Kirloskar Oil Engines,now Kirloskar Industries resumes quoting today…closes at Rs 425…It’s now reduced to a Holding Company…so what’s the Real Value after the Demerger?

On April 21,2010,Kirloskar Oil Engines Ltd (KOEL) was suspended from Trading to facilitate the Scheme of Demerger…It was last quoted at Rs 175 in April on FV Rs 2 share

The Company’s new name is Kirloskar Industries Ltd (KIL) from March 31,2010 and the demerger scheme is as below

• The Business of Engines and Auto Components is transferred to the Resulting Company Kirloskar Engines India Ltd (KEIL)…KEIL has now been rechristened to new Kirloskar Oil Engines Ltd (new KOEL)
• KIL(the earlier KOEL) retains the Properties,Investments,Bank balances,and Windmill business and Liabilities that do not relate to the Engines and Auto Components Business
• The Equity Capital of KIL is now Rs 9.71 crs of FV Rs 10 after Reduction of Capital from Rs 39 crs to Rs 9.71 crs,that’s effectively from FV Rs 2 to FV Rs 0.50 and then consolidation of 20 Shares of Rs 0.50 into One New Share of FV Rs 10
• Each Shareholder of earlier KOEL will also get shares of KEIL,now new KOEL, in the ratio of 3:4…that is,75 Shares of KEIL for every 100 shares of FV Rs 2 held earlier in earlier KOEL  
• So effectively if one earlier held 100 Shares of earlier KOEL of FV Rs 2,they will now hold 5 New Shares of FV Rs 10 of KIL and 75 shares of KIL or new KOEL

KIL (earlier KOEL) resumed trading today and closed at Rs 425…It’s now merely a Holding Company of Investments in Group Companies……so what is it’s real Value?

I had a look at the latest figures at March 31,2010…It’s Equity is Rs 9.71 crs and Reserves are Rs 469 crs,giving a Networth of @ Rs 479 crs….that’s a Book value of Rs 493

However The Investments shown in the Books are Rs 471 crs at March 31,2009…of this Rs 175 crs are in Quoted Group Companies,Rs 50 crs in Liquid Mutual Funds and Rs 210 crs are in two unquoted Toyota Kirloskar Companies….it also held 62000 HDFC shares at negligible cost…..In late 2009,they had announced that the unquoted companies were being sold at Rs 250 crs lumpsump to Kirloskar Systems Ltd….So I’m assuming that current  investments would exclude Unquoted Group Ventures…but it would have Rs 250 crs in Cash reflected in the Books as of date …….furthermore as of today,June 24,2010,the quoted Investments show an incremental value of Rs 450 crs as below

Investment…..Cost in Rs Crs….Share Price……Value in Rs Crs….Incremental Value in Rs crs

• Kirloskar Brothers…9…….261….288…279
• Kirloskar Ferrous…163.5…35….231…67.5
• Kirloskar Pneumatic…2….461…..6.3….4.3
• Swaraj Engines….0.36….376……81.2….80.84
• HDFC……0.08…..3000…..18.6……18.52

Therefore adjusting the Incremental worth of Rs 450 crs of quoted Investments on the Networth of KIL,the real networth of KIL would be Rs 929 crs…this gives a new book value of Rs 957…KIL closed at Rs 425 on BSE today with average at Rs 441 and a high of Rs 650…so the quote is at a 56% discount to Real Value….this is typical of Holding Companies…the Haircut is 30% to 60% of Real Value…as these are strategic Group Holdings and the gains are therefore merely notional and not expected to be realised in forseeable future

Now the Revenues in KIL will be from a small windmill activity and from Dividend, Interest and Capital Gains Income from it’s carried forward Investments and New Investments with the Proceeds of Rs 250 crs as above….Full Year Results should show Profits of over Rs 30 crs…that’s an EPS of over Rs 30

At Rs 425,KIL is not a bargain,atleast on Forward Earnings Multiples of over 14…Price should be in this range of Rs 400 to Rs 500….but keep an eye on what it does with the Rs 250 crs and also on the Share Prices of the Companies it has Invested in…especially Kirloskar Brothers

However what comes to my miond was a similar exercise with Jindal group Companies….Nalwa Sons Investments had resulted as a group Holding Company  and it’s share price currently is over Rs 1000,more than twice when it was first quoted after the demerger a few years ago

I suspect the same scenario will be played out in KIL too over the next few years…and share price may just double from current levels of Rs 425

The Resulting Company KEIL is now rechristened to new KOEL…confusing!?…not really…..This will be listed and begin quoting a few weeks from now….remember for every 100 shares of FV Rs 2 held in earlier KOEL,one will now hold 75 Shares in KEIL or new KOEL

Look at it this way…if one held 100 shares of FV Rs 2 of earlier KOEL,it was valued at Rs 17500 at closing price of Rs 175 on April 21,2010 before it was suspended for facilitating the demerger

Now that holding of 100 shares stands cancelled and the new holdings are 5 Shares of FV Rs 10 in KIL (earlier KOEL) that resumed trading today and closed at Rs 425…so it’s worth only Rs 2125 for the 5 shares…therefore it follows that the value of the 75 shares held in KEIL,or the new KOEL now should be worth atleast Rs 15375 or Rs 205 per share so that there is a no loss/no gain situation on pre demerger and post demerger valuations….watch out for it’s listing….my sense is that it would be more than Rs 205,thus giving incremental value to shareholders on post demerger prices

I’ll also reassess valuations of KIL and KEIL or the new KOEL when I am able to access their detailed Annual Reports for the year ending March 31,2010….but I’m deducing that the Networth as at March 31,2009 that was Rs 960 crs plus Profits in FY 10 was split to give KEIL or the new KOEL over Rs 600 crs….while KIL is debt free, the Loans of Rs 350 crs would have been transfered to KEIL or the new KOEL ….but this is where the Operations are going to be in the Engine and Auto Components Segments….this had earned over Rs 150 crs profits for the earlier KOEL in FY 10

Interesting Play in these Kirloskar Group Companies is developing 

Cheers !