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

Girish Gulati has entered this stock that too with good 1.83% stake worth 10 crores

http://www.bseindia.com/corporates/shpperent.aspx?scripcd=505196&qtrid=84&CompName=TIL%20LTD%20&QtrName=December%202014

Girish Gulati has previous trackrecord of multibaggers like Avanti feeds, Patel logistics and Freshtrop fruit

Please read below link to find out what makes TIL. A great company

Con Call Key Highlights by Capital Mkt

The new Kharagpur plant which is into manufacturing road construction equipments be it asphalt plants, crushers, screeners etc reported a turnover of about Rs 98 crore for FY’15. However, loss from this plant stood at Rs 55 crore as compared to Rs 25 crore in FY’14. The new plant is hurting the profits in terms of higher depreciation and interest costs. The plant needs a turnover of around Rs 300 crore to break even.
There is no activity happening in road construction equipment business. In past 18 months, there was not even 1 single contract of hot mix asphalt plant in India. This is despite the fact that brown field road activities in terms of roads being re built and re-layered and asphalt plants play a significant role in this business. The fact is contractors’ balance sheet are stretched and most of them are under CDR. Banks have clearly indicated that they are not going to fund any cost overrun projects nor to these contractors, unless new equity is being brought and cleaning up of balance sheet activities go on.
So while management expects some activities in road construction business to start in H2 FY’16, there is not much clarity at this moment.The caterpillar side of business, particularly the underground mining business doing reasonably well and has performed well in FY’15. It generated a turnover of around Rs 85 crore in FY’15 with PBT of about Rs 33 crore. This is against a PBT of Rs 3 crore in FY’14.
In underground mining Coal India and Tata Steel are biggest customers of the company. Going forward, surface mining will get reduced and underground mining will be given more thrust.Overall, caterpillar side business reported net sales of around Rs 1146 crore in FY’15 as compared to Rs 1010 in FY’14. PBT stood at Rs 54 crore as compared to around Rs 12 crore in FY’14.
The Old plant which manufactures cranes is also doing well with turnover of around Rs 250 crore and PAT of around Rs 33 crore. The company has plans to export these cranes to newer markets in FY’16.
Debtors and inventory built up has increased at the overall company level. This is largely due to company carrying inventory of prototypes and equipments which the contractors had informed. However due to liquidity conditions and present market conditions these inventory are not getting picked up.
Overall, management expects the performance of the company to improve and to be better in FY’16 compared to FY’15. As things have been virtually status quo and standstill at ground as far as road and construction equipment business is concerned in FY’15. Management has indicated that by the end of Q1 FY’16, some concrete directions and numbers can be talked about.Underground mining business should continue to do very well in FY’16 and further down in FY’17 given more clarity will emerge from Auctions and further leasing.As per the management April-June’15 quarter is also a difficult quarter, as nothing much has changed compared to Q4 FY’15.As on Mar’15, the company has order book of around Rs 160 crore comprises of orders from Material Handling division of Rs 78 crore, Power systems of Rs 25 crore, Mining equipment of Rs 45 crore and rest from others.

Interview of Sumit Mazumder, CMD at ETNOW . Check the link;
http://economictimes.indiatimes.com/opinion/interviews/exciting-times-for-tractors-india-as-coal-sector-reforms-play-out-sumit-mazumder-cmd/articleshow/47639710.cms

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?

7 Likes

@aveekmitra

These type of deals are common for giving kick backs to benami companies of politicians and policy makers to compensate them for their generosity. Look at vadra-DLF.

My sense is some big fish who helped them get the contract has been given these shares instead of cash to make this quid pro quo and all “white”. I used to be an investment banker and these type of shareholding is common in companies like indiabulls power (ahmed patel), GMR, GVK.

This is an industry wide well accepted practice as no cash exchanges hands and even if someone gets caught, they are no legal grounds since no profit has been booked out - remember, it’s mere allotment of shares and big paper profit.

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I have removed the email conversation but the gist of my email discussion with the mgmt:

a) Showing absolute reluctance to respond to investor queries.
b) Same response as Aveek citing confidentiality.
c) Currently asking the mgmt. to sensitize me with the confidentiality of information sought.

This is from my discussion with Sekhar Bhattacharjee:

a) Only Rs 1 has been called up. As long as company does not call up remaining Rs 9 the transaction will become void.

My conclusion:
On the face of it, this looks likes some kind of wrong-doing by the mgmt. But I think once AR is out there could be some clarity and a loan against which these OCPS are issued as security (my hypthesis based on discussion with the CS and another investor who was able to get through to Aloke Banerjee).

Disclosure: From the time this issue has been brought up I have remained on sidelines. There is no material change (+/-1%) in my position. TIL continues to be a 10%+ position in my portfolio.

But i feel the transaction will be void is just to escape investors query as 1.5 cr for a company whose turnover is Rs. 1000cr plus and is making profits and you get 25% share in it on conversion, is not at all a bad deal. Why would it go void in first place? i dont beleive that anyone would be reluctant to pay rest Rs.9 and get 25% holding.

Its very important to figure out that whom have this shares placed ? and secondly as per my knowledge no Prefernetial shares as per new act, can be made at par, it has to be at BV, correct me if anything is wrong in my understanding?

Need to still dig more to find out the truth…

Disclosure: I continue to hold TIL and there is no material change (+/- 1% ) in my portoflio for TIL

The option to call up Rs 9 is at the discretion of company. This is from what I could gather of my discussion with the CS.

What puzzles me is why go through all this trouble for 15 lakhs or even 1.5 crores?? Smells very fishy :smile:

This has the smell of a quid pro quo deal all over it

  1. placement done at par which is ridiculous
  2. only Re. 1 called up - in case anything untoward happens, they can reverse this transaction
  3. the transaction neither provides liquidity nor has a marquee investor and is done with an unknown. So, it obviously is done to benefit the other party rather than TIL.

@priyank9

once the shares area alloted and the shareholder pays up full amount, company cannot refuse it - the company is lying on this.

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Hi Thanks @varadharajanr
Anything from the law side if you have any clue please do share for the firum to understand that too in a better manner.

There is no strategic or other investments that has been made by the purchase of the OCPS.
The following is the modus operandi:
The issue of OCPS happened to Abhiksha Enterprises Private Limited. Following is the TIPL resolution to that effect:

“RESOLVED THAT pursuant to the resolutions passce by the Board of Directors of tl-re Company at its meeting held on 17d October, 2013 and also by the Shareholders at the Extraordinary General Meeting held on 186 November,2013 respectively 15,00,000 (Iifteen Lakhs) Optionally Convertible Preference Shares of i 10/- each at a partly paid up value of { 1/- per share aggregating to { 15,00,000/- (Rupees lifteen Lakhs only) bea ng distinctive numbers ftom 1 to 15,00,000 be ancl are hereby issued and allotted to M/s. Abhiksha Enteryrises P vate Limited having its Re$istered Office at J4/95A, IInd Floor, Khirki ExtensiolL Malviya Nagar, New Delhi 110017.”

Abhiksha Enterprises was founded in 2010 and following are the promoters/directors of the company:
Balakrishna Chaturvedi (Born 1936)
Mr. Akanksha Chaturvedi (Daughter of Sunil Kumar Chaturvedi born 1990)
Ms Meena Chaturvedi (D/O Bhagwandas Mulchandani(born 1959)

There is a tonne of information which points to a) things not adding up (like weird email-ids, age of director etc., change of address) and b) nature of transactions that can be faulted - from a minority shareholder standpoint. I will cut the long story short: the company passes a bunch of resolutions to increase the shareholding capital on 01/04/2015. In the newer shareholding pattern you find that Mr. Sunil Chaturvedi’s name appears, his PAN no. is also mentioned (from MCA disclosures).

The name of TIPL Managing Director is also Sunil Kumar Chaturvedi whose DIN can be found in TIPL documents.

Connecting the dots: Go to
http://www.mca.gov.in/DCAPortalWeb/dca/MyMCALogin.do?method=setDefaultProperty&mode=50

The MCA site will ask you for DIN no. of the director. Enter DIN of Sunil Kumar Chaturvedi and you will be taken to a page which gives out his name and his father’s name as Balakrishna Chaturvedi. This new page also contains a field that asks for PAN no. of the director and once you fill that it says DIN/DPIN details are matching with Income Tax PAN database completing the circle.

I do not think we need any further evidence to come to sensible conclusions. As someone in VP Chintan Baithak said and a thought that has stuck to me “You cannot have a good deal with a bad person”, I have exited all my positions.

All my inference/conclusions have been drawn from data that is publicly available on the MCA site.

12 Likes

@aveekmitra, @Anant,
Brilliant work guys. And thanks for sharing your findings that do not seem to add up.
This will serve to educate newbies and senior practitioners too about possible malpractices prevalent in our Markets.

@varadharajanr
At the same time, let us not lose sight of the fact that VP is not an ACTIVIST organisation. Neither are we CRUSADER Journalists in the vein of MoneyLife who are doing a tremendous job on this front. Anyone is free to forward your findings to MoneyLife for example, and let the Specialists take over.

Much as we admire those pursuits, let us concentrate on doing our job well - which is to focus on highlighting absence/suspect business or management quality and/or highlight superior business/management quality.

We have had to intervene on the advise of Seniors who alerted us to edit/delete member posts to maintain that clear distinction. Please understand the reasons behind.

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TIL’s consolidated results for June 2014 also has this disclosure: http://www.tilindia.in/pdf/Press_Release_28th_July_2014.pdf

@Shivkumar

On this July 28th 2014 result, TIL mentioned “A subsidiary issued 15 Lakh shares” … They never mentioned “Indian Subsidiary” i.e. TIPL issued 15 Lakh shares.

It is TIPL who provides the bread and butter (and Jam and Jelly :smile: ) for TIL and it is a Rs. 1000 Cr. business owning Caterpillar distributorship for North / East India. It was very difficult and improbable to assume in July’14 that dilution was in TIPL and not in TIL (Nepal) or TIL (Myanmar) or TIL Overseas…

But yes, I think, on hindsight, I should have checked the MCA filing of TIPL after this announcement.

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In their annual result filing to the Stock Exchange it was mentioned that it is Indian Subsidiary. Point no. 3 describes who the Indian Subsidiary is and point no. 9 describes the issuance of OCPS. This has been my reference point:

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

@Anant

Shivkumar Mentioned that July '14 result also mentioned about sale of OCPS …

In July '14 filing, they didn’t mention Indian subsidiary but told “A Subsidiary” …

My response was in that context.