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Value Creation Via Divestitures
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Value Creation Via Divestitures

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  • 1. Strictly Private & Confidential August 2009 Value Creation via DIVESTITURES Presented By: Varun Goenka JM Financial Services P Ltd.
  • 2. Agenda ~ Part I Introduction ~ Restructuring (( Reminiscience of past experiences )) Introduction ~ Restructuring Reminiscience of past experiences Case study ~ How Divestitures discover Market Cap. Case study ~ How Divestitures discover Market Cap. Case Study -- Value Creation through listing Case Study Value Creation through listing Nicholas Piramal India Ltd Nicholas Piramal India Ltd Reliance Industries Ltd Reliance Industries Ltd Bharat Forge Bharat Forge Other Cases Other Cases Case Study –– Control & Ownership Case Study Control & Ownership Sterlite Sterlite TV 18 India Limited TV 18 India Limited Strictly Private & Confidential 1
  • 3. Introduction Corporate restructuring encompasses two distinct groups of activities; Business Restructuring : Expansions – including mergers and consolidations, tender offers, joint ventures, and acquisitions; Contraction – including sell offs, spin offs, equity carve outs, abandonment of assets, and liquidation. Financial Restructuring : Value Re-engineering - Subsidiarisation, De-subsidiarisation. Ownership and control – including the market for corporate control, stock repurchases program, exchange offers and going private; Strictly Private & Confidential 2
  • 4. Does Restructuring create value? The key principle behind corporate restructuring is to create shareholder value over and above that of the sum of the parts. Corporate Restructuring creates value only if: Value of the combined entity as a result of the corporate restructuring is greater than the sum of value of individual companies. C>A+B Value creation C<= A + B Value destruction Strictly Private & Confidential 3
  • 5. Reminiscence of Demerger-Divestiture ~ to name a few…… Demerger of ‘ L&T and Ultra-tech.’ ( 2x+ post-demerger ). Demerger of ‘Godrej Consumer Products from Godrej Inds.’ ( 2x + post-demerger ) Demerger of ‘ Wockhardt Life-sciences from Wockhardt ‘ ( 2x + post-demerger ) Demerger of ‘ Hexaware & Aptech ‘. ( 60%post-demerge ) Demerger of ‘ Sterlite Optical from Sterlite Inds. ‘ ( 50% on listing post-demerger ) , Demerger of ‘ UB into United Brewries & UB Holdings ‘ . The stock was a multi-bagger in the subsequent years. Demerger of ‘ Reliance Communications from RIL Ltd. ‘ has created around 100k cr of Market Cap. for its investors. something which the core Reliance took over 10 years to create. Demerger of ‘ GTL Infra. From GTL ‘ ( 2x post-demerger ) Demerger of ‘ Great Offshore from GE Shipping ‘. ( 50%ish post-demerger ) Demerger of ‘ Network18 from TV18 ‘. ( 2x + post-demerger ) Demerger of ‘ Zee Group co.s from Zee Tele Ltd. ‘ ( 50%+ post-demerger ) Demerger of ‘ Sujana Tower from Sujana Metal ‘ ( 2x post-demerger ) Demerger of ‘SPARC from Sun Pharma ‘ ( 20% ish post-demerger ) Case of Negative returns – ‘ ABB & ABB Alstom Power ‘ ( but far-better business focus & visibility ) , ‘ Sygenta from Novartis ‘ ( Timing of transaction execution VS Demerger-announcement & eventual announcement of Record-date has made substantial difference towards ultimate return ) ( Current Market Capitalization of the above events are a different case-in-point.) Strictly Private & Confidential
  • 6. How Spin- Offs Expand PE’s & Discover Market Capitalization ! ~ Simple Case Study / Illustration The below ‘ arithmetic ‘ is an actual event , nonetheless can be taken as a ‘ hypothetical example ‘ too . Have assumed the following financial situation for a company that we shall call “Split up Ltd” that is into two businesses Cement (capacity of 1 million ton at Standard EV taken at US $ 100 per ton) and a full fledged construction business. Workings : Book value is Net worth divided by number of shares so we have Rs 900 crores/ 10 crores = Rs 90 EPS is Net profit/ No. of shares = Rs 100 crores/Rs 10 crores = Rs 10 per share. RoE is Net profit/Net worth = Rs 100 crores/Rs 900 crores = 11.11%% Since the RoE is at 11.11% we have assumed a PE of 12 for the stock. Market price = EPS x PE = Rs 120 (Rs 10 x 12) Market Capitalization is equal to number of shares x Market price = 10 crores x Rs 120 = Rs 1200 crores. Strictly Private & Confidential
  • 7. How Spin- Offs Expand PE’s & Discover Market Capitalization ! …..CONTD I… ~ Simple Case Study / Illustration Now for “Split up Ltd” company we assume: That capital is equally divided between the Construction & Cement division. Companies are assumed to be debt free. In any case debt will not affect the calculations. That the construction division ( Net profit Rs 90 crores ) is feeding the cement division ( Net Profit Rs 10 crores ) The management after deliberation splits the company into two different companies with a equal share capitals and assets. Two shares of the parent company were exchanged for one share each of the cement division and the construction division. The share capital and book value will therefore be divided between the two companies. Split up Construction Ltd – Equity of Rs 50 crores Split up Cement Ltd – Equity of Rs 50 crores. Strictly Private & Confidential
  • 8. How Spin- Offs Expand PE’s & Discover Market Capitalization ! …..CONTD II… ~ Simple Case Study / Illustration Workings: Equity share capital was halved so 50% of Rs 100 crores gives us 5 crore shares. Net worth was halved so 50% of Rs 90 crores means that the net worth is Rs 45 crores. Book value is Net worth divided by number of shares so we have Rs 450 crores/ 5 crores = Rs 90 EPS is Net profit/ No. of shares = Rs 90 crores/Rs 5 crores = Rs 18 per share. RoE is Net profit/Net worth = Rs 90 crores/Rs 450 crores = 20% Since the RoE is at 20% we have assumed a PE of 20 for the stock. Market price = EPS x PE = Rs 360 (Rs 18 x 20) Market Cap. is equal to number of shares x Market price = Rs 5 crores x Rs 360 = Rs 1800 crores. We now analyze the financials of Split up cement Ltd after the split : Strictly Private & Confidential
  • 9. How Spin- Offs Expand PE’s & Discover Market Capitalization ! …..Conclude… ~ Simple Case Study / Illustration Workings: Equity share capital was halved so 50% of Rs 100 crores gives us 5 crore shares. Net worth was halved so 50% of Rs 90 crores means that the net worth is Rs 45 crores. Book value is Net worth divided by number of shares so we have Rs 450 crores/ 5 crores = Rs 90 EPS is Net profit/ No. of shares = Rs 10 crores/Rs 5 crores = Rs 2 per share. RoE is Net profit/Net worth = Rs 10 crores/Rs 450 crores = 2.22% In this case the stock will not sell for a PE determined price because the enterprise value will hold the stock up. This is so because companies that make losses do not sell for free. The enterprise value is Rs 345 crores Market price = Enterprise value/No. of shares = Rs 345 crores/Rs 5 crores = Rs 69 Market Capitalization is equal to Enterprise value = Rs 345 crores. The Cement business which was valued at negligible value as it contributed only Rs 2 to the EPS and was valued at Rs 2(EPS) x 12(PE) = Rs 24 per share was suddenly valued at Rs 69 per share at an Enterprise value of Rs 345 crores. The PE of the construction business which was valued at Rs 8 (EPS) x 12 (PE) = Rs 96 expanded from 12 times to 18 times and the EPS went up from Rs 8 per share to Rs 18 per share thus giving it a value of Rs Rs 360.= 18(EPS) x 20(PE). Strictly Private & Confidential
  • 10. Value Creation through listing of distinct businesses Objective To list the shares of subsidiary company through allotment of shares of subsidiary company to the shareholders of parent company pursuant to a scheme of arrangement. Single Business Multiple Business Entity Entity Shareholders Shareholders Shareholders Shareholders Distribution of Distribution of shares of Y Co. shares of A, B, to the & C Co. to the shareholders of shareholders of X Co. pursuant X Co. pursuant to a scheme of to a scheme of X Co. X Co. arrangement X Co. arrangement X Co. (Parent) (Parent) (Parent) (Parent) Listed Listed Listed Listed 100% 100% 100% 100% B Co. C Co. B Co. C Co. Y Co. Y Co. A Co. A Co. (Subsidiary) (Subsidiary) (Subsidiary) (Subsidiary) (Subsidiary) (Subsidiary) (Subsidiary) (Subsidiary) Steel Telecom Steel Telecom Tea business Tea business Business Business Business Business Unlisted Listed Unlisted Unlisted Unlisted Listed Listed Listed Stake held Issue of consideration Strictly Private & Confidential 10
  • 11. Alternative Routes Formation of a special purpose company (SPV) – A 100% subsidiary of parent company Transfer investments (shares of Y Co.) from parent company to SPV pursuant to a scheme of arrangement and get shares of SPV listed Alternative 1A - Merge SPV into Y Co. at a later point in time and get Y Co. shares listed or Alternative 1B – Merge Y Co. into the SPV at a later point in time, to be decided depending on tax and cost efficiency. Alternative 2 –Let only SPV remain listed without any merger. Alternative1 is preferred purely from an administrative convenience rather than from a shareholder value perspective. Alternative 1 Transfer of Alternative 1A Alternative 1B Formation of SPV Investments to SPV* Shareholders Shareholders Shareholders Shareholders Parent Co Parent Co Parent Co Parent Co Listed Issue of Shares in Listed Listed Listed Issue of Shares in Consideration Consideration 100% 100% Listed SPV to merge into Y Y Co. to merge into Transfer of Co. SPV investment SPV Y Co SPV SPV Y Co SPV Y Co Unlisted Unlisted Listed Listed - Merge SPV into Y Co, and get Y Co. - Merge Y Co, into SPV shares listed - Investment of SPV in Y Co Y Co - As consideration Y Co issues shares will get cancelled. No to shareholders of SPV i.e. Parent further shares will be Unlisted Co and its shareholders issued *Structure under Alternative 2 shall be similar Strictly Private & Confidential 11
  • 12. Case Study - Nicholas Piramal India Ltd Scheme of Arrangement between Nicholas Piramal India Ltd. (NPIL) and Kojam Fininvest Ltd. (KFL) for transfer of 53.76% stake of Gujarat Glass Private Ltd. (GGPL) held by NPIL to KFL Appointed Date – 01st July 2003, Effective Date – 22nd December 2003 Prior to Scheme of Prior to the Pursuant to a Scheme of KFL Merged into GGL Arrangement Appointed Date Arrangement in 2007 Shareholders Shareholders Shareholders Shareholders NPIL NPIL NPIL NPIL Listed Listed Listed Listed 53.76% 100% 0.5% 53.76% 0.28% Unlisted GGPL 53.76% GGPL KFL GGPL KFL GGL* Unlisted Unlisted Unlisted Listed Listed Issue of Shares in Consideration KFL was merged into GGL in 2007 pursuant to a scheme of Amalgamation KFL was incorporated on 30th June 2003 NPIL transferred its stake in GGPL to with a paid up capital of Rs. 5 Lakhs as KFL pursuant to a scheme of The shares of GGL held by KFL were a wholly owned subsidiary of NPIL arrangement at book value cancelled pursuant to such amalgamation KFL issued its shares to the shareholders of NPIL in the ratio of 1: 4 GGL issued its shares to the as consideration of such transfer and shareholders of KFL in the ratio of 1:1 got listed GGL shares were listed in February 2008 Strictly Private & Confidential 12 *The company was converted into a public ltd. company in March 2007
  • 13. Case Study - Nicholas Piramal India Ltd Pre-Demerger Post-Demerger Present Market Cap. EQ ( In Crs. ) 38 NICHOLAS PIRAMAL Nicholas Piramal @ 325 6778 Price-June03 62 EQ ( In Crs. ) 38 GGL @ 38 310 Market Cap. 1,177 Listing Price 130 Total 7088 Sensex 3,793 Nicholas Piramal - Market Cap. 2,470 Sensex ( 26 aug ’09 ) 15700 Sensex 4,709 M Cap.June’03-Date ( x ) 6x KFL EQ ( In Crs. ) 10 Listing Price 40 Market Cap. 40 Sensex 4,709 Total Market Cap. On Demerger 2510 Incremental Market Cap 1,333 % Wealth Creation 113.3% Strictly Private & Confidential 13
  • 14. Case Study - Reliance Industries Ltd As per the Scheme of De-merger, business of RIL was segregated into five undertakings as illustrated below. These undertakings were hived off into four subsidiaries. Each of these subsidiaries issued its shares to the shareholders of RIL in the ratio of 1:1 Appointed date – 01st September 2005, Effective date – 21st December 2005, Record date – 25th January 2006 Reliance Industries Ltd Shareholders Reliance Industries Ltd Coal based energy Gas based energy Financial Services Telecom Remaining Undertaking Undertaking Undertaking Undertaking Undertaking ASSETS ASSETS ASSETS Building, Plant & Machinery, Vehicles Building at Goa Building at Bandra (E), ASSETS and Equipment located at various Mumbai Building in New Delhi locations Shares in Receivables for capital leases Reliance Energy Shares in Shares in Reliance Power Reliance Patalganga Reliance Capital Shares in Hirma Power Pvt Ltd Power Ltd Reliance General Insurance Reliance Communication Infrastructure Petrochemicals, Oil & Gas, Jayamkondam Power Pvt Ltd Reliance Life Insurance Reliance Telecom Textiles and other business Rleiance Thermal Energy Pvt Liabilities Reliance Infocomm Ltd Related Loans Liabilities World Tel holding Ltd Related Loans Preference shares of Reliance Liabilities Telecomm Related Loans Liabilities Related Loans Reliance Energy Ventures Reliance Communications Ltd Reliance Natural Resources Ventures Ltd Reliance Capital Ventures Ltd (formerly Global Fuel Ltd Management Services Ltd.) Strictly Private & Confidential 14
  • 15. Case Study - Reliance Industries Ltd (Contd) Scheme of Arrangement between Reliance Industries (RIL) and Reliance Capital Ventures Ltd. (RCVL) for demerger of financial services undertaking to RCVL Scheme of Arrangement between RCVL and Reliance Capital Ltd (RCL) for amalgamation of RCVL with RCL Demerger Scheme - Appointed Date – 01st September 2005, Effective Date – 21st December 2005 Prior to Schemes of Pursuant to Scheme Pursuant to Scheme Arrangement of De-merger of Amalgamation Shareholders Shareholders Shareholders RIL RIL RIL Listed Listed Issue of Shares Listed De-merger of 42.70% Financial Services in Consideration Undertaking RCVL merged into 42.70% RCL RCL RCL RCVL RCL RCVL Listed Listed Listed Listed Issue of Shares in Consideration - RCVL was incorporated on 3rd September 2004 and the - RCVL was merged into RCL in 2006 pursuant to a financial services undertaking of RIL was transferred scheme of Amalgamation through the scheme of demerger to RCVL - RCVL shareholding in RCL was cancelled pursuant - RCVL issued its shares to the shareholders of RIL in the to such amalgamation ratio of 1:1 as consideration of such transfer - RCVL shareholders received shares of RCL in the - RCVL got listed through the scheme of demerger ratio of 5:100 Strictly Private & Confidential 15
  • 16. Case Study - Reliance Industries Ltd (Contd) • Scheme of Arrangement between Reliance Industries (RIL) and Reliance Natural Resources Ltd. (RNRL) for de-merger of gas based energy undertaking to RNRL • De-merger Scheme - Appointed Date – 01st September 2005, Effective Date – 21st December 2005 Prior to Scheme of Pursuant to a Scheme of De-merger Post Scheme of De-merger Arrangement Shareholders Shareholders Shareholders RIL RIL RIL Listed Listed Listed 100% 100% Reliance Issue of Shares in Patalganga Reliance Power Ltd RNRL Consideration RNRL Patalganga Power Ltd Listed 100% Unlisted Unlisted RNRL Reliance Listed Patalganga Power Ltd - RNRL was incorporated on 24th April - RNRL issued its shares to the shareholders of RIL in the 2000 with a paid up capital of Rs. 5 ratio of 1:1 as consideration of such transfer Lakhs as a wholly owned subsidiary - RNRL shares were be listed pursuant to such scheme of RIL - RIL Shareholding in RNRL was cancelled pursuant to the scheme Strictly Private & Confidential 16
  • 17. Case Study - Reliance Industries Ltd (Contd) Pre-Demerger Post-Demerger Present Market Cap. RIL RELIANCE Inds. RIL @ 2020 320,000 EQ ( In Crs. ) 1,394.15 EQ ( In Crs. ) 1394.2 RCOM @ 260 54, 000 Price-Jan '06 850 Listing Price 730 RNRL @ 80 13,300 Market Cap. 118,490 Market Cap. 101,762 RCAP @ 820 20,200 Sensex 10,370 Sensex 10,735 Total 407,500 RELIANCE CAPITAL RELIANCE COMMUNICATION Sensex ( 26 aug ’09 ) 15,700 EQ ( In Crs. ) 245.63 EQ ( In Crs. ) 611.5 M Cap.Jan’06-Date ( x ) 3.2x Price-Jan '06 450 Listing Price 300 Market Cap. 9,950 Market Cap. 36,660 Sensex 10,370 Sensex 10,735 RNRL EQ ( In Crs. ) 611.57 Listing Price 17.5 Market Cap. 2,269 Sensex 10,565 RELIANCE CAPITAL Listing Price 500 Market Cap. 10,436 Sensex 10,735 Total Market Cap. - Demerger 151,127 Incremental Market Cap. 22,687 % Wealth Creation 19.1% Strictly Private & Confidential 17
  • 18. Case Study - Bharat Forge Bharat Forge – Significant Group Company holdings and non core assets BF Utilities – All businesses apart from forging business demerged into BF Utilities Pre-Demerger Post-Demerger Present Market Cap. EQ ( In Crs. ) 18.83 BHARAT FORGE BHARAT FORGE @ 225 5,000 Price – Aug 01 12 Listing Price 10 BF UTILITIES @ 890 3340 Market Cap. 250 Market Cap. 200 Total 8,340 Sensex 2,812 Sensex 3,279 Sensex ( 26 aug ’09 ) 15,700 BF UTILITIES LTD Listing Price 18 M Cap.Jan’06-Date ( x ) 33x Market Cap. 54 Sensex 3,279 Total Market Cap.- Demerger 254 Incremental Market Cap. 4 % Wealth Creation 2% Strictly Private & Confidential 18
  • 19. Some more cases…. ZEE TELEFILMS SUJANA METAL GE SHIPPING GTL EQ ( In C rs. ) 190.34 EQ ( In C rs. ) 43.35 EQ ( In C rs. ) 85.69 EQ ( In C rs. ) 38.83 EQ ( In Shares ) 19.03 EQ ( In Shares ) 43.3 EQ ( In Shares ) 8.56 EQ ( In Shares ) 3.88 Price 240 Price - Dec ' 06 300 Price 140 Price 110 Market C ap. 4567.2 Market C ap. 12990 Market C ap. 1198.4 Market C ap. 426.8 Post-Demerger Post-Demerger Post-Demerger Post-Demerger GE SHIPPING ZEE Entertainment GTL Sujana Metal Products Ltd. EQ ( In C rs. ) 152.27 EQ ( In C rs. ) 43.36 EQ ( In C rs. ) 85.3 EQ ( In C rs. ) 25.99 EQ ( In Shares ) 15.22 EQ ( In Shares ) 43.36 EQ ( In Shares ) 8.53 EQ ( In Shares ) 5.20 Listing Price 225 Listing Price 275 Listing Price 150 Listing Price 30.8 GE Shipping - Market C a 3424.5 Market C ap. 11924 GE Shipping - Market C ap 1279.5 Sujana Metal - Market C ap 160 GREAT OF F SHORE WWIL GTL Infra. Sujana Tower EQ ( In C rs. ) 38.12 EQ ( In C rs. ) 21.72 EQ ( In C rs. ) 320 EQ ( In C rs. ) 19.41 EQ ( In Shares ) 3.81 EQ ( In Shares ) 21.72 EQ ( In Shares ) 32 EQ ( In Shares ) 3.88 Listing Price 730 Listing Price 130 Listing Price 40 Listing Price 140 Market C ap. 2781.3 Market C ap. 2823.6 Market C ap. 1280 Market C ap. 543 Total M.C ap.On Total M.C ap.On Total M.C ap.On Demerger 6205.8 ZEE News Demerger 2559.5 Demerger 703 EQ ( In C rs. ) 23.98 Incremental Market Incremental Market C ap Incremental Market C ap C ap 1638.6 EQ ( In Shares ) 23.98 1361.1 276.5 % Wealth C reation 35.9% Listing Price 40 % Wealth C reation 113.6% % Wealth C reation 64.8% Market C ap. 959.2 DISH TV EQ ( In C rs. ) 42.82 EQ ( In Shares ) 42.82 Listing Price 110 Market C ap. 4710.2 Total M.C ap.On Demerger 20417 % Wealth C reation 57.2% PRESENT MARKET CAP. ZEE Entertainment 8250 PRESENT MARKET CAP. WWIL 900 PRESENT MARKET CAP. PRESENT MARKET CAP. GE Shipping 3950 Zee News 1000 GTL 2840 Sujana Metal Products 85 Great Offshore 2000 Dish TV 4370 GTL Infra. 3500 Sujana Tower 100 Total 5950 Total 14520 Total 6340 Total 185 M.C ap (x) - PD to M.C ap (x) - PD to M.C ap (x) - PD to M.C ap (x) - PD to Aug'09 Aug'09 130% Aug'09 112% Aug'09 529% 43% Strictly Private & Confidential 19
  • 20. Case Study - Sterlite Listing 1993 1997 2000 2002 Aug 2007 Rights cum Merger of Demerger of Acquisition of ADR $2 bn Public Issue Sterlite Sterlite optic HZL from GoI communications from Sterlite with Sterlite 1993 1996 1997 1998 2000 2001 2002 2003 2007 1996 Sterlite 1998 2001 2003 Communications IPO Setup as a Indal Hostile Acquisition of $1 bn Vedanta subsidiary takeover bid Balco from GoI Listing Strictly Private & Confidential 20
  • 21. Three Tier Structure Vedanta Sterlite Balco Hind Zinc Sterlite Energy Vedanta Alumina Copper Mines Strictly Private & Confidential 21
  • 22. Value Creation journery.. Promoter Holding Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Indian Promoters 1.5% 1.5% 0.0% 0.0% Malco 0.0% 4.6% 7.1% 7.1% 4.7% 4.6% 4.6% 3.61% Twinstar Holding 35.4% 35.4% 55.1% 60.2% 73.6% 72.3% 72.3% 56.98% PAC 1.6% 1.6% 4.3% 4.0% Employee Trust 0.0% 7.4% 11.5% 7.0% 3.2% 3.2% 3.2% 2.51% Total 38.5% 50.4% 78.1% 78.3% 81.5% 80.0% 80.1% 63.1% Market Cap (Rs. Crs) 167 228 210 576 1606 4569 26158 50579 Events EWT+ Malco EWT+ Creeping Rights ADR Malco+ Buyback Strictly Private & Confidential 22
  • 23. Case Study - TV 18 India Limited Objective Consolidate their media business which creates a Group structure (and reorganize capital its own capital) that is expected to unlock significant shareholder value. Pre Scheme Scenario “CNBC Awaaz” and the general news English Channel – “CNN IBN” were held in promoter entities & legally not part of the listed entity, due to government restrictions TV 18 India Limited Promoter owned Holding company CNBC TV 18 – English business news channel Awaaz – Hindi Business and Consumer Channel Moneycontrol.com – Financial portal IBN – General News Channel(s)+ Portals Commoditiescontrol.com –Commodity info portal August 22, 2003 News Uplinking Guidelines- Eligibility criteria for an applicant company desirous of uplinking news and current affairs TV channel(s) from India It is registered / incorporated in India under the Companies Act, 1956; Foreign direct investment in the applicant company does not exceed 26% of the total paid up capital * Indian shareholder to hold at least 51% of the total equity (excluding the equity held by Public Sector Banks and Public Financial Institutions as defined in section 4A of the Companies Act, 1956) in the new entity TV18 was non compliant and hence would not have got necessary licenses to operate the business; its current license on CNBC-TV18 was under threat Reason for proposed restructuring Compliance with uplinking norms Forced restructuring allows opportunity to consolidate businesses for TV18 Shareholders Strictly Private & Confidential 23
  • 24. Case Study - TV 18 India Limited (cont’d) Scheme Demerger of Media Investment Undertaking Merger of Indian News Business Undertaking of SGA News Limited Consolidation of both AWAAZ and CNN IBN Channels Existing shareholder of TV18 holding 10 shares of face value Rs 10 each would end up with 12 shares of face value Rs 5 each in Network Ltd 14 shares of face value Rs 5 each in TV18. Shareholders of SGA News for every 1 equity share of face value of Rs 10 each would get 3.67 shares of face value of Rs 5 each to Mr. Raghav Bahl transferred 2,868,225 Equity shares of face value Rs.10/- per share (Prior to the Record date) to Network 18 Media and Investments Limited pursuant to the Scheme Implications Creation of 2 listed entities Network 18 would be the holding company for strategic and financial group investments and TV 18 would act as the operating company No effective dilution for TV18 Shareholders 30% Reduction in capital Funding Options for Growth improve manifold Strictly Private & Confidential 24
  • 25. Case Study - TV 18 India Limited (cont’d) Pre-Demerger Post-Demerger Present Market Cap. EQ ( In Crs. ) 26.20 TV 18 TV18 @ 105 1,265 Price - Sep'06 600 EQ ( In Crs. ) 28.28 NW18 @ 100 1000 Market Cap. 1,572 Listing Price 630 Total 2,265 Sensex 12,962 Market Cap. 3,553 Sensex ( 26 aug ’09 ) 15,700 Sensex 14,403 M Cap.Jan’06-Date ( x ) 1.44x NETWORK 18 EQ ( In Crs. ) 25.43 Listing Price 300 Market Cap. 1,524 Sensex 14,403 Total Market Cap.- Demerger 5,077 Incremental Market Cap. 3,505 % Wealth Creation 223% Strictly Private & Confidential 25
  • 26. Agenda ~ Part II Current Opportunities Current Opportunities Kirlosker Oil Engines Ltd. Kirlosker Oil Engines Ltd. NDTV Ltd. NDTV Ltd. Electrotherm Ltd. Electrotherm Ltd. BF Utilities BF Utilities Strictly Private & Confidential 26
  • 27. Current Opportunities…… 1. KIRLOSKER OIL ENGINES Ltd. ~ FF Market Cap. 770crs. Demerger – Core Business & Investment / JV’s into 2 separate listed entities. 2. NDTV Ltd. ~ FF Market Cap. 405crs. Demerger – General Entertainment & News Entities into 2 separate listed entities. 3. ELECTROTHERM Ltd. ~ FF Market Cap. 190crs. Demerger – Engineering & Steel business into 2 separate listed entities. 1.4. BF Utilities Ltd. ~ FF Market Cap. 1130crs. Demerger – Infrastructure business & Investments into 2 separate listed entities. ( The Note assumes pre-knowledge of the companies and thus would not indulge in data or business analysis , but purely on the corporate-action and forming an opinion towards the opportunity arising ) Strictly Private & Confidential
  • 28. Demerger Case I ~ KIRLOSKER OIL ENGINES Ltd Business : Acknowledged leaders in Engines , Engine bearings , Engine Valves , Diesel generating sets & Iron grey castings. The engines are preferred choice when it comes to powering Agricultural machinery , Construction & Material handling machinery , Marine Applications and equipment used by Armed Forces. Creation of 2 separate entities ; 1. Kirloskar Engines India Ltd. ( Resultant Co. ~ to hold the current core-operating businesses ) 2. Kirloskar Oil India Ltd. ( Applicant Co. ~ to hold Investments & JV’s ) Objective : 1. To optimize ‘ Capital Structure ‘ , leading to improved Return Ratio’s – probable PE x expansion. 2. To provide ‘ visibility ‘ and ‘ resultant recognition ‘ to Investments & JV’s on books. Business Highlights & Concerns : 1. Extending product range to – ‘Alternate Fuel based Engines‘ ~ which could in all probability be the next growth- driver. 2. Behind the CAPEX curve. 3. Recent financial performance not very encouraging. Historical Performance : ( Disclaimer – Only indicative of future and not extrapolable ) C-A-G-R > 1. Networth [ 3yr – 10.1% , 5yr – 18% , 8yr – 13.4% , 10yr – 12.7% ] 2. Sales [ 3yr – 14.8% , 5yr – 16.1% , 8yr – 12.8% , 10yr – 11.2% ] 3. EBITDA [ 3yr – 1.6% , 5yr – 16.5% , 8yr – 15.1% , 10yr – 11.2% ] 4. PAT [ 3yr - (16.7%) , 5yr – 10.4% , 8yr – 13.8% , 10yr – 22.1% ] 5. Market Cap. [ 3yr - (27%) , 5yr – 15.5% , 8yr – 42.8%% , 10yr – 32.7% ] Strictly Private & Confidential
  • 29. Financial Performance (Rs Cr) Quarterly Results (Rs Cr) Year End 200903 200803 200703 200603 Period-Ended LTM 200906 200903 200812 200809 200806 Net Sales 2109.3 2155.2 1881.5 1394.1 Net Sales 2005.4 461.3 475.7 476.4 592.0 565.9 Operating Cost 1727.6 1776.2 1537.7 1138.1 EBITDA 283.0 80.1 110.4 42.3 50.1 68.5 Gross Profit 381.7 379.0 343.8 256.1 Depreciation 80.8 19.7 24.2 18.4 18.5 19.3 S,G&E 163.1 191.1 173.3 130.8 Op Income 202.2 60.4 86.3 23.9 31.6 49.2 EBITDA 218.6 187.9 170.5 125.2 Misc.Inc (Exp.) 64.0 5.6 2.3 20.4 35.6 1.8 Depreciation 80.4 43.9 40.6 29.2 Interest Exp 65.9 3.0 9.8 26.9 26.2 7.6 Operating Income 138.2 144.0 129.9 96.1 EBT 200.2 63.0 78.7 17.5 41.0 43.4 Other Inc (Expen) -25.2 -8.7 -6.9 -15.3 Taxes 71.0 20.3 29.7 7.5 13.6 13.9 Int./Dividend Income 104.7 71.5 130.6 174.5 Net Inc. (Reg) 129.2 42.8 49.1 10.0 27.4 29.5 Interest Expenses 37.6 19.7 14.4 9.7 Extra ord. Items 4.3 0.0 0.5 0.0 3.8 0.0 Earnings Before Taxes 180.1 187.1 239.3 245.6 Rep Net Inc 124.9 42.8 48.5 10.0 23.6 29.5 Taxes 62.2 66.3 59.0 42.7 EPS 6.7 2.2 2.5 0.5 1.4 1.5 Regular Net Income 117.9 120.9 180.3 202.9 EBITDA Margin 14.1 17.4 23.2 8.9 8.5 12.1 Extraordinary Items 2.4 2.4 26.6 83.2 Tax Rate 35.5 32.2 37.7 42.8 33.2 32.0 Reported Net Income 115.6 118.5 153.7 119.7 Net Margin (Reg) 6.4 9.3 10.3 2.1 4.6 5.2 Dividends 19.4 38.8 38.8 38.8 Sales Growth -3.0 -0.2 -19.5 4.6 -5.1 EPS 5.8 5.8 17.8 20.1 EBITDA Growth -27.5 160.8 -15.5 -26.9 -4.2 Net Worth 960.1 915.0 851.4 718.4 Earnings Growth -12.8 391.0 -63.5 -7.1 -18.6 Debt 349.0 342.9 106.3 67.0 EPS Growth -12.8 391.0 -63.5 -7.1 -18.6 Capital Employed 1309.1 1257.9 957.7 785.4 P/E (Annual) 9.4 5.6 20.7 13.7 14.4 Net Plant 654.8 646.0 274.9 169.4 Market Capital 2261.9 1602.7 1747.4 1024.1 1097.9 Cash 79.1 61.6 41.3 17.6 Shareholding Pattern Marketable Securities 471.9 476.3 517.4 499.9 (AS ON 30-Jun-2009) Shares (%) Ratio Analysis Foreign 19551911 10.1 Gross Margin 18.1 17.6 18.3 18.4 Institutions 20645189 10.6 EBITDA Margin 10.4 8.7 9.1 9.0 Govt Holding 0 0.0 Tax Rate 34.5 35.4 24.6 17.4 Non Promoter Corp. Hold. 6323574 3.3 Net Margin (Regular) 5.6 5.6 9.6 14.6 Promoters 120401625 62.0 Dividend Payout 16.8 32.6 21.8 19.4 Public & Others 27250081 14.0 ROE 12.3 13.4 19.6 18.7 Totals 194172380 100.0 ROC 9.0 10.7 17.6 17.1 Sales Growth -2.1 14.6 35.0 21.5 EBITDA Growth 16.4 10.2 36.1 39.4 Earnings Growth -2.5 -22.9 28.4 58.3 EPS Growth 0.2 -67.4 -11.7 -77.1 Dividend Growth -50.0 0.0 0.0 60.0 M Cap Growth -46.9 -9.4 -19.3 265.9 Invtry. Turnover(days) 25.5 26.3 22.9 23.6 Receivable Turnover (days) 52.0 55.0 48.0 41.0 Payables Turnover (days) 63.0 53.0 47.0 40.0 Market Capital (Rs Cr) 1097.9 2068.7 2282.8 2828.5 Net Debt 269.9 281.3 65.0 49.4 MARKET DATA (AS ON 14-Aug-2009) Enterprise Value 1367.8 2350.0 2347.8 2877.9 Price (Rs) 107 52 W H/L(Rs) 120 / 30 P/E 9.5 17.5 14.9 23.6 Lat. P/E 16.6 Lat. EPS(Rs) 6.43 P/BV 1.1 2.3 2.7 3.9 Mkt. Cap.(Rs Cr) 2077.4 Shares(000) 194150 EV/EBIDTA (x) 6.3 12.5 13.8 23.0 Lat. BV(Rs) 49.5 Div. Yield (%) 0.93
  • 30. INDUSTRY PEER-SET ~ Prespective PRICE DATA RATIOS Latest Market 52 Week High 52 Week Low Earnings Market Cap. / Company Market Cap. RoE % (P/E) ( P/BV) (P/CEPS) EV / EBIDTA Price (BSE) (BSE) Yield Sales Cummins India 6606 334 343.8 148.2 9.1% 43.1% 15.2 4.7 13.8 10.2 2.0 Kirl. Oil Engine 2138 110 119.6 30 8.8% 22.7% 18.4 2.2 10.9 8.3 1.0 Greaves Cotton 764 156 170.5 50.1 11.9% 24.1% 13.6 1.9 9.5 6.7 0.7 AGGREGATE 9507 9.2% 33% 15.7 3.4 12.6 9.3 1.4 PROFIT / LOSS BALANCE SHEET Year End Net Sales PBIDT PBIT Enterprise Networth Total Debt Company PAT Cash Profit EBITDA % PAT % [Latest] [Latest] [Latest] [Latest] Value [Latest] [Latest] Cummins India 200903 3304 647 602 434 479 19.6% 14% 6629 1395 23 Kirl. Oil Engine 200903 2109 298 218 116 196 14.1% 9% 2487 960 349 Greaves Cotton 200806 1150 122 97 56 80 10.6% 7% 813 403 49 AGGREGATE 6563 1067 916 606 755 16% 9% 9929 2758 421 DISTRIBUTION of Metrics over Industry Peers INVESTMENT Net Sales PBIDT PBIT Enterprise Networth Total Debt Market Cap. PAT Cash Profit Quoted Investments Inv. / Mcap. [Latest] [Latest] [Latest] Value [Latest] [Latest] Company Cummins India 69% 50% 61% 66% 72% 63% 67% 51% 5% 470 7% Kirl. Oil Engine 22% 32% 28% 24% 19% 26% 25% 35% 83% 480 22% Greaves Cotton 8% 18% 11% 11% 9% 11% 8% 15% 12% 46 6%
  • 31. INVESTMENTS ( 27th Aug. '09 ) QUOTED EQUITY Investment Company No of Equity Cost of Current Value of Year End Current Price Name Shares Inv. Investment Kirl. Brothers 200903 11026185 9 189 208 Kirl. Ferrous 200903 65992000 163 23 155 Swaraj Engines 200903 2160000 0 301 65 Kirl.Pneumatic 200903 138222 2 364 5 Total 349 433 UNQUOTED EQUITY - Book Value / Hist. Cost QUASI Cash Investment Company No of Equity Cost of Investment Company Cost Of Year End Units Name Shares Inv. Name Inv. Toyota Kirloskar Mot 200903 77000000 156 Toyota Kirloskar Aut 200903 33750000 54 Birla Sun Life Cash 14975273 15 T G Kirloskar Automo 200903 5720000 19 DWS Insta Cash Plus 14963556 15 Kirloskar Toyoda Tex 200903 9256117 9 HDFC Cash Management 18809012 20 Total 238 Total 50 AGGREGATE Value Discount factor % Discounted Value Quoted Equity 433 70% 130 Un-Quoted Equity 238 70% 71 Quasi Cash 50 20% 40 AGGREGATE 721 241 Implied Inv. / Share ( Post-Demerger ) 249
  • 32. KIRLOSKER OIL ENGINES Ltd. ~ Demerger EXISTING - FY ' 2009 Share Capital ( Rs. crs. ) 38.83 No. of Shares ( crs. ) 19.42 Total Capital Employed 1309 Total Shareholder's Funds 960 RESULTANT ENTITY ~ 4 shares held Total Debt 349 DEMERGED ENTITY ~ 3 per 4 shares held Market Price ( Rs. ) 110 KIRLOSKER OIL ENGINES Ltd. Market Capitalization ( Rs. Crs. ) 2136 KIRLOSKER ENGINES India Ltd. ( Existing Co. - Investments ) Enterprise Value ( Rs. Crs. ) 2485 ( Demerged Entity - Ongoing businesses ) ( Auto Components + Engines ) Share Capital (Rs. crs.) 9.7 FINANCIALS No. of Shares ( crs. ) 0.97 Net Sales 2273 Share Capital (Rs. crs.) 29.1 Other Income 105 No. of Shares ( crs. ) 14.56 INVESTMENTS PBIDT 298 Total Capital Employed ( Rs.crs. ) 787 Quoted Equity Inv. ( 50% dis. ) 430 215 PBIT 217.8 Total Debt 349 MF - Quasi Cash ( 20% dis. ) 50 40 PAT 113.5 Total Quoted Investments 480 255 FINANCIALS RATIOS Net Sales 2065 Key UnQuoted Inv. - Value EPS 5.8 Depreciation 75 11% Toyota Kirlosker JV ( Approx.Valuation ) P/E 18.8 PBDIT 205 Book Value 155 P/B 2.22 Interest 38 2007-08 2008-09 Market Cap. / Sales 0.94 PAT ( 35% Tax ) 109 Sales 4100 3760 Earnings Yield ( EBIT / EV ) 8.8% Implied Cost of Debt ( % ) 10.8% Profit 207 113 RoCE 8.7% RoCE 13.8% % NP 5.0% 3% No. of Cars 52800 53878 Market Value ~ Conservative Scenarios Realization / Unit 776515 697873 Capital Structure ~ IF Cetirus Paribus PE x ( 10 -15 ) 1000-1500 Consld. Share Capital ( Remain Same ) 38.83 Market Cap. / Sales ( 0.5 - 1 ) 1030 - 2060 Maruti Suzuki benchmark ~ at discount No. of Shares ( Before ) 19.42 Earnings Yield - Conservative 9%-15% PE x ( 20-30x ) 250 - 370 No. of Shares ( After ) 15.53 Per Share Range ( 1000-1500-2000 crs ) 68 - 103 - 137 MCap. / Sales ( 1- 2 ) 400 - 800 Reduction ( % ) 20% Assumed 400 Value of 15 shares 1020 - 1545 - 2050 Demerger Ratio ( For Every 20 shares ) 1 :: 15 AGGREGATE Investment ( In crs. ) 655 Cost of Original Share Pre-D 2200.0 Investment / share ( Rs.) 675 Value of 1 share 675 POTENTIAL : [ Potential Demerged Agg. ~ ( for 20 shares > 1 resultant co. shares + 15 of to be listed co. shares ) - ( Current Inv. ~Rs. 2200 ) ] = Increased visibility & Return ratios >> High MoS @ Rs. 85
  • 33. Demerger Case II ~ New Delhi Television India Ltd. Business : An integrated media conglomerate ~ News & Entertainment and end-to-end Media Services . Creation of 2 separate entities ; 1. NDTV News +India Ltd. 2. NDTV Entertainment + India Ltd. Objectives & Highlights : 1. De-conglomerization would make the organization leaner. “ Increase visibility & Investor confidence “. 2. Regulatory arbitrage would lead to ‘ Equity ‘ raising and eventual tackling of debt & costs. 3. Separate verticals with due focus / revenue models / consumer-market & investors. 4. Providing further visibility and clarity to the complex group structure / subsidiaries / ventures. 5. GE owned NBC Universal, a global media conglomerate, has acquired 26% stake in NDTV Networks Plc, a subsidiary of NDTV. NBCU has invested $150m, valuing the company at $577m . NDTV Networks Plc, a subsidiary of NDTV, pans across businesses like GEC broadcasting, lifestyle broadcasting, internet, Media Process Outsourcing, etc. NBC has an option to increase its stake to 50% in the next three years. NBC is a leading global entertainment conglomerate panning across television broadcasting, cable distribution, film production and studio and theme parks & resorts. NBC Universal owns a plethora of media labels like Universal television, NBC News, NBC Sports, CNBC, Universal Pictures, Universal Studios, etc. Historical Performance : ( Disclaimer – Only indicative of future and not extrapolable ) CAGR > ( ADEX Data attached does show some market standing / acceptability ) 1. Networth [ 3yr – 7.6% , 5yr – 5.3% ] 2. Sales [ 3yr – 30.3% , 5yr – 49% ] 3. EBITDA [ 3yr – 127.2% , 5yr – 374% ] 4. PAT [ 3yr - 606.4% , 5yr – 179.3% ] 5. Market Cap. [ 3yr - (27.3%) , 5yr – 0% ] INFLEXION POINT : Transition of Industry from ‘ Analog to Digital ‘ ; substantial increase in subscription revenue & decrease in costs. Consolidation of Industry , new entrants have made things further difficult. De-regulation / Free pricing. Strictly Private & Confidential
  • 34. INDUSTRY PEER-SET ~ AGGREGATE's BALANCE SHEET PROFIT / LOSS Capital Company Market Cap. EV Year End Total A/L Gross Block Net WC Networth Total Debt Net Sales PBIDT PBIT PAT Employed 1 Sun TV Network 10851 10920 200903 1518 1783 1027 623 1449 69 1106 804 583 340 2 Zee Entertainmen 8213 8789 200903 3975 4573 1893 2134 3400 576 2337 708 677 522 3 IBN Broadcast 1894 2024 200903 426 505 136 87 253 130 196 -52 -70 -92 4 TV 18 India 1242 1789 200903 1033 1488 365 76 486 547 596 -26 -75 -185 5 NDTV 1083 1788 200903 943 1217 349 230 261 705 492 -315 -467 -520 6 Zee News 960 1162 200903 442 611 113 343 241 202 540 101 92 45 7 T.V. Today Netw. 538 538 200903 293 448 157 98 293 0 274 68 49 34 AGGGRATE 24782 27010 8631 10624 4040 3591 6382 2228 5542 1287 789 144 Return Ratio ( %) Valuation Ratios QUALITATIVE Holding Free Non-Promoter - Selling & Earnings Yield Market Cap / Total Exp. / Employee Company TTM End ROCE (%) RONW (%) P/E P/BV EV / Sales Float INSTITUTION / Admin. / ( EBIT / EV ) Sales Sales Exp. / Sales (%) FF ( % ) Sales 1 Sun TV Network 200906 53% 23% 5.3% 31.9 7.5 9.8 9.9 23 46% 29% 11% 0% 2 Zee Entertainmen 200906 -12% -36% -3.4% -20.6 7.5 9.7 10.3 59 86% 75% 9% 219% 3 IBN Broadcast 200906 -3% -38% -4.2% -6.7 2.6 2.1 3.0 48 41% 136% 42% 97% 4 TV 18 India 200906 18% 15% 7.7% 15.7 2.4 3.5 3.8 48 64% 128% 38% 0% 5 NDTV 200906 23% 11% 9.1% 16.0 1.8 2.0 2.0 37 69% 192% 48% 169% 6 Zee News 200906 -33% -199% -26.1% -2.1 4.1 2.2 3.6 46 63% 84% 13% 241% 7 T.V. Today Netw. 200906 23% 19% 7.9% 21.5 4.0 1.8 2.2 44 44% 82% 28% 97% Distribution of Key Metrics ~ Assessment towards NDTV Relative Valuation Capital Company Market Cap. EV Total A/L Gross Block Net WC Networth Total Debt Net Sales PBIDT PBIT PAT Employed 1 Sun TV Network 44% 40% 18% 17% 25% 17% 23% 3% 20% 62% 74% 237% 2 Zee Entertainmen 33% 33% 46% 43% 47% 59% 53% 26% 42% 55% 86% 363% 3 IBN Broadcast 8% 7% 5% 5% 3% 2% 4% 6% 4% -4% -9% -64% 4 TV 18 India 5% 7% 12% 14% 9% 2% 8% 25% 11% -2% -9% -129% 5 NDTV 4% 7% 11% 11% 9% 6% 4% 32% 9% -24% -59% -362% 6 Zee News 4% 4% 5% 6% 3% 10% 4% 9% 10% 8% 12% 31% 7 T.V. Today Netw. 2% 2% 3% 4% 4% 3% 5% 0% 5% 5% 6% 23% Takeaways : > NDTV has to substantially improve its Debt / Equity & Operating Costs.~ it definitely is at the bottom of the curve in this. > There is scope for ' Equity Divestment ' by mgmt. ~ which would tackle debt & bring in strategic partners.
  • 35. ADEX Data ~ Establishing Market Share / Acceptability FY 2008 -09 ~ SPENDS ( In Million ) Network Q1 Q1 % Q2 Q2 % Q3 Q3 % Q4 Q4 % Total % Total Star TV Network 5,218 58% 5,038 55% 4,574 51% 4,386 53% 19,216 54.4% Zee TV Network 1,987 22% 2,136 23% 2,261 25% 1,885 23% 8,269 23.4% NDTV Network 1,212 14% 1,407 15% 1,600 18% 1,410 17% 5,630 15.9% CNBC Network 273 3% 289 3% 305 3% 259 3% 1,126 3.2% SUN Network 257 3% 268 3% 300 3% 270 3% 1,095 3.1% Grand Total 8,949 100% 9,137 100% 9,040 100% 8,210 100% 35,335 100.0% FY 2008 -09 ~ Fixed Commercial Time ( In Seconds ) Network Q1 Q1 % Q2 Q2 % Q3 Q3 % Q4 Q4 % Total % Total Zee TV Network 30,707,625 42% 31,579,238 42% 32,990,902 41% 30,798,725 39% 126,076,490 41.4% Star TV Network 23,921,880 33% 23,965,847 32% 26,470,877 33% 26,778,031 34% 101,136,635 33.2% NDTV Network 10,845,780 15% 11,282,984 15% 12,124,843 15% 12,726,557 16% 46,980,164 15.4% CNBC Network 4,604,249 6% 4,608,064 6% 4,611,371 6% 4,496,442 6% 18,320,126 6.0% SUN Network 2,702,234 4% 2,989,043 4% 3,327,674 4% 3,199,660 4% 12,218,611 4.0% Grand Total 72,781,768 100% 74,425,176 100% 79,525,667 100% 77,999,415 100% 304,732,026 100.0%
  • 36. Demerger Case III ~ ELECTROTHERM India Ltd. Business : Electrotherm India has been engineering metal melting industry since ’83. Current Product Range : Furnaces , Electro DI Pipes , Steel-Special Steel & Stainless Steel , Electro TMT Bars , Transformers. Creation of 2 separate entities ; 1. Electrotherm Steel Ltd. ( Applicant Co. ~ holding the traditional Steel business of co. ) 2. Electrotherm Engineering Ltd. ( Demerged Entity ~ holding the Engineering & Projects division of co. ) Objective : 1. To give due focus and visibility to the firm’s ‘ Engineering & Project ‘ division. 2. The demerger leading to probable PE x expansion , hence adding to Market Value. Business Highlights & Concern : 1. The Mgmt. may be getting over-ambitious and must manage debt. Demerger is imperative for the Engineering division to detach from company debt. 2. Multiple domains / products to manage ~ focus and execution has to be monitored. Historical Performance : ( Disclaimer – Only indicative of future and not extrapolable ) CAGR > 1. Networth [ 3yr – 172% , 5yr – 121% ] 2. Sales [ 3yr – 109% , 5yr – 123% ] 3. EBITDA [ 3yr – 123.6% , 5yr – 156.5% ] 4. PAT [ 3yr - 55.4% , 5yr – 263.4% ] 5. Market Cap. [ 3yr - 88% , 5yr – 378% ] Strictly Private & Confidential
  • 37. Financial Performance (Rs Cr) Quarterly Results (Rs Cr) Year End 200803 200703 200603 200503 Period-Ended LTM 200906 200903 200812 200809 200806 Net Sales 1325.4 724.8 344.7 183.8 Net Sales 1738 440 478 357 463 385 Operating Cost 1059.5 578.9 283.7 162.9 EBITDA 248 78 58 52 59 66 Gross Profit 265.9 145.9 61.1 20.9 Depreciation 61 19 23 10 10 10 S,G&E 52.4 31.2 16.0 5.5 Op Income 187 59 36 42 50 56 EBITDA 213.5 114.7 45.0 15.4 Misc.Inc (Exp.) 13 4 7 2 1 1 Depreciation 31.9 17.9 7.1 0.9 Interest Exp 123 38 19 36 30 30 Operating Income 181.6 96.9 38.0 14.5 EBT 77 25 23 8 20 27 Other Inc (Expen) -6.3 -3.1 -8.3 -0.4 Taxes 25 8 8 2 7 9 Int./Dividend Income 6.9 2.8 1.8 2.2 Net Inc(Reg) 51 17 15 6 14 18 Interest Expenses 78.5 35.0 9.2 1.6 Extraord. Items 2 0 2 0 0 0 Earnings Before Taxes 103.7 61.5 22.3 14.7 Rep Net Inc 50 17 13 6 14 18 Taxes 40.9 17.8 10.1 1.2 EPS 45 15 13 5 12 17 Regular Net Income 62.8 43.7 12.1 13.5 EBITDA Margin 14 18 12 15 13 17 Extraordinary Items 0.1 0.1 0.0 0.0 Tax Rate 33 17 12 12 10 10 Reported Net Income 62.8 43.6 12.1 13.5 Net Margin(Reg) 3 4 3 2 3 5 Dividends 2.7 1.8 1.0 0.7 Sales Growth -8 34 -23 20 -10 EPS 55.6 46.2 22.9 28.1 EBITDA Growth 34 12 -12 -9 -7 Net Worth 372.7 206.8 31.7 21.7 Earnings Growth 14 157 -57 -25 4 Debt 829.0 390.1 214.1 89.0 EPS Growth 14 157 -57 -29 4 Capital Employed 1213.8 608.9 257.8 114.3 P/E (Annual) 3 2 7 5 5 Net Plant 554.3 278.4 152.7 71.5 Market Capital 255 230 252 139 111 Cash 62.2 41.0 21.2 8.8 Shareholding Pattern Marketable Securities 2.1 0.1 0.1 0.0 (AS ON 30-Jun-2009) Shares (%) Ratio Analysis Foreign 3484405 30.36 Gross Margin 20.1 20.1 17.7 11.4 Institutions 9900 0.09 EBITDA Margin 16.1 15.8 13.1 8.4 Govt Holding 0 0 Tax Rate 39.4 28.9 45.6 8.2 Non Promoter Corp. Hold. 1432248 12.48 Net Margin (Regular) 4.7 6.0 3.5 7.4 Promoters 3853075 33.58 Dividend Payout 4.5 4.3 8.5 5.3 Public & Others 2696746 23.49 ROE 21.7 36.6 45.4 87.9 Totals 11476374 100 ROC 6.9 10.1 6.5 20.1 Sales Growth 82.9 110.3 87.6 220.7 EBITDA Growth 86.1 154.7 192.2 756.1 Earnings Growth 44.0 259.9 -10.4 1702.7 EPS Growth 20.4 101.7 -18.5 1687.9 Dividend Growth 49.7 92.6 33.8 NA M Cap Growth 21.1 183.9 287.3 882.2 Invtry. Turnover(days) 67.8 68.5 58.0 46.9 Receivable Turnover (days) 56.0 46.0 40.0 39.0 Payables Turnover (days) 81.0 56.0 48.0 45.0 Market Capital (Rs Cr) 499.4 412.6 145.3 37.5 Net Debt 766.9 349.0 192.9 80.2 MARKET DATA (AS ON 17-Aug-2009) 52 W Enterprise Value 1266.3 761.6 338.2 117.7 Price (Rs) 218.25 H/L(Rs) 332 / 76 P/E 8.0 9.5 12.0 2.8 Lat. P/E 5 Lat. EPS(Rs) 43.23 P/BV 1.3 2.0 4.6 1.7 Mkt. Cap.(Rs Cr) 250.33 Shares(000) 11470 Div. Yield EV/EBIDTA (x) 5.9 6.6 7.5 7.6 Lat. BV(Rs) 390.39 (%) 1.09
  • 38. ELECTROTHERM India Ltd. ~ Demerger EXISTING - FY ' 2009 Share Capital ( Rs. crs. ) 11.25 No. of Shares ( crs. ) 1.12 Total Capital Employed 1412 Total Shareholder's Funds 437 Total Debt 1200 Market Price ( Rs. ) 220 Market Capitalization ( Rs. Crs. ) 246 Enterprise Value ( Rs. Crs. ) 1446 STEEL - Segment FINANCIALS ENGINEERING - Segment Net Sales 1682 FINANCIALS Expenditure 1500 FINANCIALS Net Sales ( ~76% ) 1295 PBIT 192 Net Sales ( ~21% ) 358 PBIT 137.3 Interest 115 PBIT 54.7 Interest 115 PAT 50.7 PAT 35.6 PAT 14.5 RATIOS Capital Employed 1106 EPS 45.3 Capital Employed 143.3 RoCE 12.4% P/E 4.86 RoCE 24.8% Earnings Yield ( EBIT / ~EV ) 9.50% P/B 0.56 Market Cap. / Sales 0.15 Comparable Ranges ~ Ratio's EV / Sales 0.86 Comparable Ranges ~ Ratio's P/E 5 :: 10 Earnings Yield ( EBIT / EV ) 13.3% P/E 8 :: 15 P/B 0.6 : 1.5 RoCE 13.6% P/B 0.8 : 1.9 Market Cap. / Sales 0.3 :: 1 RoE 11.6% Market Cap. / Sales 0.3 :: 1 EV / Sales 0.6 :: 1.5 D/E 275% EV / Sales 0.5 :: 1.5 Earnings Yield ( EBIT / EV ) 8% :: ~15% Earnings Yield ( EBIT / EV ) 8% :: 12% RoCE 10% :: 15% Demerger Ratio 1 :: 1 RoCE 18% :: 25% RoE 12 % :: 20% Cost of Original Share Pre-Demerger 220 RoE 15 % :: 22% D/E 1.2 :: 1.8 D/E 0.5 :: 0.8 Probable ~ Market Cap.>~ 150-200crs Probable ~ Market Cap.>~ 250-350crs POTENTIAL : 2x+ [ Potential Demerged Agg. ~ ( Low PE / High Debt - Commodity Co. + High Growth / High RoCE EPC Co. ) - ( Current Inv. Rs. ~220 ) ] = Expanded PE x & Return ratios >> High MoS @ Rs. 180
  • 39. ‘ SPECIAL SITUATION ‘ Probables / Prespectives ~ 2009 2. Specific Case >> Hindustan Zinc ( Govt. Sell - Sterlite Buyout ) ; IDBI & IFCI ( Restructuring/Fund Raising/Asset Sale etc. ) 3. Open Offer Cases ( Orissa Sponge , Great Offshore , Zenotech ) 4. Warrant Cases ( Fortis , Orbit , Kirlosker Ferrous , NCD’s ) 5. Index Inclusion ~related to FF. ( Adani , NHPC , Oil India ) potential index inclusions ~3months from listing. 1. Amalgamation Case ( Amtek Goup , JP Hydro ....) 2. Holding Co. ~ Subsidiary IPO Case ( Godrej Prop. ~ Godrej Ltd. , Jindal Holdings ~ JSW Energy , Web18 ~ TV18 , Life Insurers... ) 3. Rights Issue ~ Substantial BS/PL Impact ( Adlabs , TV18 .. ) 4. Potential EVENT Plays ( RIL/RNRL - Straddle / Vol. Trade, Cash Stripping in PSU's, FPO Arbitrage ) 5. CAPEX Beneficiaries >> Power Ancillaries ( Equipment , Cables etc ) , Oil & Gas Infrastructure & Equipment ( Pipes , Cylinders , Rigs , Maintenance ) .... 6. Stock Screeners ( Reminiscence ~ period Sep’08-Mar.’09 ) >> [ ( Net Current Assets + Quoted Inv. + Cash / Market Cap. ) ; ( Normalized Earnings Yield ~2x Bond Yield ) ..........] Strictly Private & Confidential
  • 40. ~Thoughts on Impact & Experience of Divestitures in the Real Economy……….. 1. Divestiture of larger consumer-packs to “Re.1 Sachets ‘completely re-defined / re-created the target consumer / industry pie / distribution reach. 2. Voluminous books like ‘Lords of the Rings ‘ – split into 3 separate entities , increased its affordability , sales & shelf life. 3. Tranch’ing / Divestiture of ‘Coupon & Principal ‘from bonds by Salomon Brothers created new market & increased tax-efficiency. 4. Divestitures / M&A has increased/improved efficiencies – ‘ Credit Rating – leading to lower borrowing cost , Supply chain & Integration benefits etc.. 5. Pre-fabrication technology has re-defined the way ‘Construction ‘ is planned and executed, leading to enormous benefits to all stakeholders on multiple-fronts. 6. Capital Structure – Differential Voting rights, Hybrid Instruments, Debt covenants ; have provided huge lenience towards optimization of Asset/Liability cash-flow & duration match. 7. Indian Newspapers VS Tabloid’s of the West – Size of front page can drastically alter the entire portfolio of ad-space offering / revenue. Strictly Private & Confidential
  • 41. Disclaimer The information contained in this email has been prepared solely for your information and is not an offer or solicitation of an offer to buy/sell any securities/instruments mentioned or to participate in any trading strategy. JM Financial and/or its affiliate companies may deal as principal in its own name or act as a market maker for securities/instruments mentioned or may advise the issuers. This is not a research report and is not from JM Financial Research but it may refer to a research analyst/research report. Unless indicated, the views are of the author's personal views and may differ from those of JM Financial’s Research or others in the Firm. We do not represent that the information contained herein is accurate or complete. Information is subject to change without notice and we may not update this. Past performance is not indicative of future returns. No portion of this email or its attachment(s) shall be forwarded or distributed to any person without our prior written approval. You may not use email to request, authorize or effect the purchase or sale of any security or instrument, to send transfer instructions, or to effect any other transactions. This email is solely for the addressee(s)/intended recipients and may contain confidential information. Sender does not intend to waive confidentiality or privilege. If you have received this email in error, please destroy immediately and notify the sender. Varun Goenka AVP – Capital Markets Group. JM FINANCIAL FINANCIAL SERVICES P Ltd. Apeejay House , Churchgate. Mumbai 400020. M : 09004670600 / 022 67043037 @ varun.goenka@jmfinancial.in Strictly Private & Confidential