IVRCL Infrastructure, which is into BOT (Build, Operate & Transfer) road projects has recently
stated that they would not be bidding for any more projects for the next 6
months or so. On top of that, they would be selling out three of their projects
by March 2013 to fetch around 2200 Cr to deleverage their balancesheet. The
company has also incurred a loss of Rs 124 Cr in the 15-month period ended
June'12. Company chairman E Sudhir Reddy says that this is the plan to keep the
company afloat. However, this might not be as simple as it looks. Preserving
capital and monetizing projects means that the company want to bring in cash on
its balancesheet. And most likely would like to increase its stake in the
company to ward off any takeover bid by cash-rich Essel Group controlled by
Subash Chandra. Essel group, which has interests in infrastructure related
projects as well, has increased its stake to 12.27% in IVRCL - higher than the
chairman and MD E Sudhir Reddy's 11.8%. By the way, 11.8% is too low a stake in
a company as the controlling promoter. The promoters have clearly stated that
they would not like to loose the control of the company and also added that
Essel Group will not be added to the board of members of the company. Now with
a lower stake in the company than Essel, saying this might sound a little
awkward, to say the least.
A few days back when Essel group made that
2.08% purchase in IVRCL, a buzz occurred throughout the media that probably
Subash Chandra is looking for an ownership change at IVRCL. This drove the
prices of the stock to as high as Rs 75 a share! But after Subash Chandra
declined that they do not intend to takeover IVRCL, the prices declined and are
now is around Rs 40. The company may look to increase its stake further by
buying some small chunk again as the prices have come down. And that too
without making any open-offer. SEBI's regulations says that any company having
a stake of 25% in another company has to go for an open offer to buy another 10% (minimum) stake in the company. IVRCL's move to strengthen the balancesheet might just prop
Essels to increase it earlier than later as the prices would move up as and
when the company starts to find buyers for its projects. Then, further promoter
buys would drive the stock further up. Decrease in the debt levels and
improvement in the economy may just drive the prices to levels at which the
Essel group may not find it attractively valued. Thus for a retail investor
looking for relatively safe bet in the market, the company, at current prices,
provide a good opportunity.
A little more analysis:
IVRCL is a Rs 1277 Cr company by market capitalization and is
head-quartered at Hyderabad. The company has around 2000 Cr of debt on its
books as of today. In the Quarter ended June'12, the company had a sales of Rs
1252.3 Cr but made a negative PAT of Rs. 6 Cr! A big chunk of its operating
expenses consists of 'other expenses' of Rs 669 Cr. The interest expense is at Rs 137.64 Cr which at
an EBIT of Rs 147.85 Cr gives a pathetic Interest Coverage Ratio of 1.07. The
story has been repeating for the last 5 quarters atleast. On an income of Rs
6239.83 Cr, the PAT was a disappointing Rs 18.08 Cr only in the last 5 quarters. The interest outgo
has been a whopping Rs 397.87 Cr. Or an EPS loss of about Rs 15 a share. This would have meant a tripled or quadrupled
(or more) share price from the present levels based on the industry PE. Now, with the company's focus on
decreasing the debt, the stock seems all set for a rerating. At Rs 100
or Rs 120, it certainly becomes unattractive for a hostile takeover. And that could be the actual plan of Mr E Sudhir Reddy!
Now, lets have a look at the chart of the company to see when it would be good to make an entry in the stock.
The stock seems to be breaking out of its long term downward spiral. A confirm signal could be seen only after it breaks the 42-42.5 level comfortably i.e. with better volumes. A movement above 42.5 can take the stock to as high as 47 in the short term and upto 54 odd levels before it decides its next recourse.
The present
situation looks scary but the company seems to be taking the right steps.
Moreover, history has shown that any such stake war has always created
humungous investor wealth. Who can forget the battle between ITC and Ramesh
Damani to own the controls of VST Industries. The battle that ensued between
them drove the prices of the VST from sub Rs 80 to higher than Rs 120 in a
matter of weeks. Ramesh Damani had to give up at that time and this also
prompted ITC to increase its foothold in the VST. 10 years later, Ramesh Damani
remained an investor in VST but with a valuation of over Rs 530 Cr at the
current prices. His initial investment of about 80 Cr in the stake were made good through the dividends that VST has paid over the years!
Read a piece of the
then-ongoing battle, here (Mar 2001).
I also wanted to
talk about the stake war that is going on between EIH and RIL on one side and
ITC on the other. That is probably a much interesting story to dig into. On one
side you have Oberois, the renowned owners of Oberois and Trident chain of hotels.
Then you have ITC which runs the second largest chain of hotels in India after
the Tata's Indian Hotels. And then you have a multi billionaire with a lot of
idle cash looking out for next big investment opportunity to put his money in.
He gets an offer from the Oberois to buy out a portion of their stake in the
company and stand there as a 'White Knight' to ward off any hostile bid by the
FMCG major. The choice of players in this game is quite interesting and
presents a lot of angle to be probed, specially about the intentions of the
so-called 'White Knight'!
Would cover it in
one of the coming articles. :)
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