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Delisting Discussions - Hexaware, Vedanta & all of them

1461232028476.pdf (228.9 KB)
Read this you’ll be able to clear many doubts with respect to delisting procedure.

What happens if I do not execute my shares during delisting and never give even after 1year. Can I keep it forever? Is there be any benefit in retaining it like dividends or higher pricing power? Can I sell it to promoters lets say after 5 or 10 years?

You’re free to do that but you will be at promoter’s mercy then. Promoters of Norma offered much lower price than exist price to those who kept on holding.
Imo one shouldn’t love the stocks that much. They are for making wealth not to love. Here in case of delisting they are to make speculative returns.

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Market conditions were very different so people should not be misled into believing returns will be high this time around

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Agreed. These are just historical returns and does not mean that similar performance would be repeated.
Disc : Not Invested.

While going through some of the mint articles describing the current de-listing, i found that analyst groups believe that de-listing price could be higher. Highlighting the reason mentioned by Emkay global services (which expects a strong likelihood of hike in offer price):

  • much higher valuation multiples accorded to recent buyouts by strategic and financial investors. (Need to find examples on this, are they referring to recent Polaris deal? or 2018’s deal of this company only?)
  • relative valuation discount for Hexaware at the offer price compared to peers.
  • past precedents wherein offer prices have seen significant upward revisions. (in the range of 35-40%, when the deal completed)

Analyzing the deal done in August 2018. At Rs 447 per share, company was valued at Rs 13360 Cr MCAP (both debt and cash on book was pretty low, so ignoring them)

  • In august 2018, last 4 quarters financial numbers
    • Sales : 993, 1005, 1049, 1137 Cr (Sum: 4184 Cr) ~ 3X
    • OPM : 17%,16%,16%,16%
    • Operating profit : 173, 160, 163, 177 Cr (Sum: 673 Cr) ~ 20X
    • PAT : 142, 121, 136, 154 Cr (Sum: 553 Cr) ~ 24X
  • Currently, last 4 quarters
    • Sales: 1308, 1481, 1529, 1542 Cr (Sum: 5860 Cr)
    • OPM: 16%, 16%, 16%, 15%
    • Operating profit: 212, 238, 240, 234 (Sum: 924 Cr)
    • PAT: 151, 184, 168, 175 (Sum: 678 Cr)
  • At indicative price of Rs 285, promoters are trying to buy company at market cap of 8518 Cr, which is pretty undervalued.
    • 8518 Cr / 5860 Cr = ~1.5X of TTM Sales
    • 8518 Cr / 924 Cr = ~ 9X of TTM operating profit
    • 8518 Cr / 678 Cr = ~ 12.5X of TTM PAT
  • Valuing at the previous multiples used during August 2018 deal. Market cap should be around 16000 Cr - 18000 Cr, which would translate into Rs 544 to Rs 626 per share.
  • It is also worth noting that August 2018 deal was completed at 10% less price than then present market price (Rs 484 or so)

Relative valuation of peers (TTM PE)

  • Persistent Systems – 15X PE
  • Mphasis – 14X PE
  • L&T technology – 16X PE
  • Hexaware – 14.44X PE

Promoters have been trying to exit from this acquisition from quite some time now. But each time they try to exit or bulk sale, price increases sharply and the deal fails.

  • The PE firm had first explored a sale of Hexaware in 2016, reaching out to French IT firm Capgemini and PE firms Blackstone and Carlyle, according to a report in The Economic Times.
  • In 2017, it informed shareholders that Baring was exploring a sale to investors outside India|
  • In 2018, Baring managed to sell an 8% stake through block deals for ₹1,120 crore. However stake was sold at a significant discount of 10% to the prevailing market price, triggering a steep single-day fall of 16.5% in shares of Hexaware.

Analyzing major shareholders of Hexaware:

  • Baring private equity Asia – 62.4%
  • FII – 16.82%
  • DII – 12.86%
  • Public – 7.88%

Major persons/funds involved in the deal:

  • Chirag Setalwad of HDFC – 7.2%
  • T Rowe Price International discovery fund of FII – 2.2%
  • Taher Badshah of Invesco – 1.3%
  • R. Janakiraman of Franklin – 1%
  • Sohini Andani of SBI - 1.2%
  • Ntasian Emerging Leaders Master Fund – 0.96%
  • Manish Gunwani Nippon – 0.6%
  • Pictet - Indian Equities – 0.74%
  • HDFC Standard life insurance company limited – 0.74%

This 9-10 people/fund add up to 16% of shareholders. which requires that promoters get the deal favorable to these people. Also, they will need to convince other FPIs which owns smaller number of shares. There are 189 FPIs holding 16.82% stack in company, top few highlighted above. If the company really wants to get de-listed, there is high probability of this deal going through and also as more rational players are involved here, valuations should be fair. It may not be as high as Rs 544 to Rs 626 per share as per valuation of 2018’s deal. But even a 30% less than that price would be in the range of Rs 380 to Rs 438. This seems to me a conservative price with some margin of safety.

if the deal does not get through, stock may revert back to older valuation, but even in that case, there are high chances of not having significant loss of capital (over the medium turn), because of decent fundamentals of the stock.

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Havent heard frm the company since the initial announcement regarding delisting on 12th June. Meanwhile, an interim dividend of 3/share was declared wid record date as 1st July.

So anybdy who bought for arbitrage before dat mst have got the dividend kicker as well.

Though the only thing that I doubt is how the company is goin to manage money for delisting?? Cash ajd investments are negligible

it’s not the company buying you out it’s promoters. You are confusing Delisting (At promoter level) with Buy Back of shares (AT Company level).

Yup. Point taken. I might have messed up my interpretation wid bad writing skills :stuck_out_tongue:

My only concern is how the promoter entity doing the de-listing is getting the funds for this transaction? 1 guess is that they might be getting some cheaper debt available to them.

They are getting equity from Baring PE. How Baring PE will arrange funds is anybody’s guess. I think we don’t need to go that further. To me, there seems high probability of delisting going through and valuations are backing up stock price. Therefore, holding peacefully.

I was trying to figure out the how to think about de-listing situations. This thread Special situation (demerger, rights issue, delisting) - checklist has good amount of insight for such special situation.

In summary, a good de-listing case should have 5 things

  1. Valuation comfort at current price: This reduces the downside risk in the case of deal not going through. Hexaware is not at expensive valuation.
  2. Management quality: So that they don’t do all kind of tactics for the deal. Looked for problems in past for Hexaware and Promoters. Nothing grave i could find.
  3. Incentive to delist: If promoters have incentive to delist, they can pay bit higher also. Naresh has captured this very well. HT Global need to refinance its debt and having all the cash-flow of Hexaware would help in that regard.
  4. Shareholding pattern: If professional investors hold large chunk of share, management may be reduced in their attempt to do nasty things. Also the likelihood of deal getting through is higher, if there is concentrated shareholding. True in this case. Large chunk of company is owned by FII and DII.
  5. Floor price: Buy as cheaper to floor price as you can. Obvious one.

One can go through this blog on HT Global’s bond to understand better why there is urgency to de-list shares. If HT Global does not come up with a plan to refinance the bonds by July end 2020, rating agencies would further downgrade the bond. HT Global bonds are 100% of secured by Hexaware shares. As Hexaware share price plummeted and credit rating agencies downgraded bond of HT Global, yield spiked to 21%, Which later came back to its normal level of 7%, as the announcement of de-listing happened and share price of Hexaware jumped back. If the yield remains very high, it would be difficult for HT Global to get it refinanced easily. Hence it is in best interest of promoters to get the company de-listed and thus protect from sharp share price down.

If the deal somehow does not go through, we may see some other mechanisms of cash being sent from Hexaware to HT Global, may be buy the way of special dividend or share buyback.

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Hello,
What is the expected timeline of the delisting. And what are the important milestones.

Thanks

What if HT Global not able to give concrete plan and ultimately not able to delist Hexaware as well and its bond are downgraded to least…how will it affect Hexaware prospects with its promoters in trouble? Obvious route in such cases is pledging of shares by promoters and in that case the share price falls.

One of your points mention that promoters must be in sound condition but in this case I see they in need of debt refinancing and at an edge…how are promoters condition sound and healthy then. I see them in trouble?

Pls correct me if wrong. Thanks

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Not sure if I can quote directly from that blog, but these are 2 interesting points mentioned there : -

  • According to the credit report from Fitch, as at 31 June 2019, the company had a standalone cash balance of USD 17 million and no near-term debt maturities. Hence the liquidity of the company was adequate. Furthermore, the company also had USD26 million in its interest-reserve account to fulfil the obligation of maintaining one year’s worth of coupon.

  • Given that dividend distribution from Hexaware comprises the majority of HT Global’s earnings, and Hexaware has paid out a dividend on 30 March, we therefore hold a positive view towards HT Global with the long-term support of dividend payment from Hexaware.

In addition to above, another dividend of Rs. 3/share was paid on July 1. So, they got an additional Rs. 56 crs. approx against the total due bond obligation of around Rs. 2760 crs. So, the question remains of how much liquidity the promoters have to give above the floor price.
Another scenario that can play out here is that delisting fails and thn they sell thr stake to sm other buyer. That will be enough to cover the bonds.

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Yes that might be one of the paths followed if de-listing does not work. But why would Baring PE Asia wants that? Hexaware is one of their prime investments and they can get higher value for it, if they can take it private and sell it to somebody after some time. My point was since they have good immediate motivation, they may not shy in giving higher share price. Even if we assume they need to pledge the shares (to refinance the debt), going private option is still better than being in public. For all practical purposes, we should think promoters as Baring PE and not HT Global.

But all being said, yes that is a risk if de-listing does not go through.

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Latest on INEOS delisting : -

It says this will set a precedent for delistings to come.

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I have a basic query here : -

Is there a date by which the shaeholders who hold shares are eligible to tender in de-listing? Something like record date etc.

Can someone clarify on this - along with source of the info, if possible.

Good results in given scenario

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Results are good. The dividend is being paid as the HT global has to serve repayment obligations.
However the stock will not perform the way other IT stocks have. The reason is that promoters will not let the price to move above 450 at lease till RBB.