The week of big exits and the budget

The eleventh trading week of 2012 witnessed good amount of activity in the bulk deals section. It ended with the presentation of the union budget from Pranab Mukherjee.

Talking about bulk deals, on March 12 2012, Rupert Murdoch sold his entire stake in Hathway Cable to Providence Equity Advisors and Macquarie Bank for Rs. 358 crores. The deal was closed at an average price of Rs. 145/- per share. My calculations indicate that Rupert Murdoch made a mere 5% gain on his original investment in Hathway. Further, the huge 18% discount to the market price indicates that Rupert was finding it really hard to offload his stake in the company.

On March 14 2012, Kitara Capital (managed in India by Amitabh Chakraborty) bought shares worth Rs. 23.80 crores in Mumbai-based Supreme Infrastructure from Reliance Mutual Fund and the promoters of the company. Supreme Infrastructure (an entity of the Sharma family which owns large chunks of real estate in Powai) is involved in road projects across India. Kitara Capital is part of the Sultanate of Oman-based Ajit Khimji Group.

On the same date, V P Nandakumar of Manappuram Finance sold shares worth Rs. 144.65 crores in his company to investors like Baring India, Sequoia Capital and Siguler Guff. The shares were sold at an average price of Rs. 40/- per share.

Ashish Dhawan’s ChrysCapital was also seen buying 4.2 million shares of Karur Vysya Bank at an average price of Rs. 380/- through their fund Warhol Limited on March 16 2012. The seller here was India Max Investment Fund Limited.

Further, ICICI Emerging Sectors Fund continued to exit MCX India. On March 12 2012, the fund sold shares worth Rs. 31.7 crores in the company. This is in addition to the share sales of Rs. 56 crores done last week by ICICI Emerging Sectors Fund.

UK-based Coronation Investment Management Company, too, has been offloading shares in Educomp Solutions. The company sold shares worth Rs. 73 crores during the week. Malaysia’s SWF Khazanah also sold its entire stake of 4.17% in Yes Bank for Rs. 531 crores after holding it for five years.

Crisil should acquire a smaller player rather than splurge on buybacks

Well. Let me first clarify that this is purely my thought and therefore the analysis carried-out in the article need not have had the desired impact as proposed.

Here are some data points to begin with. Crisil India, a subsidiary of S&P, has a market capitalization of Rs. 6,700 crores or US$1.3 billion. During the last year, Crisil made a net profit of Rs. 206 crores on operating revenues of Rs. 807 crores, on a consolidated basis. Its latest balance sheet suggests that the company is debt-free and has cash and cash equivalents worth Rs. 258 crores.

Crisil has done well for itself as well as for its shareholders. Over 2007-11, Crisil’s revenue and net profit recorded a CAGR of 19% and 25% respectively. If one had bought shares worth Rs 1 lac in Crisil in Dec 2007, the shares would be worth more than Rs 2.5 lacs as of date with some extra earnings in the form of dividends.

Crisil has managed this feat through both organic as well as inorganic growth. Crisil acquired Pipal Research in October 2010 for US$12.75 million, paying 1.6x sales for the same. Crisil had acquired another research firm named Irevna few years back for US$12.0 million, paying 2.2x sales. It is easy to conclude that both these acquisitions have been very fruitful for Crisil because research division is now the single largest contributor to the overall revenue of Crisil. Last year, the research division contributed 52.5% to the overall revenue, followed by Ratings (40.4%) and Advisory (7.1%).

Now, let me change the track to what I wish to communicate. The legendary investor Warren Buffett had recently announced a stock buyback, the first by Berkshire. Stock/Share buybacks are usually considered as a means to return excess money to shareholders. They also indicate that the company is not finding any other attractive investment opportunity for the cash it holds. Simply put, if Berkshire is doing a stock buyback, the management probably thinks that the best investment option (given the current market conditions) is to invest in its own stock.

Crisil too has engaged in quite a few stock buybacks. It recently closed a buyback program, purchasing shares worth Rs. 80 crores (USD16 million) from the open market. My moot point here is: Crisil could actually have put this money to better use, than do buybacks.

My theory behind this reasoning is simple.

With a M-cap of Rs 6700 crores, Crisil is currently trading at 8 times its sales, and 32 times its earnings. During the last five years, it traded at an average sales and earning multiples of 6x and 23x. In other words, this means that the market usually values Crisil at 6 times sales and/or 23 times earnings. ICRA, which is in similar business as Crisil, also trades at 8x sales.

Now assume that Crisil had actually used the money spent on last stock buyback to acquire another company similar to Irevna or Pipal and strengthened its research division further. In fact, a company in similar business is actually located in the vicinity of their Mumbai headquarters and clocks annual revenues of USD10 million. Taking cue from earlier acquisitions of Pipal and Irevna, we can safely assume that they could have scooped-up this company for anything between USD16-USD22 million.

The new acquisition could have added USD10 mn to the topline and USD60 mn to the market capitalization of Crisil.

I hope someone in Mape Advisory, which advised Crisil in previous acquisitions, reads this and helps Crisil become a Rs. 10,000 crore M-cap company soon.

MCX makes its debut; markets’ not surprised with listing gains

The tenth trading week of 2012 witnessed the first IPO listing for the year. On March 9 2012, MCX finally made its debut on the Indian bourses’, closing the day with gains of nearly 26% based on the issue price of Rs. 1032/- per share. This wasn’t of much cheer to the retail investors who ended up making between Rs 2100 to Rs 3100 on their investment of 2 lac rupees.

Data from Bulk deals sections indicates that Copthall Mauritius Investment Ltd. bought shares worth Rs. 56 crore in MCX at an average price of Rs. 1333/- per share. The seller was ICICI Emerging Sectors Fund.

Hyderabad-based Nava Bharat Ventures Ltd. also witnessed good deal activity this week. On March 9 2012, Kingfisher Capital CLO Limited (a subsidiary of Lehman Brothers Holdings) sold shares worth Rs. 60 crores in the company via bulk deals. Nearly 82% of these shares were bought by the promoters of Nava Bharat Ventures Ltd. through A N Investments Pvt Ltd, Nav Developers Limited, and Nava Bharat Ventures Employee Welfare Trust. Post this deal, Kingfisher Capital CLO Limited has cut down its stake in the company to 11.2% from 14.5%.

Other bulk deals for the week included companies like HDIL, Sintex, Core Projects and NCC.

On March 6 2012, Merill Lynch bought shares worth Rs. 25.4 crores in Mumbai-based real estate developer HDIL Limited. My earlier posts would inform that Goldman Sachs had also bought shares in HDIL Limited on Feb 14 2012. On the same date, Morgan Stanley scooped-up shares worth Rs. 14.9 crores in plastic products company Sintex Industries.

On March 7 2012, Goldman Sachs bought shares worth Rs. 18.2 crores in education service provider Core Projects, while Reliance Life Insurance Company bought shares worth Rs. 7.4 crores in infrastructure firm NCC Limited. My earlier posts would inform that Baer Capital had also bought shares worth Rs. 22 crores in NCC Limited on Feb 6 2012.

The week of Ambani bros

Bulk deals during the ninth trading week of 2012 belonged to the Ambani bros. Large buying from firms belonging to both Mukesh Ambani as well as Anil Ambani took place during the week.

Reliance Industries’ buyout of Analjit Singh’s stake in EIH (Oberoi Hotels) for Rs. 192 crores was the highlight deal of the week. On March 2, 2012, Reliance Industries Investment and Holding Limited bought 21.3 million shares of EIH Limited from Pivet Finances Limited and Gaylord Impex Limited (both belonging to Analjit Singh) at an average price of Rs. 90/- per share. Do recall that Mukesh came as a white knight for Bikki Oberoi in Aug 2010, buying close to 15% stake in the hotel company for Rs. 1,000 crores, to ensure that ITC did not become a threat to the current management. The deal marks the complete exit of Analjit Singh from EIH.

The younger Ambani – whose firms are usually quite active in the bulk deals section – was seen lapping up shares in Intel-backed Persistent Systems Limited. As per the data available on NSE and BSE, Reliance Capital bought a little less than one million shares of the pune-based IT firm at an average price of Rs. 305/- per share. Reliance Capital now owns 6.5% in Persistent Systems. US-based Capital Group Companies, Inc. was the seller in Persistent Systems.

Two more companies which saw some buying were: Talwalkar Fitness and ABG Shipyard. An entity named American Funds Insurance bought 2.5 lac shares in Talwalkar Fitness at an average price of Rs. 160/- while Deutsche Securities Mauritius was the buyer in ABG Shipyard, taking up 5.0 lac shares for Rs. 20.4 crores. Do remember that last week some shares of ABG Shipyard were picked up by Australia-based Macquarie Bank too.