The market leader says it plans to transfer its units to a subsidiary in which Roquette Freres will be the majority stakeholder
When, or rather, why does a winner quit? Shareholders of starch and starch derivatives giant Riddhi Siddhi Gluco Biols Limited are pondering over this question.
Riddhi Siddhi, the market leader in India and the largest exporter of starch and starch derivatives, has decided to transfer all its units to a subsidiary in which French company Roquette Freres will be the majority stakeholder.
But what prompted the company to take this decision so suddenly? The shareholders don't have a clue. They are not happy about it, and have accused the company of cheating them.
Indian Air Force group captain, MP Surange, who has a minority stake in Riddhi Siddhi, said, "The promoters of the company are in the process of selling the assets to a French company in a manner that the entire proceeds will flow into the corpus of the promoters, with very little or no benefit to the minority holders."
Some days ago, Ganpatraj Chowdhary, managing director, Riddhi Siddhi said in a television interview, "Among all the manufacturing units of Riddhi Siddhi, three of them will be tasked to the subsidiary company. Roquette will take a majority stake in this subsidiary company. The enterprise value is estimated approximately at Rs 1,250 crore." Roquette Freres, which already has a 14.96% stake in the company, will initially have the majority stake, and may then move up to a 100% stake. Mr Chowdhary said the deal would take around six to nine months to be completed.
While the management is glowing, shareholders are puzzled by the lack of communication from the company on this decision. The Riddhi Siddhi stock, which was trading at about Rs500 levels end-October has dropped to Rs350 levels now in just two months and this is giving minority shareholders sleepless nights. Now, no one knows how the valuation money will be distributed among the stakeholders.
According to a financial analyst with a reputed firm, "The move will definitely affect shareholders adversely. If there is no communication from the promoters and no indication on how the money will be distributed, there is room for confusion and suspicion. This, in turn, will affect the goodwill of the company."
Many shareholders don't understand the rationale for giving up a very profitable business. That too, when the company is the market leader with a more than 35% market share. Mr Chowdhary claimed on television, "We are confident of receiving Rs1,000 crore turnover for the current year, with the EBITDA margin of 20%. We are expecting EBITDA for the current year to be around Rs200 crore-plus."
Generally, companies that sell a majority stake in the unit use the funds for new ventures. What has Riddhi Siddhi planned? The management was not available for an answer.
Earlier last year, Dutch paints and chemicals manufacturer AkzoNobel sold its National Starch arm to American Corn Products International (CPI). Now with Roquette Freres' making a move on Riddhi Siddhi, other companies may follow.
Even experts, who are optimistic on the sector following the entry of foreign MNCs, agree that selling off a profitable business is baffling. Will Riddhi Siddhi sort out the matter with stakeholders in the coming six months? Looks unlikely.
Yet another strong quarter from TCS leads to upgrades; Axis overcomes asset quality and margin concerns; order booking weakness a major worry for L&T
Tata Consultancy Services (TCS)
The dollar revenue for the country’s top software services exporter, was exactly in line with estimates at $2.14 billion, up 7% quarter on quarter (q-o-q). Revenue in rupees was about middle of the expectations spectrum at Rs9,663 crore, up by 4% q-o-q.
Business in North America grew by 7%, in the UK by 12%, and in the Asia Pacific by 19% q-o-q. The Banking, financial services and insurance (BFSI) segment grew by 8% and retail by 7%. Volume growth was strong at almost 6% and pricing showed some improvement.
TCS has outperformed Infosys Technologies—the country’s No.2 software exporter—for the seventh consecutive quarter on year-on-year EBITDA and net profit growth.
EBITDA margins improved to above 30%, partly aided by bad debt reversals; the margins gap between TCS and Infosys is now only about 300 basis points against a peak of 830 basis points two years ago. Margins have risen as a result of better sales productivity and control of manpower costs.
Net profit was much higher than expected at Rs2,330 crore, up almost 11% q-o-q.
Other positives include broad-based growth (except in telecom), a pick-up in clients’ discretionary spend and a positive commentary on the deal pipeline and pricing outlook.
The fact that TCS hired over 20,200 people (over 7,700 lateral hires) in the quarter (after hiring nearly 19,300 people in the previous quarter) suggests that it is preparing for a big year ahead. Attrition has come down from 20% in the second quarter to 17%.
Net interest income beat the higher end of the expectations spectrum. Provisions were almost 16% lower y-o-y.
The CASA (current account savings account) ratio improved q-o-q but it was still lower y-o-y. Profit also beat the higher end of the expectation spectrum.
Asset quality improvement and margin expansion were the highlights of the quarter. Net interest margin (NIM) was at 3.8%, up 13 basis points on the quarter, against expectations of flat to slightly lower margins.
Fresh slippage ratio (as a percentage of previous years’ loans) moderated to 1.6% (compared to 2.2% in the past two quarters). Loan book growth was at 46%, again slightly higher than expectations. Over the next few quarters, loan growth could moderate as the bank grapples with a high base.
Fee income growth at 21% was good. This came mainly from the large corporate segment (up 36%) and retail banking (up 21%). But fee income from business banking, capital markets and agri/SME banking continues to be under pressure. A slight concern is that in recent quarters the gap between fee growth and loan growth has been expanding, with fee growth lagging loan growth.
Treasury profits were at Rs130 crore, up from Rs110 crore in the second quarter, and came in mainly from fixed income portfolio.
Larsen & Toubro (L&T)
Revenues came in much higher than expected for the country’s biggest engineering company. Net profit was also above the higher end of expectations. However, margins were much lower than expected due to a huge increase in the cost of goods and services.
Raw material costs went up 73% on year, subcontracting charges were up 39% and construction material charges were up 32%. Margins were also impacted as for some orders execution had started but had not entered the ‘margin recognition phase’. Most brokers expect margins to pick up at least slightly in the next quarter.
Order booking was a major disappointment, down 25% y-o-y and 35% q-o-q. Even so, L&T has maintained its full-year inflow guidance of 25% with caveats of slippages in FY12. The company said that a lot of the expected orders are likely to be booked only in March 2012. L&T said various scams, split up of large projects, politics, land acquisition issues and delay in allocation of coal blocks were some of the reasons for order bookings getting delayed.
The order backlog is up 26% on year and flat on the quarter. The current order backlog is probably enough to provide revenue visibility for a couple of years.
Infrastructure and power are likely to have contributed a larger chunk of L&T’s segmental revenue in the third quarter compared to the first half, believes institutional brokerage Kotak. The share of oil and gas would also have increased substantially.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)
Before the initial public offering, analysts and the CIL management were speaking of increased production and higher prices for the company’s products. However, the story has changed dramatically now
Coal India Ltd (CIL) had raised a whopping Rs15,000 crore through its initial public offering (IPO) in October last year, citing rising production and increasing prices, ambitious expansion plans, a strong balance sheet and a‘5/5’ rating.
But now, just two months after the public offering, CIL is talking about a fall in production, due to a moratorium enforced by the Ministry of Environment and Forests (MoEF) in granting clearances for mining projects in critically-polluted areas.
Besides, with inflation worrying the government, will CIL’s proposals for a price hike be accepted by the powers-that-be?
Citing Partha Bhattacharyya, chairman and managing director (CMD) of CIL, brokerage house CLSA says, “The CMD highlighted the risk of a shortfall in production targets due to a moratorium enforced by the MoEF in giving clearances for mining projects in critically-polluted areas.”
“The Comprehensive Environmental Pollution Index (CEPI) was supposed to be reviewed in October, but it has been extended till March. As a result, we clearly estimate an impact of 16 million tonnes (MT) in reduction this year (on production),” according to wire agency PTI, which quoted Mr Bhattacharya.
CIL has set itself a production target of 260.50MT in 2010-11 and it plans to produce 486.50MT of coal in 2011-12.
This disturbing news, surfacing just two months after the IPO, clearly indicates once more how rating agencies and broking firms do not look at each and every aspect of a company before making their ‘recommendations’. Agencies such as CRISIL Research and ICRA (an associate of Moody’s Investor Services), and others, assigned IPO Grade ‘5/5’ to CIL—and recommended a ‘buy’ on the public sector coal major, citing the ‘strong’ fundamentals of the company, but they did not bother to pay attention towards the true nature of operations of CIL See the earlier Moneylife article: (http://www.moneylife.in/article/4/10241.html).
The company has been accused of violating various environmental norms, a number of times. CIL’s very nature of operations is extremely risky, and has always been under the radar of the MoEF. But it was just a matter of time before the MoEF clamped down on CIL.
Since environment minister Jairam Ramesh took over the MoEF portfolio, CIL has been facing stiff opposition for its current and future projects. Mr Ramesh is strongly recommending that “dense” forests should be declared ‘no-go’ zones for mining, which will surely affect CIL’s production plans. The ministry of coal has been seeking Cabinet permission for more than 200 coal blocks. However, the MoEF has stuck to its guns.
The MoEF introduced the ‘no-go’ prohibition norms, under which mining is not allowed in areas with over 30% gross forest cover (or 10% or more in ‘weighted’ forest cover).
Before the company’s IPO was launched, research and rating firms were betting that the company would be able to hike prices three to four times over the next few years due to a proposed ramp-up in production. However, now the fall in production is poised to weigh down the company’s balance sheet. Mr Bhattacharyya, in an interview to a television channel, admitted that coal production would grow merely by 1.2%-1.3% and sales would go up by a measly 3.5%-4% till September of this year.
The company is also in not in a position to hike prices of coal to maintain its margins; any hike will increase costs of power generation—among other services—stoking inflation even further.
With CIL planning to increase the share of washed coal in the overall mix significantly over the course of the next few years, the fuel bill would rise further for coal companies.
The company is also expected to increase salaries of its employees by June this year. These expenditures will obviously dent profit margins—even as sales may not grow.
Though CIL feeds the country’s energy requirements, a question has risen over the quality of its produce.
According to the Geological Survey of India, as on 1 April 2010, the inventory of total coal resources in the country were 276.81 billion tonnes. However, out of these reserves, only 39.67% are in the ‘proven’ category, while the balance comes under the ‘inferred and indicated’ category, according to an answer provided to the Lok Sabha by the minister of state for coal, Sriprakash Jaiswal.
The Indian steel industry largely depends on imports of coking coal, as the quality of coal produced by CIL indigenously is quite inferior in comparison to these imports.
As Moneylife has reported earlier (see above link) CIL is one of the largest state-owned companies in the world, but its operations are spread over Jharkhand, Chhattisgarh, Orissa (areas where development has lagged behind the rest of the country) and in Andhra Pradesh (currently beleaguered by political turmoil) and West Bengal.
CIL has a history of illicit mining and has been targeted by the so-called ‘coal mafia’ and Naxalites. The company has been fighting various court cases. One of them involves a case alleging corruption involving a former managing director of the company.