Thanks for writing in, appreciate your investing efforts. That’s all required for a value investor and you are already one.
I can see the convertible options were due within 2015-2018 and you are saying they got redeemed before.
Procedure notes
The companies act gives a maximum period of pref share issue i.e. 20 years (30 years for Infra projects). They are free to redeem the shares before subject to some conditions e.g. from profits (after putting aside money for dividend), fresh issue of shares etc.
2013 they introduced a section where it said if are unable to redeem by issuing further pref shares 3/4th members consent there.
Why they are doing, might be a history behind it, I am quoting few scenarios ….you analyse.
Please do check the outstanding shares for last 5 -10 years to see whether there was a dilution took place. If they have converted to equity definitely number of shares would have gone up unless they bought back which is unlikely.
Have they again issued preference shares to start a new trance. These are piggy back, when a windfall profit comes from sale of asset and brand redeem the last series and issue a new one. Bottom line remains same.
Dilution of shares can only happen if there is a “net” increase in number of equity shares.
This is murkier than I think:
In the first place why company is doing ping pong of preference shares? Was it in trouble and gone through a CDR (bank’s blessing) to save the business?
The asset base so bad and banks didn’t believe in intangible ….then last choice is ownership dilution.
I know Wockhardt is a famous company but I don’t track at all even news, apologies. As per my stupid investment philosophy I don’t buy business who provide bedded hospital services or classroom education services.
As From the Last 5 year AR the Total Outstanding Equity shares are-
1). 109,435,903 (2010)
2). 109,435,903 (2011)
3). 109,435,903 (2012)
4). 109,538,403 (2103) 147,500 issued under Employee stock exchange scheme.
5). 109,751,153 (2014) 167,750 more issued for employee.
6). 110,072,903 (2015) 321,750 more issued for employee.
7). 110,494,403 (feb 2016) some more issued for employee.
So total share redeemed from 2010-till now are 740,043,612 vs 1,058,500 (total new share issued to employee).
from all this data it does not seems like they are creating new share to redeem.
Question arise here is whether they will do the same thing to redeem the share like past or they will allow bank to convert to new share and ultimately lower EPS.
Interesting notes, some one rightly pointed out “twist and turn”.
It went to CDR and came out of it in 2012. Arguably it started issuing EPS after successful exit presumably through good earnings? Or sale of assets?
If it has exited CDR, why these convertible shares are with banks? What is the current debt to asset? I am confident collaterals are already mortgaged, nothing left out, hence bank have pounced on with a bargain of pref shares. Obviously the objective is if Wockhardt fails to pay debt, bank will exercise their right and distribute the shares publicly by sale.
What is percentage of non redeemable to redeemable? Add both and compare to total long term debt, this would give you an indication how much bank has trusted on promoter to pay his from own pocket. What was the premium offered to non redeemable shares and dividend? If premium and dividend is lower than risk free rate…well boy then we are getting into serious number crunching.
Was there a piggy back? List out the redeemable pref shares year wise, if there is only ups and down with same number it can tell us something as banks do not believe in management’s long term ability to handle pref shares.
Saying all that banks can give loan on someone’s hat also.
This is a special situation case, distressed asset turning to white may be….I am not qualified to comment without doing a thorough research.
-they gave the premium of 4% p.a on simple basis.
-and 0.01% of dividend on pref shares.
Redemption of 740,043,612 is confirm by reduction in share capital from 2013 AR. and also cross confirmed by cashflow statement of 2013.they sold some business to get the cash.
From 2012 they are maintaining one redemption reserve of 490cr.
If you calculate the redemption amount for the remaining 59.7million(including 12.1million of OPCCRPS) of preference shares at 5 rupee per share it comes to 300 cr. adding 96 cr ( 4% p.a premium simple basis for 8 years-till 2018).
Giving total redemption amount 396 cr. Adding 2 missed dividend(in 2010,2011) will give the total amount more than 400 cr.
So company is well prepared to pay the redemption amount with premium.
Conclusion-
1).Company went through CDR in 2009 and came out in 2012 ,paying all the redemption amount by selling some of the business.
2).Company is almost debt free. and holding separate reserve account to pay for pref share.
Question-1).Having good reserve to pay for preference share ,why its not paying now?
2).Are banks got greedy to convert them into equity share as the price of the share has zoomed to many times from 2009 level?
Holding preference shares , redeeming and again issuing is not a bad practice. Even Tata group does a lot, (you may check TCS, Tinplate as I remember those two). Preference share is a safe capital as these share holders do not enjoy voting rights, can’t interfere in management, no chance of take over etc.
The mute point is when convertible shares pledged with bank. But if debt is repaid why bank is holding? That means it were not used as collateral, rather covenants.
Collateral is like I am keeping your asset against loan taken, if you don’t pay i will possess it. Covenants are the ones which are agreement based which sets the limits and conditions for debt agreement. Normally a company goes for covenant when your lender is too smart and you are in big problem.
if you can see any document which has been used as issue of preference shares , reading the contracts with bank if mentioned may throw some useful indications.
In either case as long there is a agreement which is not prejudicial to the interest of business you shouldn’t be worried about bank making money. Recently they lost 2 lac crore through NPA:) including loans on hats, brands etc.
What you should be worried:
previous dilution history
future dilution take it as pinch of salt.
Lets assume dilution happens, what will happen ….preference capital reduced and equity capital goes up. Earnings, assets remain same.
When a company issue bonus its considered that these guys can service large equity base.
if you are happy earnings visibility, debt situation and asset base you may not worry too much about dilution.
I thing i have to dig deeper into Agreement to know the cause.
To know all these company Act i planning to buy a book.
I would be really helpful if you suggest one book on company Laws(keep in mind i am not from finance or CA background).
Companies Act you can download for free. It consists of several chapters, see which are the ones you are interested.
The books otherwise are academic heavy. My opinion, when you have confusion google it or use a forum.
Banking agreements, commercial lending are governed by multiple acts. I don’t want to confuse you, but unfortunately our regulations are like that.
Being an investor that would be too much I think, for some of us it came with education. But I can tell you they are not much helpful while investing….it only refines the language we speak.
You may put your heart and soul out in understanding the business you like, financials you will close the gaps as you progress.
If you want to dig dip in business, I can suggest few my of favourite books.
Company clarified today that its 3 units have received EIR with observations. These include 2 Waluj plant and L1 Chikhalthana plant. But they claim it does not materially change the status on import alert.
Firstly, the tile of this thread ably suits the company and its ongoing troubles.
Secondly, there seems to be something fishy with management - they have stopped conducting concalls since last few quarters and also have shifted regd. office from Mumbai to Waluj for avoiding shareholders and their one point query.
Lastly, the clarification put out today is totally misguiding - It states that Company has received EIR with observations on completion of inspection. whereas EIR is only issued when the observation made out in Form 483 are properly addressed and hence there is no such thing called EIR with observations, what they have received is Form 483 with observations.
I think management is trying to cover up many mismanagement’s very smartly and not coming out with a clear status as to where the issue has stuck with regards to USFDA
EIR just indicates the closure of inspection and is issued based on observations made in form 483 and subsequent reply by the company.If FDA is not satisfied with this and finds violations despite the clarifications/ reply by the company , they issue OAI - EIR where the company has to act on the specific instructions given by FDA . EIR has three types - OAI , VAI and NAI (Experts can correct me if I am wrong here ). Please find below the information on EIR received so far by Wockhardt for 4/6 inspections in 2015-16.
We have to bear in mind that there are two more plants - 1 in Ankleshwar ( which received 4 observations- Inspection ended on 15th December 2015 ) and 1 in Shendra ( which received 9 observations - Inspection ended on 12th Jan 2016 ) for which the inspection is yet to be closed and EIR to be released. We do not know what type of EIR will FDA issue for these 2 plants. Going by the track record and the nature of observation of Shendra unit , NAI - EIR seems quite unlikely.
Disclosure : Invested at higher levels and at deep loss!
I think Wockhardt is the classic case of how Nepotism can destroy a company. Mr. Murtaza Khorakiwala does not look promising to me. His addresses and TV Interviews does not show him as if he has fire under his belly or have vision. After so many 483s and import alerts, even a Pan Wala would have learnt and ensured that at least those plants which were not under ban follow the cGMP Practices. But now it seems Wockhardt has inefficient management team. For Shendra, every time they were saying we are waiting for USFDA. I think management needs to take some strong steps fire some people and send a message and develop a good culture.
Here is the summary of my observations:-
Pros
84 ANDAs pending with USFDA
Incurred R&D expenditure of 2000 Crores in last four Years
Three key plants have got EIR so 483s closed
Except US Business they are doing well
Most of the molecules are First to File or complex
Cons
Nepotism and a MD who lacks vision (Not sure)
Lack of Transparency
Management keeps lying, I have doubts whether they have seriously received EIRs or are just bluffing
Focus not on meeting quality standards first
Annual Report looks like more of copy paste done
Repeatably cGMP problems
Now the only good thing is at Sales/Market Cap it looks cheap. The valuation gap is there but one has to take a decision of basis of available opportunities.
Last two sentences (reproduced below) of the news item in Business Standard is interesting
The mood in Wockhardt was upbeat after the US drug regulator closed inspections at Chikhalthana and Waluj plants recently without any adverse observations (Form 483). The company had also hired consultants and remedial measures were underway to address FDA concerns.
Not sure how the market would react to this news tomorrow
CNBC TV 18 reporting that Chikhalthana plant has cleared US FDA inspection. Although company came back with standard reply that they do not any additional information to share, it seems something is “brewing” here. Stock went up 12% intraday to settle down at 8.6% for the day.
If true, this would start the process of rerating this company
Slightly old news (June 2016) but I am surprised to notice that Wockhardt has won awards on using digital technology in Pharma company, much ahead of BIG 3 of Indian pharma of Sun, Lupin and Dr. Reddy’s…
During bad times, one tends to ignore these incremental good things happening inside the company as everybody is so focused on big event of USFDA clearance. But I think shrewd investors need to ahead of the curve…
Will this be beginning to the long awaited USFDA approval to various plants or will it be a “one-off” case, only time will tell. But time is ripe for Wockhardt to come out of coma (US FDA ban started in Nov 2013) so I feel very less downside from here on. At the same time, investors have been here many times so there is lot of pessimism around this company.
Although, this incident raises question about the integrity of the management and execution of this company. The ban period of 3 years and maybe more shows a big failure. Management says too many lies and we cannot take this company as a long term bet anymore. Short term gains can be made here once the stock starts doing it’s recovery after the approvals come in.
I agree with you, maybe I was too optimistic Just came across news on CNBC 18 . See below
On Tuesday, CNBC-TV18 reported quoting unnamed sources—that Wockhardt’s Morton Grove formulation plant in Illinois, US received 11 observations from USFDA. Morton Grove plant contributes about 35-40% to US sales.
The US facility was inspected by the US health regulator in February 2016.
CNBC listed the issues and it was highly disappointing to see same issues being repeated across the board.
Just came across news on CNBC 18 . See below