IBC referred Cases: Value investing or Value trap?


(Dhiraj Dave) #41

@umang
In my opinion, we are talking failed enterprise which are not able to service debt. Of course in very optimistic bull market even turnaround companies can perform well, but they there higher riskiness nature as well. Secondly, there is very limited but a probability that new investor write down whole equity and delist the company. In such case, minority shareholders may have marginal value. I am again and again repeating that there is unfound optimism about getting resolution plan and HOPING that the company market capitalisaton is double/triple without realising that we expect lenders to take haircut. Why should new investor shall share a single paise wealth after taking all risk and investing money in failed enterprise?

Debt is suppose get repaid in case of liquidation in waterfall above the equity and equity is suppose work as buffer. However, I find most investors are wishing exactly otherway round, i.e. Lenders taking haircut equity value increases for minority shareholder !!! In fact, today I was inform that new investor may creat convertible structure/warrants issued to him, which provide him mechanism to sell new equity in market are higher value, and convert his warrent into equity (which would be priced at today SEBI determined fomrula, almost near to face value). In such structure, he can ensure that stake remain at 75% and he continue to exit from investment at higher price and subscribing warrant at near face value during 18 months period. This structure may fully comply with SEBI requirement of minimum 25% public holding.

I am not legal expert and SEBI registered advisor. In my limited understading, it would be better to invest the distress company after knowing the new management and structure, may be at three-four time current price, then to invest now when proability of very high loss of capital. Finally each investor need to evaluate his/her own risk profile and take call.

Thanks for your comment on the thread.


(SAMIR SHAH) #42

I also feel that it is better for clarity to emerge from the NCLT process, rather than jump the gun and invest today. There are innumerable ways in which existing equity can be shafted.
On the other hand, a lot of these bidders are set to get great assets at dirt cheap prices. The uncertainty around the whole process is certainly going to result in the first few cases selling really cheap. I think it is safer to invest in a Vedanta, JSW Steel or a Tata Steel, if one must participate in the process.


(desi.guru) #43

It is really great that you have responded to my request. As far as my significant position in the stock is due to the averaging as I had bought at a very high rate. I am not very good and finance/accounts/PE/PB jargon but try to read about companies, keep an eye on news and economy.

Now since I have seen that few of the NCLT/IBC referred defaulting company’s price is touching high (JP, Monet etc.) I thought IVRCL may also have a chance of running high as its in Infra sector and Govt seems genuinely interested in pushing for major Infra spending (Roads, Bridges) etc.

I don’t have much to offer in terms of value of enterprise etc. Promoters of the company has a very low holding though mere 5% and recently they put two of their asset for sale for debt settlement. So I think promoter is trying to settle debt, which may offer good run for the stock.

Thanks


(Gaurav Agarwal) #44

In a fresh round of negotiations with JSW Steel-Aion, lenders have suggested that banks’ stake should be raised to 18 per cent while public holding would be 8 per cent and the JV can have 74 per cent. Currently, founder Sandeep Jajodia and his family have a 25 per cent stake, lenders 49 per cent and the balance is with the public.

I was reading the article again. Lenders are asking that remaining equity of promoter should be transfered to them. Why would promoter transfer their equity to banks at this stage?

Does NCLT has power to so something like this?



Let us assume that suggestion of lenders as per above ET article goes thought and final shareholding is something like this

Bank - 18%
Public - 8%
JSW, Aion JV - 74%

As of Sep-17 according to company’s disclosure on BSE, company has fully paid equity shares approx 20 crores.

Now, in order to change the shareholding to above (as suggested by lender). What possible routes can resolution plan take?

Would it be issuance of new equity or something else?


(Umang Joshi) #45

Thanks Dheeraj. Its a steep learning curve, and I am glad you’ve started this conversation. Lots to learn


(anantshri_gupta) #46

This thread has been extremely valuable to me as I attempt to understand the various possible results that may emerge from the NCLT process.

I do have a query - What will be the financial impact of NCLT acquisitions on the bid winner? For example, if JSW Steel acquires an asset for a certain haircut, will JSW Steel’s balance sheet improve/worsen ? Will the profits/losses from this new asset reflect in JSW Steel’s consolidated earnings result ?

Thank you.


(Dhiraj Dave) #47

In case JSW get the new assets at distress value, it would be good for group. While, there could be issue on integrating same into new company, in case the managment able to use capacity productively (which is likely given JSW experience in steel business, already relatively better ability to management/source working capital which is typical problem area for such units), it shall be value accretive for acqirer, The benefit would occur over 2-3 years. Hence, how market would react depend on sentiment. In Current phase of bull market, when market is looking for excuse to defy gravity in stock prices, there is high probability that everything may discounted very quickly. In normal market, increase in value of acquirer would be in phases and linked to how the distress company is integrated and what kind of syngeries are realised by acquirer and reflection of same in numbers.

In addition, one need to ensure that it is not JSW group but JSW company which is acquiring this disress assets. If acuisition is by group, then depending on structure, JSW company may benefit or may not at all benefit as same could be acquired in another group company. In case of Monnet Ispat, it is believed that there are some family relation between promoter of Monnet group and JSW promoter which has resulted bid from JSW. How it is sturctured is the most important point in driving benefit from this acquisition for JSW group/company.


(kaustavpal) #48

This is turning out to be an important repository of information about NCLT. Tx.
Away from the Steel sector, Alok Industry case is interesting where employees have expressed interest to bid for control. What caught my attention was the directive from the lenders barring the would be promoters from delisting for 5 years. Please see the ET article of Jan 11. To quote

The resolution professional (RP) for Alok Industries has stipulated that those interested in acquiring the textile company will not be permitted to delist the stock from the stock exchange for five years post acquisition of the company. Any move by the potential investor to dilute their stake below 51 per cent will have to be approved by the lenders, said two senior officials familiar with the development.

Read more at:
//economictimes.indiatimes.com/articleshow/62455925.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Other than delisting, unfavourable share swap by the new promoters is another danger. The parent company could swap their share for multiples of the acquired company, at terms which might see massive dilution of value for existing minority shareholders.

There may be possible upside to the share value once these running concerns are made debt free.


(anantshri_gupta) #49

Thanks Dhiraj. This is helpful.


(Dhiraj Dave) #50

I have gone through news report. I do not why Bank official would insist on such condition. Generally, Banker have clause in loan agreement that any change of control/ownership in the borrower business would have explicit approval of lender which is normal lending practice in india. This condition to ensure that the management does not change without knowledge of the lender. However, when new investor is investing in distress company, forcing listing obligation of 5 years may reduce attractiveness of the investment for distress investor and would to that extent would reduce bid for distress assets, other thing being same, in my opinion.


(Gaurav Agarwal) #51

(Gaurav Agarwal) #52

(Dhiraj Dave) #53

Great news but limited information about listed equity share price. It give detail of enterprise value, expected cash infusion and utilisation of newly infused cash, but silent on equity value, stake, acquistion price, and writedwon (if any) of existing equity capital. While market is perfect and generally it know more than individual investor, still it may make sense to wait for more details in my opinion.


(Gaurav Agarwal) #54


I am confused are there two companies Bhushan Steel & Bhushan power & steel. I see only Bhushan steel is listed. What about Bhushan power & steel. Is this a subsidiary?

Also, looks like tata’s are ready to pay too much for these assets.


(Dhiraj Dave) #55

Bhushan Power is not listed. Hence, beside theorical understanding, no practical interest from people like us who are looking at equity investment.

I feel value lies in eye of investor. Hence, it would unfair to comment on any investment by the oldest group, which definitley understand steel business better then any of us and survived despite great business judgement error on Corus. The ready capacity, with excess iron ore with Tata group, they may be best placed to gain from current upswing in steel prices. We would be able to comment on same only after 3-5 years.


(Umang Joshi) #56

In this video 2 out of 3 “experts” say equity cannot be extinguished. Not sure why these things are open to interpretation, aren’t there any guidelines?


(Umang Joshi) #57

After speculating for months with 0 value for equity, now CNBC does a 180deg turnaround. Now they find Rs. 80 as a very conservative value for Bhushan. Till yesterday, Lata & CNBC at large were saying 0 value.


(Dhiraj Dave) #58

First Legal person view is different. Secondly, Mr. Tulsiyan missed that 25% non promoter stake include also lenders. So equity can increased by 10-20 times and dilute.

Find enclsoed artcile providing specific about no sharholder approval required once resolution plan approved by COC/NCLT. Mr. Tulsiyan may have missed this probably in my opinion. My understanidng may also be wrong. We would anyway know answer shortly. Globally or even in BIFR (Pre IBC restructuring mechanism), most of cases,equity was written down by 90-95% before new investment.


(Umang Joshi) #59

Not sure if you’ve seen the video till the end. Tulsian towards the end is quite emphatic that there is no legal foundation in writing of equity for a publicly traded company. In fact, 2 of the 3 experts say equity would kept. Frankly, I am not sure what the process is, and learning a lot from your posts here.


(Dhiraj Dave) #60

The lastest news on Bhushan Power (unlisted firm) indicate that TATA group is looking forward to write down whole equity before investing in new equity. While same may not be true for Listed companies, but a pointer for all those who were expecting sweet deal in distress companies.