interesting point in a response to this blogpost that after the national power grid has opened up it  seemingly makes Transmission Business more profitable and therefore this Business is being demerged  by  the Agarwals of the Vedanta Group just like Adani too did in his group

Continuing on this observation ,if Anurag’s view indeed has a strong modicum of  truth and fact,and I sense it does, then  the Agarwals of Vedanta have a secret agenda playing out that raises Corporate Governance Issues yet again for them !

The way they have positioned this demerger and explained it ,most likely all minority shareholders would be exiting the Power Business when demerged into the unlisted Sterlite Power Transmission Ltd…come to think of it ,the Agarwals must have deliberately kept this business unlisted so as to clearly guide minority shareholders to exercise the exit option!

This is what the Directors have to say in their Report for the Corporate Restructuring and why the Power Business will remain unlisted (I’ve highlighted this in bold) :

“The corporate restructuring is viewed by the Company as a potential value creator for all shareholders combined with an objective of bringing a sharper and independent focus on both the segments, which have reached a certain scale and addressing two distinct opportunities of sustainably large magnitudes. It will essentially provide two separate and distinct platforms, one for Telecom business, which is in a high growth stage on the backdrop of huge data consumption opportunity and the other for Power business, which will be a strategic vehicle for creation of infrastructure assets in the growing transmission sector. Considering the differentiated attributes, the inherent business models and capital requirement of each of these businesses, the equity shares of the telecom business will continue to be publicly listed, while those of the newly formed power business will remain unlisted. The decision to keep the equity shares of the power business unlisted is in line with the global model for such infrastructure companies, which are not amiable to quarterly public market reporting requirements and need operational freedom and capital structure flexibility. Accordingly, this restructuring will essentially allow investors the choice to continue to be associated with all these businesses, or only specifically invest in businesses that best suit their respective investment philosophy. It also creates an opportunity for value discovery of each business independent of the other. The restructuring has been undertaken after careful consideration and review by the Board and also echoes the feedback received from the investor community. Once the demerger scheme is effective, after due regulatory approvals, shareholders of STL will continue to retain their equity share of ` 2 each in STL (pure-play Telecom Company). Additionally, for every five equity share of `2 each held in STL, the shareholders will have an option to receive one equity share of `2 each of SPTL issued at a premium of `110.30 or one Redeemable Preference Share (RPS) of `2 each issued at a premium of `110.30 each. The shareholders will have the option of continuing to be invested in SPTL or redeeming the RPS through liquidity options. The RPS will be redeemable within 30 days of issue, if opted for. The value of SPTL has been decided by the Board based on the recommendation of 2 reputed Independent Valuers (Price Waterhouse & Co. LLP and Haribhakti & Co. LLP)”

If this was a global practice to keep such power infra cos unlisted then why did they set this up in the listed Sterlite Tech Company in the first place !?

…..and  how do we interpret this other than the potential of an IPO in the coming years in the holding company Sterlite Power Grid Ventures Ltd for all Grid & Transmission business !….if minority shareholders opt to exit the Power Business now they  would not reap the benefit of the unlisted Power Business that could be unlocked  when it may go listed again in the next four years ! 

The  FY 15 consolidated balance sheet of Sterlite Tech shows Rs 409.10 crs in Optionally Convertible Preference Shares that were issued in July 2014 by a subsidiary,Sterlite Power Grid Ventures Ltd to Standard Chartered Financial Holdings ,Mauritius

This is the note in the Annual Report for this

“During the year, Sterlite Power Grid Ventures Limited (‘SPGVL’) was incorporated as a wholly owned subsidiary of the Company. SPGVL issued 409,099,372 Optionally Convertible Redeemable Preference Shares (‘OCRPS’) with face value ` 10 per OCRPS at ` 11 per OCRPS for a total consideration of ` 4,500,098,092 (including premium of ` 409,099,372) and 2,000 equity shares of face value ` 10 each at ` 10 per equity share to Standard Chartered Financial Holdings, Mauritius (‘Investor’) pursuant to Subscription agreement and Shareholders’ Agreement dated 7 July 2014 (‘Agreements’) executed among the Company, SPGVL and the Investor. The Agreements specify various exit options for the Investor including an IPO. The OCRPS are either convertible into equity shares or redeemable after 60 months from the date of allotment so as to provide the Investor with desired IRR from the date of allotment of OCRPS (‘Closing date’) until the date of exit. The OCRPS are convertible into such number of equity shares of SPGVL so as to provide 27.11% of equity share capital (calculated on a fully diluted basis) as on the the date of allotment. In case the return to the Investor on conversion is less than desired return, SPGVL will issue its equity shares to the Investor at the minimum possible price as permitted by the applicable laws and regulations so as to provide a return agreed as per Agreements to the Investor subject to Investor’s equity shareholding in SPGVL not exceeding 49.9%. Alternatively, OCRPS are redeemable at a price mutually agreed between STL and the Investor based on the fair market value of the shares of SPGVL at the time of exit subject to the Investor getting desired IRR. As a result of the above, the effective equity holding of the Group in SPGVL has reduced to 96.15% (72.89% on a fully diluted basis if the OCRPS get converted into equity shares of SPGVL). The gain on dilution of Group’s effective stake in SPGVL has been recognised in reserves and disclosed as “”Gain on dilution”” in Note 4 – Reserves and Surplus.

SPGVL’s effective holdings in Group companies as at 31 March 2015 are as follows:   

Sterlite Grid Limited 100.00% – Sterlite Grid 2 Limited (Erstwhile Sterlite Display Technologies Private Limited) 100.00% – Sterlite Grid 3 Limited 100.00% – East North Interconnection Company Limited 49.00% – Bhopal Dhule Transmission Company Limited 100.00% – Jabalpur Transmission Company Limited 100.00% – Purulia & Kharagpur Transmission Company Limited 100.00% – RAPP Transmission Company Limited 100.00% – NRSS XXIX transmission Limited 100.00% ” 

Anurag,you’ve truly exposed  what I sense is this  continuing mindset of the Agarwals to use their listed companies coffers  to further their business ambitions and then rip minority shareholders off before the real mega cash rolls in !….I daresay this thinking even extends to their paypackets !…For instance the Vice Chairman of Sterlite Tech,Pravin Agarwal who also is the brother of the Anil Agarwal is set to be paid Rs 15 crs annually in Basic Salary &  Personal Allowance and a further Rs 10 crs in Perquisites and even Performance Incentives as decided by the Board not to exceed 150% of  Basic Salary & Personal Allowance from ongoing year FY 16 !….View this in context of the Consolidated FY 15 Bottomline  Loss of Rs 2.64 crs !    

This is what I think  on the ‘Exit or Not to Exit’ Options that  Minority Shareholders will be facing  when the Power Business is demerged:

Well,I do expect that the Profitable Pure Play Telecom Business that remains in Sterlite Tech post demerger  of the Power Business will grow in leaps and bounds and will reflect well in the Share Price moving up too

I reiterate what I’ve stated earlier in the blogpost

“My sense is that whenever the record date is announced in FY 16 for the demerger  and trading switches to an ex demerger  basis just a few days prior,the ex demerger share price will quickly climb back over Rs 22+(Value worked out per share of Power Business)  to the cum demerger share price

Thus this would make your shareholding in the Power Business free,should you opt to remain in it and not exit through the Redeemable Preference Shares Option which will return Rs 112.30 to you for every share you hold in the entitlement ratio of 1: 5 !

Makes Sense to stay in the Power Business too and not allow it to be virtually a Private domain of the Agarwals and a few institutional equity investors