Emami Infrastructure Ltd at Rs 91…..Listed on July 28,2010 with suspicious and crazy gyrations of near Rs 600 on the upside and below Rs 90 on the downside…What’s the Story!?

I’ve been asked to Value newly listed Emami Infrastructure Ltd (EIL) after it’s Price Acrobatics displayed on the first day of Listing,on Wednesday last week!  

I needed a ‘Saridon’ at the end of the Interesting and quite revealing Valuation exercise !…there should be a law against the number of companies that a Real Estate Player opens in the Group !…you will understand once you go through this blog

Emami Infrastructure Ltd listed on Wednesday,July 28,2010 and Price swings were crazy…opening at Rs 250 on NSE and then touching  heights of Rs 598.80 and lows of Rs 86 and closing at Rs 104.8…closed lower at Rs 101 on BSE…and today it’s Rs 91

On the first day of Listing,there are no Circuit Breakers…so price mischief through volatile swings is easily facilitated…seems Emami Infrastructure too is a prey to this Game…SEBI is planning to investigate Listing Day swings…also have a look at the Bulk deals on that day on BSE (source bse website)

BULK DEALS ON BSE ON THE FIRST DAY OF LISTING OF EMAMI INFRASTRUCTURE LTD

Scrip Code:533218   Date : Wednesday ,July 28,2010

Except for one,all have squared off at marginal profits…the only genuine sale is by an FII, T Rowe…they were in the Top Ten Shareholders list at the time of the Scheme of Arrangement…..clearly these are synchronised bulk trades to create volumes on the bourse…they do not serve the purpose of efficient price discovery,or genuine,credible and authentic trading……it’s a rampant misuse of the Bulk Trade Window….but why does this misuse continue !?……no prizes for guessing !….a lot of people,part of a nexus, should be brought to book for destroying the sanctity of our markets

Let’s turn to the Valuation of Emami Infrastructure Ltd….but before I do that,let’s revist how Emami took over Zandu in 2008  

An Ambitious Emami Group wins a Hostile Bid for Zandu

Remember how in 2008 for Rs 700 crs the Agarwals of Emami Group took over Zandu Pharmaceuticals from the Parikhs (no relations of mine!) in a hostile takeover battle…with more than a little help from the Anand Rathi Group…a lot of Coincidences here that surround the Birla Group….Emami Promoters are ex Birla Group Managers from the 1970s…Anand Rathi too headed the Finance Function in a leading Birla Company….Birla Financial Companies were aggressively buying Zandu in 2007/8 before the takeover bid….A Zandu share of FV Rs 100  was available below Rs 1000….the hostile takeover took it to Rs 20000 !…Friday,Zandu share was quoted at Rs 3100…..but effectively yet near Rs 16000 as a Zandu Shareholder was given 14 free shares of flagship, Emami Ltd of FV Rs 2 for every one share of FV Rs 100 held in Zandu under the Scheme of Arrangement of 2009..last week Emami split the FV from Rs 2 to Rs 1 and is quoted now at Rs 457 for a FV Rs 1 Share 

So what’s this great Scheme of Arrangement ? and what led to it ?

The answer lies in Zandu Pharmaceuticals…… it is headquartered in Dadar,a prime area in midtown Mumbai…it has 2.4 acres here…..Today’s papers report that a 2.39 acre property of NTC’s Poddar Mills at Worli Naka,also midtown Mumbai, was sold for a whopping Rs 474 crs in a winning e-bid by Indiabulls Real Estate,one of the eight bidders against a reserve price of Rs 250 crs…Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

This brings to the fore my first curiousity …. why has Emami reduced it’s holdings from 72.80 % to 35.51 % in Zandu Realty Ltd ? …Oh Yes,Zandu Pharmaceuticals ,after demergering the FMCG Business to Emami,has been renamed Zandu Realty Ltd……or has Emami merely sold partial stake to known people not forming part of Promoter or Promoter Group ?  

In 2009,Emami,probably working on it’s Zandu takeover gameplan, decided to demerge it’s Realty Business from it’s FMCG Business….even for Zandu

A scheme of Arrangement was arrived at with even help from a Big Four Firm,E & Y….in fact interestingly Emami Infrastructure Ltd boasts of just a 26 year old as one of it’s Directors…his address,interestingly also happens to be in the same building in Mumbai where my office is located !…actually that caught my eye first!…the Information memorandum released by the company http://www.emamiltd.in/press/eil.pdf profiles him as “he possesses  extensive knowledge and experience as Lead Advisory and Transaction Advisory Services in Ernst & Young India Ltd”  ….Wow! all at the young age of 26 !

The Gist of the Scheme of Arrangement is as below

• Zandu Pharmaceuticals will demerge it’s FMCG Business to Emami Ltd and it will be renamed Zandu Realty Ltd to reflect it’s continuing business….Every Shareholder of Zandu will retain his existing holding in Zandu and in addition will get 14 equity Shares of Emami Ltd of FV Rs 2 for every One Share of Zandu held of FV Rs 100…Emami has just split it’s FV further to Rs 1…thus effectively the Zandu Shareholder gets 28 Emami Shares of FV Rs 1 for every share he holds in Zandu  
• Simultaneously,Emami Ltd will demerge it’s Realty Business to Emami Infrastructure Ltd (EIL)….Every shareholder of Emami Ltd will get One Equity Share of EIL of FV Rs 2 for every Three Equity Shares of FV Rs 2 held in Emami Ltd…The Share Capital of Emami will stand as it is…so the Emami Shareholder will continue to hold his Emami shares + hold free entitled shares in EIL…the Realty Business transferred to EIL consists basically of two Investments….Rs 9.8 crs through  20 lakh shares or 100% holding in Emami Realty Ltd and Rs 165.3 crs through 555636 Shares or 68.9% holding in Zandu….A Zandu Shareholder entitled for Emami Shares will not be entitled for Shares in EIL through the new Emami Holding
• EIL will be listed seperately on BSE,NSE and KSE

An updated Information memorandum filed in July 2010 just before Listing of EIL provides the latest Financials as of March 31,2010….the earlier Information Memorandum of 2009 showed Financials as of September 30,2009

There is a huge difference in both….In the six months between September 30,2009 and March 31,2010,EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

This Rs 211 crs received by EIL has been applied as below as inferred from Financials of September 30,2009 and March 31,2010

• Repayment of Unsecured Loan  : Rs 144 crs…..Rounded of Difference between Unsecured loans of Rs 156.72 crs and Rs 12.55 crs at 30/9/2009 and 31/3/2010 respectively
• Donation : Rs 10 crs……clubbed under  Administration and Other Expenses in the P & L A/c
• Interest  : Rs 23 crs…..shown in the P/L A/c at 31/3/2010
• Rs 34 crs given as Loans and Advances : This is the addition to the Current Assets at 31/3/2010

EIL’s Equity Capital  (FV Rs 2) is Rs 4.86 crs……At March 31,2010,the Profit on Sale of Zandu Shares is Rs 45.34 crs…but after adjusting Rs 23 crs for Interest and Rs 10 crs for Donation and Rs 2.25 crs for Tax and normal expenses,the Net Profit  is Rs 10.68 crs…This gives an EPS of Rs 4.4 and on Share Price of Rs 91,a  Multiple of 20…..However the Auditor has taken 5289250 shares as the weighted avergae shares in the denominator to show an EPS of Rs 20.20….Perhaps this may have been the misunderstanding that led to a crazy near Rs 600 Share Price on Listing Day…The Actual Number of Shares of FV Rs 2 existing for EIL is 24298392

EIL’s Networth at March 31,2010 is Rs 38.97 crs giving a Book Value per share of Rs 16…that’s a near 6 Book Multiple…Reserves are Rs 34.10 crs of which the Capital Reserves are Rs 23.42 crs   

The Balance Sheet at March 31,2010 also interestingly shows a Lower Unsecured Loan amount of Rs 12.55 crs…there are no Fixed Assets and the only Investment is Rs 9.8 crs in wholly owened subsidiary ERL…it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value…Why keep Unsecured Loans Pending and dole out Loans & Advances ! ?

The Structure of EIL

EIL has a wholly owned Subsidary Emami Realty Ltd (ERL)….ERL in turn has several subsidiaries as below

100% Holding

Emami Ashiana Pvt Ltd

Emami Rainbow Niketan Pvt Ltd….owns 286329 shares or 35.51%  in Zandu Realty at March 31,2010…From 4/2/2010 Zandu Realty ceased to be a Subsidiary and from 31/3/2010 is an Associate Company in the Emami Group….I wonder though,if Emami will continue to consolidate Zandu in their Accounts the way they do for a Subsidiary as they will yet have control over the Board and Operations  

Nathvar Triacam Pvt Ltd…ceased to be a subsidiary from 28/1/2010

Octagon BPO Pvt Ltd…developing an IT Park over 0.64 acres at Rajarhat

80% Holding

Emami Constructions Pvt Ltd…..is developing jointly with Anand Rathi Realty Fund a Residential Complex of 510 Apartments over 4.46 acres in Kukatpally

60% Holding

New Age Realty Pvt Ltd

55% Holding

Delta PV Pvt Ltd…..is developing an IT Park over One Acre at Salt Lake Sector in joint venture with Anant Rathi Realty Fund and CD Equi Finance Pvt Ltd

Land Reserve

The Memorandum states that Wholly Owned Subsidiary of EIL,ERL OWNS a Land Reserve of 103.12 acres…..Projects are not directly in EIL,but in step down subsidiaries…..They are all at early stages of Planning and Revenues from them will not flow till 2013 atleast….This makes EIL merely a Holding Company….it has Strong Net Current Assets of @ Rs 45 crs at March 31,2010…,but while cash is Rs 5.4 crs,Loans and Advances are hefty at Rs 39.93 crs…Of these Loans and Advances,Rs 27.62 crs are made to Parties other than Subsidiaries and Rs 7.4 crs are Recoverables in Value

Reduction of Promoter Shareholding in ZANDU Realty  

Zandu’s market cap today with share price at Rs 3100 levels is Rs 250 crs…it has 806400 shares of FV Rs 100 outstanding and records as of March 31,2010 show that the Emami Group holds 286329 shares or 35.51% of Zandu through just one company, Emami Rainbow Niketan Pvt Ltd….down from the 587055 shares or 72.80 % held by it through group six group companies at September 30,2009

EIL has sold off it’s 555636 shares in Zandu Realty for Rs 210.64 crs.making a Profit of Rs 45.34 crs…it’s cost was Rs 165.3 crs,computing to Rs 2975/share…while sale computes to Rs 3791/share…Current Zandu Price is @ Rs 3100

Now only Emami Rainbow Niketan Pvt Ltd holds 286329 shares or 35.51 % in Zandu Realty….This moots the Question….Did ERNPL pick up these shares from EIL when EIL disposed it’s full holdings in Zandu for Rs 211 crs ?…Assuming it did,then the ERNPL Balance Sheet would show this Investment at a Cost of @ Rs 109 crs…How was this Funded ?…were  Unsecured Loans of similar amount merely transfered by EIL to ERNPL….this means the Profit Entry created in one group company,EIL on Sale of Zandu Shares, is negated by atleast half by mark to market loss in the Books of step down subsidiary, ERNPL…. Was this Profit created merely to provide some Earnings basis of Valuation to EIL to justify a High Price on Listing ?….EIL is unlikely to repeat this Profit unless it sells of Investments in ERL !….also Funding an Investment through an Unsecured Interest bearing loan brings into Focus the Rationality of doing this…as significant Interest is paid out…Rs 23 crs,because of Interest on Unsecured Loans shown at Rs 156 crs at September 30,2009 ,were knocked out from EIL profit…..Juggling Real Estate Assets,Loans,Loss and Profits in Group Entities ? 

Zandu Realty Shareholding Pattern reveals this….

• On September 30,2009,it had 11518 Shareholders,including Six Promoter Group Shareholders led by flagship company,Emami Ltd who held 587055 shares or  72.80 % of the Equity 
• On December 31,2010,it had 25303 Shareholders,including only One New Promoter Group Shareholder ,Emami Infrastructure Ltd who held 425502 shares or 52.77% of the Equity….so EIL has already started selling Zandu Realty Shares
• On March 31,2010,it had 39855 shareholders,including only one and a new one too,Promoter Shareholder,Emami Rainbow Niketan Pvt Ltd,who held 286329 Shares or 35.51 % of the Equity

No Non Promoter Shareholder holds more than 1% of the Equity on all three dates

Why would Promoter Emami Group reduce it’s holding in Zandu Realty from 72.80% to 35.51 % ?….of the 587055 shares it sold,assuming 286329 are now in ERNPL,then who has brought 300726 shares !?…The Jump in Shareholders from 30/9/2010 to 31/3/2010 is 28337…this implies an average Holding of 10 or 11 shares for the incremental shareholders !…SEBI needs to investigate this angle…more so what was the the need for Emami to reduce their stake in Zandu ?….Zandu’s current Price of Rs 3100 gives a market Cap of @ Rs 250 crs..Zandu’s Networth including FMCG Business at March 31,2008 was Rs 78 crs….after FMCG Business has been transfered to Emami,only the 2.4 acres Land remains as an Asset in Zandu Realty and it’s Networth dropped to Rs 23 crs at March 31,2009…..this 2.4 acres would be worth atleast Rs 500 crs in undeveloped state,if one takes this morning’s paper headlines as the benchmark…. NTC had sold their 2.4 acre Poddar Mill Plot at Worli,in Mumbai…a liitle distance from Zandu’s Dadar base…for Rs 474 crs…Indiabulls Real Estate was the winning e-bidder among eight that were contesting…If developed the Value is significantly much more,probably Rs 1000 crs….Emami held 72.80% of this at 30/9/2009….and Zandu was their subsidiary….now they hold just 35.51%…this makes Zandu just an Associate…have the Sold Shares gone to Promoter known Hands who do not form part of the Promoter Group on Paper ?

FIIs and MF Holding in EIL   

HSBC Global Investment Funds held 1265338 shares or 5.21% of EIL…..T Rowe Price International INC (T Rowe Price New Asia Fund) held 1098655 shares or 4.52% of EIl…HDFC Equity Fund held 400000 shares or 1.65% of EIL….these would have resulted under the Scheme of Arrangement because of their Emami Ltd Shareholding…..The Bulk Deals above show that T Rowe commenced disposing of their holding on the First day of Listing itself  

Now T Rowe should be assumed as an Intelligent FII…..

Conclusion

EIL is quoted at Rs 91…it’s Book Value is Rs 16….it is unlikely to repeat Rs 10 crs + FY 10 Profits anytime soon….it’s Real Value lies in the Projects and Land Reserves that are reflected in the books of it’s subsidiaries and step down subsidiaries….how much of it will flow back to EIL in the years ahead is a question mark…..moreover in my view the Promoters Emami Group have raised a Corporate Governance and ‘We could not care less for EIL Minority Shareholders’ Issues in showing full sale of EIL’s Zandu Investment (68.90 % of Zandu Equity) at Rs 211 crs by transfering ostensibly 35.51 %  from now listed EIL to it’s stepdown subsidiary ERNPL (Subsidiary of ERL) and selling of the rest to outside the Promoters Group

EIL shareholders would have benefited directly and substantially more in the years ahead if the Emami Group had retained the full (68.90% of Zandu’s Equity) Zandu Investments in now listed EIL itself and not shown 35.51 % in ERNPL and sold off the rest outside the group….I read it as a Ploy to Privatise Huge Profits that Zandu Realty may throw up in the Future on developing it’s 2.4 acres…..Today’s Winning Bid of Rs 474 crs for a similar acreage in a nearby plot in Mumbai is a clear indication of this….There was no need to reduce the Emami Group Stake in Zandu from 72.80% to 35.51%….because Zandu Realty Shareholders will surely reap the Bonanza in the years ahead from development of Zandu’s 2.4 acres….Zandu Market Cap is @ Rs 250 crs….it’s Property is worth atleast Rs 500 crs undeveloped and in all probability Rs 1000 crs when developed….EIL’s Selling price computes to Rs 3791 per Zandu Share….even at this Price the Market Cap of Zandu would have been just Rs 300+ crs….way below it’s true value

EIL Shareholders seem to have been shorted   

I daresay the Emami Group will not be winning too many friends any soon unless they are part of the gameplan  

Neither my Clients nor me hold shares in any Emami Group companies as of date

Zandu Realty Ltd at Rs 3100 though looks interesting !…apparently Emami Group does not share my view…they’ve reduced their Holding !

Cheers !