The Survey calls for widening of the tax base and prioritisation of expenditures. It also recommends increasing diesel and LPG prices, in line with prevailing international prices. It looks as if Chidambaram would present a fiscally prudent Budget tomorrow, says Nomura
The Economic Survey tabled in Parliament by finance minister P Chidambaram paints an optimistic picture of the Indian economy and holds out hope for the future. At least for tomorrow’s budget, the Survey suggests that the government will present a fiscally prudent budget, says Nomura in a research report.
Nomura said, “The survey paints a cautiously optimistic picture of the economy. We expect the government to project a fiscal deficit of 4.6% of GDP in FY14 from 5.3% in FY13”.
The Survey said, “Controlling expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG, need to be raised in line with their prices prevailing in the international market.”
Here are Nomura’s key takeaways from the Survey...
Growth has bottomed
The government expects real GDP growth to improve from 5% y-o-y in FY13 (year ending March 2013) to 6.1%-6.7% in FY14, supported by a normal monsoon and a further moderation in inflation, which should create space for further rate cuts. The Survey states that the “downturn is more or less over and the economy is looking up” and that the slowdown has been a “wake-up call for increasing the pace of actions and reforms”. We expect the focus to shift from spending on consumption to investment.
Fiscal consolidation is likely
The Survey states that the government will be able to contain its fiscal deficit at the revised target of 5.3% of GDP in FY13. The Food Security Bill is likely to add to the subsidy burden, but it is necessary from a welfare perspective, and therefore calls for improved targeting of subsidies. To make the medium-term fiscal consolidation plan credible, the Survey calls for widening of the tax base and prioritisation of expenditures. Further, the Survey recommends increasing domestic prices of diesel and LPG, in line with prevailing international prices.
Lower inflation to create space for rate cuts
The Survey states that WPI inflation is likely to moderate further to 6.2%-6.6% y-o-y by March 2013 from 6.6% currently. The Survey also expects moderate global commodity prices in 2013 and 2014 to aid a benign inflation outlook in FY14. The survey recommends curbing demand as an effective tool to reduce inflation in the short run. However, in the long run, it notes that measures to improve supply are the only way to have non-inflationary growth. From a monetary policy perspective, the Survey states that fiscal consolidation, demand compression and augmented agricultural production should lower inflation, giving the RBI (Reserve Bank of India) the flexibility to reduce policy rates. Hence, “a further shift in the policy stance of RBI…would be desirable.”
Gold imports need to be curbed to contain the current account deficit
The Survey states that in the near term the focus has to be on curbing imports, mainly by making oil prices more market-determined and curbing imports of gold. On capital flows, it recommends a greater emphasis on FDI and long-term FII flows. Specifically on external commercial borrowing, the document noted that it needs to be monitored carefully so that entities without access to foreign exchange revenues do not leave significant exposure unhedged.
Here are the highlights of the Economic Survey 2012-13...
According to the proxy voting advisory, there are not enough disclosures by the Piramals on promoter group entities and related party transactions and the rationale can also be achieved through inter-se transfer instead of the merger
Bengaluru-based InGovern Research Services has advised shareholders of Piramal Enterprises (PEL) to vote against the proposal to merge PHL Holdings Pvt Ltd (PHPL) with the company citing lack of rationale and business logic.
In an advisory note, InGovern, said, “Rationale given for this amalgamation can also be achieved through an inter-se transfer or a scheme of amalgamation at the promoter group level and does not suggest any specific business logic for PEL shareholders.”
PEL has issued a notice for a court convened meeting on 13 March 2013 for a composite scheme of arrangement and amalgamation under Section 391 to 394 read with Section 78 and Sections 100 to 103 and other applicable provisions of the Companies Act, 1956, between PHPL and the company.
PHPL is a company forming part of the Promoter Group of PEL and as of 31 December 2012, holds 48.73% stake in PEL. Post the merger, Sri Krishna Trust, a family trust of the Piramals, which holds 100% stake in PHPL, would directly get shares in PEL. Institutional investors hold 28.3% stake in PEL. Aberdeen Global Fund and Life Insurance Corporation of India (LIC) are the largest institutional shareholders in PEL with 9.37% and 3.23% stake, respectively.
PEL in the notice to its shareholders has not made sufficient public disclosures on PHPL or its step-down subsidiaries. On the face of it, the transaction seems to be a straight forward merger of a holding company with its listed subsidiary, where shareholders of PHPL will directly get shares in the listed entity PEL.
“However”, InGovern said, “a deeper scrutiny of PHPL reveals that the entity had entered into related party transactions with its step-down subsidiaries, which have now been merged with PHPL in October 2012, in the past three years. This raises concerns with regards to the current scheme of amalgamation between PHPL and PEL.”
InGovern said it looked at the filings made by PHPL and its step-down subsidiaries for the past three years in addition to the public filings and stock exchange filings made by PEL during this period. InGovern said it also approached the company for further details of the transaction but were told to visit the company for inspection of the documents and the same were not made available to the proxy advisory electronically. “The company has clarified that PHL Holdings will not have any debt in the books of PHPL as on the appointed date and that there will be no adverse impact on the financials of PEL due to the merger,” the report said.
“PEL should clarify to its shareholders the rationale for these past transactions and their potential effect due to these related party transactions on PEL shareholders if the current merger goes through. The company should also publicly disclose the financial documents for PHPL ending 30 September 2012 and 31 December 2012 as well as all scheme related documents, for greater public scrutiny,” InGovern said.
According to the proxy advisory, the rationale given (by PEL) for this amalgamation can also be achieved through an inter-se transfer or a scheme of amalgamation at the promoter group level and does not suggest any specific business logic for PEL shareholders.
Recently, PHPL transferred its shareholding in Piramal Life Sciences to Sri Krishna Trust through an inter-se transfer and the same can be used in this case instead of going for merger of PHPL with PEL, InGovern said.
“Given the backdrop of the related party transactions that have happened in the past between PHPL and its step-down subsidiaries, it seems as if the current merger might have been affected to cover up some of these past corporate actions. We urge the company to provide more clarification on the business rationale for such a transaction,” the proxy advisory said.
Investors of Shree Digvijay Cement Company were offered an extremely low valuation as the ownership was transferred from one company to another in a convoluted deal that made it look like an indirect acquisition. As expected, complaints made to the regulator remain unfruitful
A few weeks back Gujarat-based Shree Digvijay Cement Company (SDCCL), a 1.3 million-tonne (MT) capacity cement manufacturer, made a disclosure on the BSE website that its promoters Cimentos de Portugal (Cimpor), a Portuguese cement company, would be transferring its stake to Votorantim Cimentos (Votorantim), an unlisted cement company based in Brazil. What transpired in the previous few months makes this look like a simple transfer of shares as the promoters are of the view that this is not a direct acquisition but an indirect acquisition through the acquisition of shares of Cimpor. But in fact on looking deep into the events that transpired over the previous year, Votorantim gave up its ≈21% stake in Cimpor to acquire other assets owned by Cimpor around the world which included SDCCL. The worst part is, as brought to our notice by two investors of SDCCL, that in the open offer, shareholders of SDCCL were offered a valuation of just $22 per tonne (Rs10.94 per share) whereas other cement companies in that period with the same capacity were quoting a valuation around $100 per tonne. All this happened under the Securities and Exchange Board of India’s (SEBI) nose and with its approval despite repeated complaints by the investors. We contacted SDCCL for their response, however, no reply was received at the time of publishing this story.
Discrepancy in valuation
The open offer made by SDCCL was valued by Kotak Mahindra Capital Company. The offer price quoted was Rs10.94 based on some valuation metrics. As per Kotak, the offer price was at a premium of 12.3% to the volume weighted average price for the two weeks prior to the date of the public announcement (PA) and at a premium of 15.2% to the volume weighted average price for 60 days prior to the date of the PA. By the time of the start date of the open offer, the offer price was at a premium of just 2.72%.
In terms of a key valuation indicator for cement companies, the enterprise value per tonne, the valuation done by Kotak worked out to just ≈$22 per tonne against a benchmark of $80-$100 per tonne for smaller cement companies around that time. The valuation done by Kotak was extremely low especially for a profitable company with a low debt. Agreeably, the promoters chose an opportune time when the company was highly undervalued and the shares were poorly traded. We have looked at other acquisitions of this size.
As per a recent research report, by Avendus, Jaypee Group made a deal to acquire Andhra Cements at an enterprise value of around $85 per tonne in December 2011. In September 2012, Dalmia Bharat Enterprises acquired the 1.5 MT Adhunik Cement’s plant in Meghalaya at an enterprise value of $120 per tonne with a capacity utilisation of 50%. In fact, Cimpor, in December 2007, acquired SDCCL at a valuation of $160 per MT!!
A complaint raised to SEBI by one investor in July 2012 on this discrepancy was answered by the banker to the offer who coolly stated that the “Letter of Offer” (LOF) has been approved by SEBI. The LOF also states the transactions that take place which, though convoluted, states that the transaction is an indirect transfer through acquisition. However, on taking a broader view, at the end of the transaction Cimpor transfers its control of SDCCL to Votorantim—seems completely like a direct acquisition.
Indirect acquisition or direct acquisition?
In March last year, Camargo Corrêa SA (Camargo), which holds ≈33% stake in Cimpor, through a company controlled by it—InterCement Austria Holding (InterCement)—made an open offer for acquiring the remaining shares of Cimpor. Later in May, the Portuguese Securities Commission directed that the tender offer be revised to a mandatory tender offer. Through the mandatory tender offer InterCement came to acquire ≈40% of Cimpor. Therefore, Camargo directly and indirectly held nearly 73% stake in Cimpor. (See chart below)
Now comes the interesting part, these companies entered into a restructuring agreement, where certain assets held by Cimpor and InterCement would be swapped. Cimpor transferred some assets (from Morocco, India, Turkey, etc, which included SDCCL) to InterCement and the latter transferred 17 operating plants to Cimpor. This was the first transaction for asset swap. Then, InterCement would then transferred these assets received from Cimpor to Votorantim for Votorantim‘s 21.40% stake in Cimpor. Cimpor’s assets in Spain, Morocco, Tunisia, Turkey, India, China and Peru, as well as a 21.2% stake in Cimpor’s consolidated net debt were valued at 817 million euros by two independent investment banks, Morgan Stanley and Rothschild. A corporate announcement on Cimpor’s website states that the transfer of its assets from InterCement to Votorantim is outside its corporate sphere. Both InterCement and Votorantim are unlisted companies.
Therefore, Votorantim has direct control of SDCCL through this restructuring even though it did not make an initial acquisition offer for Cimpor. Now as the first acquisition offer was made in March, the open offer in SDCCL was triggered as per SEBI’s Substantial Acquisition of Shares & Takeovers (SAST) Regulations, 2011. However, the open offer was announced much later in June and soon after the restructuring agreement. This avoided two open offers being triggered, the first being the acquisition by InterCement and then the transfer to Votorantim. The regulator didn’t seem to mind.