HUL OFFER IS A WATERSHED MOMENT, DON'T TALK VALUATIONS HERE

The voluntary open offer from Unilever for shareholders of Hindustan Unilever is easily the most significant development for Indian market. Make no mistake, its way bigger than a petrol price decontrol, or allowing FDI in retail or anything where you may have heard lot more noise. What we should not do at this moment is to belittle this deal by talking about valuations, acceptance ratios and punting on what it means for other cash rich MNCs and their Indian arms.

Just think about it, Unilever is willing to put $5.4 bn cash to work, just to increase their stake in Indian arm to 75% and be rest assured, they won’t get all they want at Rs 600/share and they may at some point make a higher offer which we cannot speculate at this point. (By the way, the promoters of Saint Gobain and Fresenius Kabi should note this development and not dither over what is loose change)

What should an investor of HUL do? While the HUL stock is at life time high, this does not take away the fact that the stock would still rank as an underperformer if you invested in the stock 10 years back.

You will be amazed to know that despite all its massive outperformance in the last 3 years, only 3 index stocks have underperformed HUL over the last 10 years. While HUL is up 190% in last 10 years, only Hindalco, Reliance Infra and Ranbaxy have given lower returns if you take data from February 2003, which is when the great Indian bull market actually started.

During these 10 years, Sesa Goa has become 82 fold, Lupin 47 fold, Kotak Mahindra Bank a 40 bagger, and Axis Bank a 30 bagger. Ok, let’s agree that some of them have not been the part of index for 10 years and have only been added after significant outperformance. So look at peers, who have been in index for long. M&M is a 30 bagger, L&T a 15 bagger, Tata Motors 8 bagger and even the closest competitor ITC has been a 14 bagger. Of course all these stocks have had their triggers over last 10 years in terms of economy and individual company issues.

Unilever clearly is not doing this for charity, nor is it doing this because it thinks it owes it to shareholders. No way, it is doing that because it is betting on the much larger theme, which is the Indian consumption story. And while we may keep debating how expensive stocks look in the consumption basket, as the past bull market has shown, the market can make absolute mockery of near term valuations when it gets in the mood to reward a particular sector or a stock.

ANOTHER MNC DELISTING GONE SOUR

Are these MNC promoters coming out with a clear message? Give us your shares at our price, else we will short change you, and not even give you the current market price and the Indian merchant bankers will help us short change the Indian shareholders?

Since I got a lot of feedback on Fresenius Kabi, here comes the next important issue on the radar. Just look at how the minority shareholders of Saint Gobain Sekurit are being treated. Again, all of this is done within the letter of the law, but the spirit is nowhere to be followed.

Just a backgrounder – In 2012, the promoters of Saint Gobain Sekurit came out with a delisting offer and indicated a price of Rs 31/share as acceptable to them. The discovered price, to their horror was Rs 90/share and even at that price, not enough investors tendered and hence the company rejected the delisting. Of course, even the shareholders got greedy and may be Rs 90/share was not the right price for Saint Gobain but what they are getting now is clearly not the right value. 

Now look at what's happening. The same promoters have another company called Grindwell Norton (which is much bigger in size) and now they are merging the 2 companies. But the merger ratio leaves so much to be desired.

A simple stock price related swap would have meant 1 share of Grindwell for every 11 shares of Saint Gobain. Even in terms of sales, Grindwell is 9 times bigger than Saint Gobain. And in terms of market cap, Grindwell is 7 times Sanit Gobain. But look at the merger ratio – 17 shares of Saint Gobain are needed for a small mercy of 1 share of Grindwell Norton.

Simply put, if you have shares worth Rs 380 of Saint Gobain, you will get a share of Grindwell worth Rs 255. That’s a loss of 33%, technically the share of Saint Gobain is now worth Rs 15/share. It’s the same company, where the promoters were happy to delist at Rs 31/share.

And more importantly it does not end here. The merger process also involves merging 2 unlisted companies with Grindwell Norton and you don’t need knowledge of rocket science to know that these 2 companies should be promoter entities and look at the merger ratios here

For every 1 share of unlisted Saint Gobain Crystals, you get 2 shares of Grindwell Norton and for every 1 share of unlisted SEPR, you get 2.6 shares of Grindwell Norton. So technically, the assets of Grindwell Norton are being distributed among the shareholders of unlisted companies while the minority shareholders of the listed entity are being given the loose change.

In the listed Sanit Gobain Sekurit, the MNC promoters own 86% stake with no institution holding and the balance 14% stake is with small shareholders. In Grindwell Norton, promoters own 58%, has large institutional holding with both domestic mutual funds and FIIs listed as shareholders.

Do the promoters of Saint Gobain Sekurit have absolutely zero regard for the minority 14% shareholders of the company? It’s a 200 crore market cap company so 14% represents a princely sum of Rs 28 crore. Why can’t they be fair to these small investors? Or is this the new way of MNC promoters bullying small shareholders and telling them – it’s either our way or highway.

IS SEBI WATCHING THIS DAYLIGHT ROBBERY?

Fresenius Kabi! Rings a bell? It should, it was the first company that burst the bubble of MNC delisting hope story by opting for an offer for sale to reduce promoter stake. Basically, according to SEBI guidelines, promoters need to either cut stake to below 75% or delist the company. Fresenius Kabi had 90% promoter stake and was on top of the list of punters taking bets on top dollar delisting price.

Now take a look at the set of events. The stock first doubled from 85 in December 2011 to Rs 170 by April 2012 on hopes of deslisting. Then, the promoters opted for an OFS instead of delisting and the stock fell to Rs 80. The OFS took place at Rs 80 but what was interesting was that a large chunk of OFS was subscribed by 4 merchant bankers. RBS Merchant Bank subscribed 30.5 lakh shares, Macquarie bank 29.65 lakh shares, Morgan Stanley 25 lakh and Nomura another 23 lakh for a total of 1.08 crore shares.

Now this is not illegal, and at no point am I accusing any of the entities here but look at what the company is doing now. Its come out with a voluntary delisting offer with a floor price of Rs 130/share. I am not in the business of predicting these developments but if all these merchant bankers do tender at 130/share, that will go a long way in the company being delisted. Remember, with the current float of 19%, the company now only needs 9.5% stake to delist and keep in mind, it did an OFS of 9% to cut stake from 90% to 81%. Do the math here. Its far easier for company to accumulate 9.5% after having given 9% stake in an OFS to select entities than it was to garner 5% when the public float was 10%. And I won't be surprised if all those who were allotted shares in OFS actually do tender in delisting offer.

This stock was seen as undervalued at 180/share when delisting buzz was alive. Just imagine, what a daylight robbery it would be if indeed the promoters manage to delist the company at Rs 130/share. Is there anyone looking at the plight of minority shareholders? This is all being done within the law, but sometimes spirit of the law is ignored in just following the letter of the law.

My other fear is that once this delisting is through, this will provide perfect precedence to some other promoters on how to delist the company at throwaway prices.

IS THIS INFOSYS OR SOME MIDCAP COMPANY?

Let’s be blunt here. Infosys is not the respected company it has been. It does not deserve to be called an IT bellwether anymore and clearly the current management is absolutely no patch on the kind of leadership it had some years back.

Just imagine this kind of performance under Nandan Nilekani and Mohandas Pai. Even if they would have come with an occasional shocker, they would stand up to tough questions and not stand behind the comfort of their own corporate communication manager asking them silly and easy questions.

Look at the guidance. 6-10%. Why not 2-14%? That also has same median or even 0-16% for that matter? Let’s be clear here – Infosys guidance has ZERO meaning for the market now. It does not respect the current management and it should not do it in near future too.  And they haven’t declared EPS guidance because they have no clue on what will be their pricing, margins or anything for that matter. And what will be amazing? Expect TCS and HCL Tech to rub salt into their wounds over next 2 weeks by maintaining their standards (just like Infy maintained its standards).

And one word for the analysts too who keep saying this is a great, under-owned stock. Under-ownership? What under-ownership. The FII holding is at multi-year high, mutual funds have not sold much. The only selling has come from LIC and insurance companies which had their own reasons as I wrote in my previous blog.

But, my apologies to LIC – they turned out to be the smartest investors, even if it’s by default. They sold 80 lakh shares at around 2900 Rupees (something which the stock will not hit for at least 2 years)

Nine months back, I turned positive on Infosys. I had a strong feeling that it was coming out of a rut and a patch of outperformance was coming. I was right for last 9 months but today’s event has changed it all. The company has revised the clock backwards by a good 2 years and whatever confidence it built over the last 6 months has been destroyed.

Be under no illusion of stock finding bottom at 2300 or so. For me even if you assume an EPS of Rs 170 for Infosys, you should apply a multiple of 10-11x because this is now just another midcap kind of volatile companies which we have plenty of in this market. The stock doesn’t deserve to trade above 1700-1870 given the circumstances.

IS LIC BEING FORCED TO SELL BLUECHIPS?

Its Earnings season again, and as usual, companies are reporting the shareholding pattern changes to the exchanges and this gives data hungry people like me some fodder to feed on. So let’s get started. Of course, this is still early stages and we will get more data as and when more companies come out with this mandatory requirement.

Around 10 of Nifty 50 companies have reported this data so far and to me, what really stands out is the kind of selling LIC has indulged in.

LIC has sold nearly Rs 3,000 crore of their investment in 6 Nifty stocks – Infosys, HDFC Bank, HUL, Cairn, BHEL and Bank of Baroda. To be fair, out of these, it has actually added investments worth Rs 540 crore in India

The largest selling from LIC is in case of Infosys. The corporation has sold 80 lakh shares in April-June quarter worth Rs 2,200 crore. Of course, they made a bit of killing on it since the stock came out of a bit of a bear market post its earnings and had a one way rally from Rs 2,200 to around 2,900 and LIC had been accumulating some of these shares at very low prices.

LIC has also sold nearly 1.4 crore shares of HDFC Bank worth Rs 260 crore; 1.3 crore shares of HUL worth Rs 650 crore and as I mentioned earlier, has bought 1.8 crore shares in Cairn India worth Rs 540 crores.

What really stands out is LIC action on BHEL and Bank of Baroda. The corporation has sold shares worth Rs 400 crores in these 2 underperforming PSU stocks.

Now, like everyone else, LIC is in stock markets to make money, preserve profits and cut losses – so nothing sinister in it. But then, you associate LIC with really long term investing, especially in blue chips and any kind of selling will attract suspicion – more so with the market being so dependent on institutional flows.

The big question is – would LIC have still sold so much in secondary market if it didn’t have to face an aggressive Govt calendar of PSU divestment? And this question becomes important at a time when LIC is actually pleading with regulators to remove the 10% cap on company specific investments