IBC referred Cases: Value investing or Value trap?

(rakeshdevna) #21

I think there is very limited information available to make an assessment here. If anyone on this group has access to specific information, it may be of help. That all cash deal - is it that the all cash deal will take out entire debt and full equity of existing promoter gone to zero, then the company will become fully funded by equity to start with?. May well be the case, provided lenders are okay to take that hit and completely exit. Still thats a massive dilution.

As said by Dhiraj, liquidation will yield nothing for shareholders. Any resolution by secured lenders will ensure massive dilution of equity interests since they hold priority. CoC should measure this proposal as a resolution process and not recovery process. Only then would they compare sacrifice being made by each class of stakeholder.

(Silent Investor) #22

There are 4 binding bids in case of Electrosteel, so the chances of resolution is high.

How much do NPA assets fetch for the lenders usually?

(Gaurav Agarwal) #23

RBI first list referred to NCLT

bhushan steel
essar steel
bhushan power
alok industries
amtek auto
monnet ispat
lanco infra
electrosteel steel
era infra
jaypee infra
abg shipyard
jyoti structures

(Praveen A) #24

It is impossible to make any judgement of the value of the shares. The only thing we can do is to try to do a valuation of the assets based on replacement value, potentail profits/cash flows,tec. To value the shares we need to know the liability side or the post reorganization capital structure.

In the case of Electrosteel, what exactly is 4500cr. If it really is the EV, then it means the fresh investor will bring in fresh capital lesser than 4500cr because they won’t own 100% stake post reorganization. Are we saying they will pay say 75% of 4500cr, which 3375cr towards debt repayment and investment in business take a 75% stake in the business. if the assets are worth more, I don’t know why the creditors will agree to this

If 4500cr is the fresh capital, again some of it will be used to repay debt and rest will go towards required investments in the business. In addition to this the creditors might demand that a certain sustainable amount of debt still remain on the books rather than write it off. Finally the new investors and possiblly also the creditors would be issued fresh equity leading to significant dilution. This way the EV would be higher than 4500cr with most of the value retained by the new investors and the creditors. The value of the existing shares of minority investors will depend on the amount of dilution and the debt retained

(Gaurav Agarwal) #25

On Tuesday, Kolkata-based Electrosteel Steels Ltd said four companies – Tata Steel Ltd, Vedanta, Renaissance Group and Edelweiss Alternative Assets Advisory Plc – have submitted their resolution plans for the company. Bankers told BloombergQuint on the condition of anonymity that the bids for Electrosteel Steels would be evaluated this week. The Vedanta Group has submitted a bid worth Rs 4,500 crore for Electrosteel Steels, the highest among the four bidders, The Economic Times first reported on Tuesday citing unnamed sources. At that prices, bankers would need to take a haircut of roughly 50 percent.

Source - https://www.bloombergquint.com/business/2018/01/10/five-companies-firm-up-bids-for-bhushan-steel

(Silent Investor) #26

One other critical point to notice is current market price vs face value, since new equity infusion is likely to be calculated at face value. Electrosteel is trading at a 30% discount to face value of 10… Monnet ispat is trading at 3.3x face value, hence making it much more riskier.

Watch this video

(asvasanra) #27

Is it not the other way around. That lenders have priority on liquidation proceeds relative to equity investor/owners of the company. Also, if Vedanta is offering Rs 4500 Crores it is after due consideration of the amount owed to lenders and of the estimated value of the asset? In which case it falls woe fully short of the replacement cost of the business. Can we not assume that the lenders accept the proposal and the new investor is issued equity shares afresh for the quantum of money instead of writing down ?
Excuse me for my ignorance on the subject. Just asking as some one who is yet to understand the basics.

(Gaurav Agarwal) #28

What in your good estimate is the replacement value of the asset?

(Dhiraj Dave) #29

In the second presentatin about appraoch to valuation for unlisted public company/private company and asset sale by Listed companies, there is virtually nil equity value. It is only in Listed public company, which has constraint on minimum 25% public holding and also SEBI restriction there is some value remain for minority shaholders. Till Now Open offer is being relaxed for new investor under IBC by SEBI and also conversion of debt into equity by Banks in defaulting companies. The new investor is however have lock in of 3 years and also need to keep public shareholding of 25% to comply with listing requirmeent in my opinion. Due to this the equity of minority public shareholder is getting some value. Otherwise technically, when lender take haircut, there is no value for shareholder.

I would request all members to spend time on reading full thread and going through both presentation. Most of questions are anwered in previous presesntation and replies. This would assist us to make thread more relevant.

(Praveen A) #30

This 25% rule can easily be satisfied by the lenders being issued equity. I seriously doubt they will write down their debt and let existing shareholders walk away with so much of the value. The lenders and the new investors are only ones with a seat at the table and they have the flexibility to design the capital structure in any number of ways so that they retain most of the value between themselves. A proper valuation can be done only post reorganization when the capital structure become clear and it would be risky to speculate before that.

(Silent Investor) #31

A very good article on this issue.

(Silent Investor) #32

The News is lenders are ready to take big hair cuts like 50% or more, rather than going for liquidation. 75% of the creditors have to agree on derailing the resolution plan. Lenders seem to prefer all-cash deals. Retaining equity or debt might better for their long term interest, but I don’t think our Indian banking system works that way.

Why are they ready to take a big hair cut?

(Gaurav Agarwal) #33

In the video at time stamp 1m 56s, S P Tulsian is saying that public shareholding of 23% in Monnet Ispat cannot be written down by Banks or NCLT. He has not given the reason for the same.

Approx Shareholding pattern in Monnet Ispat

Banks - 52%
Promoters - 25%
Public - 23%

@dd1474 Need you attention here.

(Silent Investor) #34

Exactly ! thats why they may not wait for a higher bid. By experience they would have learnt that liquidation value will be lesser than the bids they get, as they have to go to the same companies to buy their liquidated assets.

(desi.guru) #35

Anyone has idea/future prospect on IVRCL as it has also gone in to NCLT and I am holding a very large quantity. Infact I increased my holding after it was reported in RBI’s second list of defaulter and seeing the kind of manipulation done on JPA (not in NCLT though).


(Gaurav Agarwal) #36

This is todays news about Monnet Ispat.

The restructuring plan proposed by the JSW Steel-Aion Capital joint venture for Monnet Ispat involved Monnet promoter the Jajodia family owning 8 per cent stake in the company post restructuring, banks 10 per cent, public holding at 8 per cent and the JSWAion venture 74 per cent.

This is not inline with what S P Tulsian said in IBC referred Cases: Value investing or Value trap?

(Dhiraj Dave) #37

Another report on Monnet Ispat.

(Umang Joshi) #38

I could be totally wrong here, but if we assume 17 share price as suggested by Bloomberg, the story begins with new owners coming in. We’ve seen Prakash industries go from 50 to 230 odd. Monnet under new management should have a decent turnaround.

(Silent Investor) #39

For a 75% haircut, public shareholders equity is getting diluted from 23% to 8%, roughly 65%.

So, lets fit this into the calculations done by our BloombergQuint friends.They are considering an equity value of 2050 cr post fresh equity infusion. Their dilution ratio from public shareholder perspective is 1:6 , as 20 cr shares become 120 cr. Here as per the ET report, the lenders want 8% for the public shareholder. So, the dilution ratio is 8:23.

Hence new shares count should be 23 * 20 / 8 = 57.5 cr.

New share price could be 2050/57.5 = 35.65 per share, which is about the current market price range. If the business turns around, then as per their calculation,

EBITDA = 1000 cr
EV / EBITDA = 7,
EV = 7000 cr,

new share price after market re-rating post turn around = 7000/57.5 = 121.73 per share… good upside !!

Here, these calculations are based on the assumption of lenders taking a 75% haircut in exchange for a 18% equity stake, as per the news reports …

(Dhiraj Dave) #40


Since you have already taken significant positon and action speak louder then words, we all would appreciate if can explian your rationale for the position. Secondly, we are trying to discuss broad framework rather then actual value and buy/sell suggestion as I am not SEBI analyst. Thirdly there are many moving parts in the investment decision making i.e.

  1. What is entry enterprise value offered by new investor?,
  2. How same being financed by new investor?
  3. What settlement option banker opt including equity stake and hair cut banker take on debt?
  4. What is write-down on existing equity? and
  5. Last but not least, what is the final enterprise value the company gets post equity writedown, new investment infusion and change in management.

With so many moving parts, you would appreciate how difficult and low probability of success while predicting price.