Recently APL Apollo bought a distress plant from a subsidiary of Shankara Buildcon for some 70 Cr.
At the end of the above note this information regarding capital infusion was given.
This shows the confidence of the promoter with his business. That is indeed very good. If one tries and asses closely this infusion was done for the plant acquisition of shankara buildcon.
In the same press release it was mentioned that shankara was operating the plant at 40% and APL under its umbrella can operate the same at much better levels. Another important point is shankara has done a contract with APL that it will buy 2.5 lac ton material in Fy2020 which APL says will assist their volumes and the said contract is an exclusive one.
How it benefits APL (these are my assumptions and i could be wrong also here)
- Say APL has overpaid for the plant by X amount. The traditional method for accounting this is in cash flow from investing activities.
- Now APL (the money it has overpaid has to get back the same) over bills its inventory and sells the same to shankara (exclusive contract 2.5 lac ton which will assist volumes). The money received goes in cash flow from operations hence also affecting free cash flows from next period.
- Company key highlights is focus on cash flows.
Page No 7 & 8 in this presentation.
This show the strength of the business with increasing and improving Cash Flows.
How it benefits Shankara
- Shankara is in stress. They get to release their working capital tied up in their business by this stake sale.
- They get to pay down their debt with the same to some extent.
Shankara is the second largest player in southern region (again as per the press release) which was not able to efficiently use the plant (40% utilization levels) / Suddenly that same acquired plant has ramped up to efficient usage in just 1-2 quaters going forward.
The max growth in volumes and realizations the company is getting in GP (Galvanized segment) the in efficient plant acquired from shankara.
All looks like too good to be true. And when promoter shows confidence in business by infusion capital via pref allotment and warrants during the same time promoter is also selling their stock in open market sale (as per bse disclosures)
The confidence fading away in a time of few quarters.