Value addition


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Value addition

  1. 1. Conflict of Interest A conflict of interest (COI) occurs when an individual or organization is involvedin multiple interests, one of which could possibly corrupt the motivation for an act in theother. The presence of a conflict of interest is independent from the execution ofimpropriety. Therefore, a conflict of interest can be discovered and voluntarily defusedbefore any corruption occurs. A widely used definition is: “A conflict of interest is a set ofcircumstances that creates a risk that professional judgment or actions regarding aprimary interest will be unduly influenced by a secondary interest.” [1] Primary interestrefers to the principal goals of the profession or activity, such as the protection ofclients, the health of patients, the integrity of research, and the duties of publicoffice. Secondary interest includes not only financial gain but also such motivesas the desire for professional advancement and the wish to do favors for familyand friends, but conflict of interest rules usually focus on financial relationshipsbecause they are relatively more objective, fungible, and quantifiable. Thesecondary interests are not treated as wrong in themselves, but become objectionablewhen they are believed to have greater weight than the primary interests. The conflict ina conflict of interest exists whether or not a particular individual is actually influenced bythe secondary interest. It exists if the circumstances are reasonably believed (on thebasis of past experience and objective evidence) to create a risk that decisions may beunduly influenced by secondary interests.
  2. 2. IFCI Industrial Finance Corporation of India At the time of independence in 1947,Indias capital market was relatively underdeveloped. Although there was significantdemand for new capital, there was a dearth of providers. Merchant bankers andunderwriting firms were almost non-existent. And commercial banks were not equippedto provide long-term industrial finance in any significant manner. It is against this backdrop that the government established The Industrial FinanceCorporation of India (IFCI) on July 1, 1948, as the first Development Financial Institutionin the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through the central banksStatutory Liquidity Ratio or SLR which in turn enabled it to provide loans and advancesto corporate borrowers at concessional rates. This arrangement continued until the 1990s when it was recognized that therewas need for greater flexibility to respond to the changing financial system. It was alsofelt that IFCI should directly access the capital markets for its funds needs. It is with thisobjective the constitution of IFCI was changed in 1993 from a statutory corporation to acompany under the Indian Companies Act, 1956. Subsequently the name of thecompany was also changed to IFCI Limited with effect from October 1999. IFCI has fulfilled its original mandate as a DFI by providing long term financialsupport to all segments of Indian Industry. It has also been chiefly instrumental intranslating the governments development priorities into reality. Until the establishmentof ICICI in 1956, IFCI remained solely responsible for implementation of thegovernments industrial policy initiatives. Its contribution to the modernization of IndianIndustry, export promotion, import substitution, entrepreneurship development, pollutioncontrol, energy conservation and generation of both direct and indirect employment isnoteworthy.
  3. 3. Formation of IFCI: The IFCI was the 1st specialised financial institution setup inIndia to provide term finance to provide term finance to large industries in India. It wasestablished on 1st July, 1948 under The Industrial Finance Corporation Act of 1948. IN1993 it was reconstituted as a company to impart higher degree op operational flexibilityin operations.Objectives of IFCI: The main objective of IFCI is too provide medium and long term financialassistance to large scale industrial undertakings, particularly when ordinary bankaccommodation does not suit the undertaking or finance cannot b e profitably raised bythe concerned by the issue of shares.Functions of IFCI:1) For setting up a new industrial undertaking.2) For expansion and diversification of existing industrial undertaking.3) For renovation and modernisation of existing concerns.4) For meeting the working capital requirements of industrial concerns in someexceptional cases.
  4. 4. Topic The much awaited initial public offering (IPO) of Multi Commodity Exchange ofIndia (MCX) hit the market in February 2012. The offer is a milestone for the Indianstock markets as MCX is the first commodity exchange to go public. Indeed, MCX is thefirst exchange to be listed on stock exchanges. Earlier, listing of National StockExchange and Bombay Stock Exchange was on the horizon. But due to issues likeconflict of interest those talks remained on paper and subsequently vanished into thinair. The MCX IPO was oversubscribed more than 45 times including the portion ofanchor investors and over 54 times excluding anchor investors. The issue received Rs36000 crore as against the issue size of Rs 663 crore. MCX was listed at a hugepremium of 35% to its issue price of Rs 1032 and currently is valued at Rs 6288 croreconsidering its latest closing of Rs 1233. Financial Technologies (India) (FT), largely a software firm that makes popularequity trading software Odin, used by stock market brokers for trading, has 26% equitystake in MCX. The promoters equity stake is currently valued at Rs 1635 crore. Againstthis liquid wealth, FTs market capitalisation stood at Rs 3606 crore. Is FT undervalued?FTs price to earning (P/E) multiple is around 45 on trailing 12 months (TTM) ended 31December 2011 and seems to be the case of rich valuation. However, based on the factthat FTs 26% MCX holding constitutes around 45% of FTs total market capitalisation,FT commanding rich valuation is no surprise. FTs revenue model is unique. Apart from developing software, the company isinto nurturing new businesses, building scale of the businesses and making profitableexit. Clearly, MCX is a hidden treasure for FTs equity investors. MCX would supportFIs valuation, providing a sense of security to investors. Another mega beneficiary of listing of MCX is IFCI. IFCI holds 24.42 lakh equityshares of MCX or 4.79% of its equity base. At the current level, this holding of IFCI is
  5. 5. valued at Rs 301 crore, which is over 9% of IFCIs current market value of Rs 3295crore. No wonder, IFCI has gained 104% to Rs 44.35 in 2012 till 9 March from the 30December 2011 closing of Rs 21.75 in the run-up to MCXs listing. Other listedcompanies holding equity stake in MCX include Corporation Bank (3%), Union Bank ofIndia (1.07%), State Bank of India (1.04%), Canara Bank (1.03%), Bank of India(1.03%), and HDFC Bank (1.03%). Probably the best part about FT and IFCI is both these firms have liquid wealth inthe form of a listed company whose value can be determined on a regular basis. Thereare several such companies with liquid wealth. Capital Market has made an attempt tounveil 15 companies with embedded jewels. The idea is not to talk about purely holdingcompanies or investment companies. For instance, Tata Investment Corporation, which has investment in several Tatagroup companies like Tata Chemicals, Tata Power, Voltas, Tata Global Beverages,Titan Industries and Tata Motors, is not considered. Tata Investment Corporation is intoinvestment and earns revenue from dividend paid by companies and through capitalgains. Similarly, firms like United Breweries Holdings and Jindal South West Holdings,which act as holding or investment companies, have not been considered. The coretheme is to pick companies running lucrative and profitable businesses and also holdingsignificant equity stake in successful business ventures with a strong financial profile. Now the argument against this investment strategy is that the moment oneconsiders financials on consolidated basis, the financial performance of subsidiaries,joint venture companies and associate companies is discounted and taken care of in theconsolidated financial results. True, but not completely. For instance, FT held 31.18% inpre-IPO MCX. It holds 26% in post-IPO MCX. Now what impact does MCX have on theconsolidated financials of FT? In terms of hardcore figures, FTs standalone totalincome stood at Rs 499.7 crore, while on consolidated basis FTs total income stood atRs 553.2 crore.
  6. 6. If one is not convinced with the fact that consolidated financial performancecannot completely reflect on the trading floor and in the valuation, look at Sundaram-Clayton, the second company in the lot of select 15 companies with liquid wealth thatcan be en-cashed any moment. TVS Motors is an indirect subsidiary of Sundaram-Clayton. Anusha Investments, subsidiary of Sundaram-Clayton, holds 48.56% andSundaram-Clayton holds 8.84% direct equity stake in TVS Motors. Sundaram-Clayton is valued at Rs 607 crore, while TVS Motors has marketcapitalisation of Rs 2109 crore. Interestingly Sundaram-Claytons 57.4% equity stake inTVS Motors would be valued at Rs 1210, which is twice the value commanded bySundaram-Clayton. If Sundaram-Clayton decides to offload TVS, it would make more ofmoney compared with its present market value. Sundaram-Clayton supplies rawaluminium castings and machined castings for commercial vehicles, passenger carsand two-wheelers. The value mismatch noticed in the case of Sundaram-Clayton and TVS Motorscan also be seen in small- and mid-size companies. Transwarranty Finance holds58.96% equity stake in Vertex Securities. Transwarranty Finance is valued at Rs 24crore and Vertex Securities at Rs 59.6 crore. Transwarranty Finances equity stake inVertex Securities is valued at Rs 35 crore, which is higher than its market value. EID-Parry (India) is the third company among the 15 companies with embeddeddiamonds. EID-Parry (India) holds 62.73% equity stake in fertiliser maker CoromandelInternational. EID-Parry is broadly into five business segments: sugar, alcohol, power,bio-pesticides and nutraceuticals. Among these, sugar and power are the mainsegments by revenue contribution. Its sugarcane throughput capacity is 32,500 tonnescrushed per day and co-generation capacity of 146 MW across its sugar mills. EID-Parry is also a clear case of the market not taking into account its equityholding in Coromandel International. EID-Parrys market value is around Rs 3386 crore,while its equity stake in Coromandel International is worth Rs 5402 crore, which is over
  7. 7. 1.5 times EID-Parrys market worth. Coromandel Internationals market capitalisation isRs 8611 crore. Out here, the substantial dividend paid by Coromandel International is one of thekey highlights. Coromandel International is generous in payment of dividend. It paid700% in the fiscal ended March 2011 (FY 2011) and 500% each in FY 2010 and FY2009. It paid dividend of 197.2 crore net of dividend tax in FY 2011. This translates intoequity dividend of Rs 123.7 crore for EID-Parry. This is a significant amount consideringEID-Parry reported net profit of Rs 79.2 crore in FY 2011 and Rs 205.2 crore FY 2010. Tube Investments of India, the Murugappa group company, is into threesegments of bicycles, engineering (precision welded tubes & cold rolled steel strips) andmetal-formed products (rolled formed car doorframes and automotive chains). Itcommands a market share of close to 30% in bicycles and 50% in the specialitybicycles segment. It enjoys market share of 50% in precision welded tubes, 60% inrolled formed car doorframes, and 40% in automotive chains. Tube Investments also acts as a holding company and has 60.55% equity stakein Cholamandalam Investment & Finance Company. It also holds 74% in unlistedCholamandalam MS General Insurance Co. This is embedded treasure. The listing ofCholamandalam MS General Insurance in future could be a bonus for the company.Tube Investmentss holding in Cholamandalam Investment and Finance is valued ataround Rs 1230 crore as against its market cap of Rs 2700 crore. In certain cases, the valuation seems to discount the value of equity holdings likefor Adani Enterprises, the fifth company. Adani Enterprises holds 77.49% equity stake inAdani Port and Special Economic Zone and 70.25% equity stake in Adani Power. On astandalone basis, Adani Enterprises is primarily into trading activities. At the current market price of Rs 325, Adani Enterprisess consolidated P/E is110 and standalone P/E works out to 13. This is based on financial numbers for FY2011, with standalone earning per share (EPS) of Rs 2.95 and consolidated EPS of Rs26.28 for FY 2011. The FY 2011 figures highlight the fact that consolidated figures
  8. 8. seem to be factored in the share price. Its equity holdings in Adani Port and SpecialEconomic Zone (Rs 20182 crore) and Adani Power (Rs 11524 crore) is currently worthRs 31705 crore, while Adani Enterprises itself is valued at Rs 35733 crore. Among the most visible companies with several listed firms under its belt isMahindra & Mahindra (M&M). Apart from being the leading manufacturers of tractors,passenger and commercial vehicles, M&M acts as a holding company for several groupcompanies that are into diverse businesses. The overall universe of M&M is massive.M&M had 111 subsidiary companies, seven joint ventures and 14 group associatecompanies on 31 March 2011. M&Ms strategic equity stakes in listed companies include Mahindra & MahindraFinancial Services (56%), Mahindra Holidays & Resorts India (83.09%), MahindraLifespace Developers (51.05%), Mahindra Forgings (52.97%), Mahindra Ugine SteelCompany (50.69%), Tech Mahindra (47.65%) and Swaraj Engines (33.22%). M&Msequity stake in these companies is valued at around Rs 11200 crore as against M&Msmarket capitalisation of Rs 40740 crore. Gammon India is in a similar situation as Sundaram-Clayton and its subsidiaryTVS Motors. The company is presently valued at Rs 638 crore, which is lowercompared with its 72.45% equity stake in its subsidiary, Gammon InfrastructureProjects, which is valued at Rs 792 crore. Gammon India is into civil engineering andconstruction.The firm executes infrastructure, transportation, power and transmission projects.Promoted by Gammon India, Gammon Infrastructure Projects largely participates indevelopment of infrastructure projects in public-private partnership. The past continues to haunt Gammon India. Indeed, one of the key reasons fordisparity in valuation between Gammon India and its subsidiary is the fact that GammonIndia is facing challenging times since the collapse of the underconstructed flyover inHyderabad in September 2007 Gammon India.
  9. 9. Gammon India points to another problem with the strategy of investing incompanies with massive listed wealth. The enterprise value of Gammon India works outto Rs 2763.4 crore considering total debt of Rs 2126 crore on its balance sheet on 31March 2011, while the enterprise value of Gammon Infrastructure Projects stood atRs 1266.7 crore, taking into account total debt of Rs 173.6 crore. Thus, for investors itwould be prudent to look at the enterprise value before taking the plunge, particularly ininstances were the debt component is on the higher side. Among mid-cap companies, Amtek Auto is an interesting case. The Rs 1960-crore company by sales, manufactures auto and non-auto components. In the autosegment, the firm is into forging, aluminium casting, machining and sub-assembliessegment, while it manufactures components for tractors, earth-moving, construction andlocomotive equipment. This apart, Amtek Auto has 61.64% equity stake in Amtek India. Amtek India manufactures iron-cast automotive components including connectingrod assemblies, cylinder blocks, flywheel assemblies and turbo-charger housing. AmtekAutos equity stake in Amtek India is worth Rs 1696 crore, which is over 50% of itsmarket value of Rs 3212 crore. Besides, Amtek Auto also holds 54.96% equity stake inAhmednagar Forgings, valued at around Rs 350 crore. Not only private sector companies but even public sector undertakings (PSU)have liquid assets bunched on their balance sheets. Consider PTC India, a PSUestablished in 1999. It is a leader in power trading, holding 60% equity in PTC IndiaFinancial Services. PTC Financial Services was awarded the infrastructure financecompany status by the Reserve Bank of India in August 2010. PTC India came out withan IPO of PTC Financial Services in March 2011. PTC Financial Services provides finance in the form of equity and debt to powerprojects in generation, transmission, distribution; equipment manufacturers; and energy,procurement and construction (EPC) contractors. It also extends carbon credit finance.PTC Indias 60% equity stake in PTC Financial Services is currently valued at Rs 538crore, which is little less than one-third of its market value of Rs 1686 crore. PTC India
  10. 10. has another 100% subsidiary, PTC Energy, which is primarily into coal trading. PTCEnergy reported total income of Rs 93.8 crore in FY 2011 compared with Rs 27.8 crorein FY 2010. It could achieve higher scale going forward. Cadila Healthcare, with 70.24% equity stake in Zydus Wellness, is anotherinstance of a company with embedded diamonds. Cadila Healthcares equity stake inZydus Wellness is worth Rs 974 crore. However, by percentage, the market value ofCadila Healthcare it is on the lower side, at around 7%. Still it is a jewel considering thefact that Zydus Wellness is into fast-growing consumer wellness products, which can beconsidered as a sub-category within the fast-moving consumer goods sector. Net sales of Zydus Wellness increased to Rs 335.4 crore in FY 2011 from Rs42.7 crore in FY 2007, a rise of 7.8 times. In comparison, the financial performance ofCadila Healthcare looks unimpressive. Its net sales rose to Rs 2179.1 crore in FY 2011from Rs 1450.3 crore in FY 2007. Grasim Industries is another example of the market not discounting its prizedequity holding in Ultratech Cement. Grasim Industries commands market value ofRs 25242.6 crore. As against this, the value of its 60.33% equity stake in UltratechCement is worth Rs 24353.4 crore. Essentially, this means if one invests in GrasimIndustries one is really paying only for the cement business. The remaining business. ofthe company comes for free. Grasim Industries manufactures viscose staple fibre (VSF) and chemicals. Thegroup is worlds number one manufacturer of VSF, with capacity of 7,44,000 tonnes.Ultratech Cement is among the top 10 global cement companies, with capacity of 52million tonnes per annum (mtpa). Ultratech Cement would be investing US$ 2.4 billionover the next three years to expand its capacity by 9.2 mtpa. The additional capacity isexpected to go on stream in FY 2014. Similarly, Jaiprakash Associatess equity stake in Jaiprakash Power Venturesstood at 67.93% and Jaypee Infratech 83.16%. The stakes in these two companies are
  11. 11. together valued at Rs 13092 crore compared with the market value of JaiprakashAssociates, at Rs 16894.5 crore. On standalone basis, Jaiprakash Associates is mainly into construction andcement. On the other hand, Jaiprakash Power Ventures is the largest private sectorhydro power producer with 1,200 MW of operational assets. Around 5,000 MW ofcapacities are under various stages of development. Jaypee Infratech is executing theYamuna Expressway project. At the group level, Jaiprakash Associates is the thirdlargest cement producer in the country with 23.7 mtpa installed capacity. It would beenhancing its capacity to 35 mtpa by FY 2012 and to 50 mtpa by FY 2013. In November 2010, Texmaco demerged its heavy engineering and steel foundrybusiness to a newly formed company, Texmaco Rail & Engineering (TRE). Texmacohas retained the business of real estate, mini hydro project, investments and otherbusinesses. Under the demerger arrangement, one share of TRE was issued for oneshare of Texmaco. Texmaco had 30.04% equity stake in TRE on 31 December 2011.This is valued at Rs 382 crore as against the overall valuation of Texmaco at Rs 380crore. Even in this instance, investors in Texmaco would be getting the business of TREalmost for free as its holding in TRE itself is equal to its market capitalisation. With 50.06% equity stake in Rallis India, Tata Chemicals is sitting on liquidwealth of Rs 1265 crore. This amounts to 14% of Tata Chemicalss market value, whichstood at Rs 8991 crore. Though this is not a very high percentage, Rs 1265 crore too isnot a small amount by any means. It is an icing on the cake. With manufacturingfacilities in Asia, Europe, Africa and North America, Tata Chemicals is the worldssecond largest producer of soda ash. The company is also into complex fertilisers, urea,vacuum salt and cement. Rallis India manufactures crop protection chemicals, seedsand plant growth nutrients. Kalpataru Power Transmission, the last bet on companies with liquid wealth, has67.19% equity stake in JMC Projects (India), valued at Rs 228 crore. Kalpataru PowerTransmission, valued at Rs 1665 crore, mainly manufactures power transmission
  12. 12. towers with capacity of 1,38,000 tonnes. Since inception, Kalpataru Power has installed14,000 km transmission lines and 9,00,000 tonnes of towers. JMC Projects is involvedin the business of civil and structural works for infrastructure and power plants,commercial and residential buildings, and industrial projects across the country. In the last three years JMC Projects has not been able to ramp up its revenuedue to headwinds faced by the infrastructure industry. However, if its financialperformance over the last five year is considered, it has done exceptionally well. Fromnet sales of Rs 500.2 crore in FY 2007, its top line touched Rs 1373.8 crore in FY 2011.Similarly, its bottom line improved from Rs 16 crore to Rs 41.7 crore in this same period. Solely focusing on equity holdings of companies in listed firms as a parameter forstock selection should be avoided. Such investment could be strategic in nature andunlocking could never happen even in dire state of affairs. However, it could be one ofthe parameters for stock selection. Ultimately what matters is the financial performanceand future outlook by revenue visibility and growth. But liquid assets on the balancesheet could shield companies during rainy days.
  13. 13. MCX IPO subscribed 91 % on 1st DayThe Initial public offer (IPO) of top commodity exchange MCX was subscribed 91 percent on its first day today, as the first-ever IPO by an Indian bourse witnessed robustdemand from retail as well as institutional investors.The shares reserved for retail investors got over-subscribed 1.5 times on the first dayitself, with bids worth an estimated over Rs 300 crore.Besides, the portion reserved for institutional investors was subscribed 74 per cent withbids worth about Rs 150 crore.The IPO, which is estimated to raise about Rs 663 crore and has already seen anchorinvestors being allocated shares worth about Rs 100 crore, today got total bids worthabout Rs 500 crore, while bidding would continue for another two days.The bidding began this morning for the MCX offer, which also happens to be the firstIPO of the year 2012, and would continue till February 24. The shares are being sold inthe price-band of Rs 860-1,032 a piece.In the first day of the IPO, the investors submitted bids for about 50 lakh shares, whichaccounted for 90.7 per cent of about 55 lakh shares being sold through the 100 per centbook-building process.A total of 12 anchor investors have already been allocated about 9.27 lakh shares at thetop-end of the price band, taking the overall IPO size to 64,27,378 shares.Investment bankers said that the bids are largely coming at the top-end of the priceband, enthused by the demand from anchor investors at that level and the issue couldget oversubscribed multiple times. The anchor investor portion was also oversubscribedseveral times, showing an unprecedented demand level for many months now as theprimary market has remained sluggish for almost a year now.
  14. 14. The total offer of 64,27,378 equity shares account for a 12.6 per cent stake in MCX and2,50,000 shares have been reserved for eligible employees.Based on the upper end of the price band, the IPO could raise up to Rs 663 crore.Brokerage firm Emkay Global Financial Services said that "scalable model, ability togenerate sustainable free cash flows, healthy return ratios and reasonable valuationsprovide room for decent upside and has recommended investors to subscribe theissue."Another brokerage house Angel Broking said, "We believe MCX being the only majorcommodity exchange in India and the worlds fifth largest exchange can witness stronggrowth in revenue and profitability going ahead, which makes its valuation much moreattractive than global peers.At the end of todays bidding, the portions reserved for Qualified Institutional Investorswas subscribed 74 per cent, while the retail portion was oversubscribed 1.5 times.Edelweiss Financial Services, Citigroup Global Markets India Private Ltd and MorganStanley India are the booking running lead managers of the share sale.The promoters FTIL currently holds 31.2 per cent stake in MCX, which would comedown to about 26 per cent after the IPO.Financial Technologies (India) Ltd, State Bank of India, Bank of Baroda, GLF FinancialsFund, Alexandra Mauritius Ltd, Corporation Bank and ICICI Lombard General InsuranceCompany are seven investors who will be divesting part of their holdings in MCX.MCX has more than 70 per cent share in the annual estimated turnover of Rs 177 lakhcrore for the entire commodity derivatives market.Globally, MCX is the fifth largest commodity exchange, while it figures among the toptwo positions in gold and silver segments.
  15. 15. It would be the first exchange in India to go public, putting the country at part with othermarkets like the US, UK, Japan, Australia and Hong Kong.