TIL - Infra story-can this be the next multibagger?

A Very Intriguing Case of TIL

(This note is being written in detail keeping many new learners in mind. Seasoned investors may find it long winding)

Please review the annual accounts of TIL dated 31st March 2015.

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/DFBC60A7_104E_4CB9_9078_B7C2DB26CFC8_153858.pdf

The point no 9 of the notes attached to Consolidated Balance Sheet reads as

“During the year the Indian subsidiary has issued and allotted 1500000 (Fifteen Lakhs) 9% Optionally Convertible Preference Shares (OCPS) at Rs. 10/- each, of which Rs. 1/- was called up”

TIL has only one Indian Subsidiary that is Tractors India Private Limited (TIPL) which holds the distributor license for North and East India for Caterpillar and out of Rs. 1400 Cr. consolidated revenue of TIL, TIPL generates Rs. 1000 Cr. revenue. Also, last year standalone loss was Rs. 28.62 crores vs. consolidated profit of Rs. 4.72 crores. So, it can be surmised (in absence of AR 2015) that 60% revenue and most of the profit were generated in the subsidiary company.TIPL.

Also, reasonable growth of revenue and profit is expected from this subsidiary in coming years as Caterpillar after purchase of Buchyrus in 2011, would be a formidable player in the full spectrum mining equipment solution both for under and over ground mining. .

So, in simple words, TIPL issued 15 lakhs OCPS at par and out of that issue, company received 10% i.e. Rs. 15 Lakhs as called up portion for a Rs. 1000 Cr. profit making company. I checked from TIPL return on MCA site that the issue was made on 28th July 2014 and it was indeed issued at par and was not issued to any strategic or institutional investor. And company was silent on whether any valuation of the shares were done at the time of issuance.

Till the day of issuance of OCPS, TIL held 100% equity in TPIL through 4500000 (Forty Five Lakhs) shares and the value of this acquisition as per their 2014 AR is about Rs. 95 crores. So, while creating the subsidiary, TIL issued shares of TIPL @ Rs. 210/- per share approximately.

If 15 lakh shares are issued at Rs. 10/- then it is 33% dilution and post money equity valuation of the company is just Rs. 6 Crores. If the OCPS is converted, TIL would have 75% equity in TIPL. How can a company with Rs. 1000 crore revenue can dilute 33% of equity at par value when they themselves subscribed it at Rs. 210 few years back. Did the company lost 98% of value in the intervening period? Even though their were strain on Working Capital and company faced tight liquidity condition, but can the valuation be so low? Moreover, company apparently didn’t get any financial benefit out of it as it got only Rs. 15 lakhs out of this transaction till March 2015.

During the last one year, share price of the company never gone below Rs. 120/- and on the day of issuance of OCPS, the shares of TIL were traded in the range of Rs. 400/-. Keeping in mind the large size of existing business, good opportunities ahead, strong backup from Caterpillar, I have unable to understand the rationale of this OCPS issuance and straightaway diluting 25% equity just for Rs. 1.50 Crores when prevalent market price was at least 25 times more (assuming rest of value attributed to other businesses).

If the company needed emergency capital keeping these OCPS as collateral, I feel there were many options available to them than this huge dilution … Promoters could have pledged shares for example.

Also, the company didn’t file this information with September 2014 Balance sheet filing even though issue was made on 28th July 2014 and only reported it on 31st march 2015 without providing any further details on this significant development. What are the rules of SEBI for share issue in subsidiary? Especially when the subsidiary has very very significant impact on whole company?

Company did respond to my e-mail telling that under confidentiality obligation they can’t divulge any detail at this juncture about this transaction.

What may be the possible reasons? If anyone has any inkling may please share.

As per my understanding, if these OCPS are converted into equity the existing minority shareholders would get seriously affected in a very negative way. And what can stop the OCPS holder from converting these preference shares?

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