Suashish Diamonds [BSE code: BSE: 526733] is engaged in import of rough diamonds, cutting and polishing the same and export of cut and polished diamonds. Yesterday company announced its intention to delist. See the announcement here Yesterday closing price was INR 200 and company announced indicated floor price of INR 230. Company shares trades under illiquid category so as per SEBI rules delisting price is based on “Other parameters including return on net worth, book value of the shares of the company, earning per share, price earning multiple vis-à-vis the industry average.” In simple words delisting price will be based on promoter’s honesty and willingness to pay fair value to minority shareholders.
Financials [all numbers from 31st March 2012 annual report, as company does not report consolidated numbers for its quarterly results]
It has a short term loan of 450crs, but also has investments [shares & debentures] of 330cr and cash of around 300crs. So effectively it’s a debt free company. FA turnover is above 14x which shows business is quite asset light. Over the last six years it has generated free cash flow [after tax, WC and FA] of more than 400 crs [This is after sudden spike in receivables & inventory in 2012 which resulted in negative OCF of around 150crs for 2012]. Current market cap of company is around 420crs and even at proposed delisting price of 230, implied market cap will be only 480crs, which appears to be quite less when compared to the FCF generated of more than 400crs in last six years. So on average FCF multiple is around 7x. Networth is around 730crs out of which fixed assets are less than 70crs and balance are reflected by liquid assets like cash, shares and working capital. So company is proposing to delist at less than 0.7x book value.
So is there a possibility of higher delisting price?
Don’t jump looking at above valuation. I do not think there is ANY POSSIBILITY of fair price getting discovered in this delisting. To me, it appears to be another case of ‘Mutually agreed’ delisting case like Fresenius Kabi Oncology [read here more on this], though I must admire Suashish Diamonds to be more sophisticated when compared to Fresenius Kabi Oncology.
Suspected Scheme [ or just my ILLUSION….]: Mere presence of Religare [ex-promoters of Ranbaxy] makes me jittery and may be enough reason to do EXTRA due diligence. Religare Fininvest holds 3.3% stake in the company and another 14 individual shareholders holds another 2% stake. For delisting, company needs to acquire minimum of 5.3% stake. Thus just 15 entities consent is enough to get the company delisted. As per my rough calculations Religare acquired its stake at around 130-140 per share. So even if they tender its shares at 230 per share, it will earn CAGR of more than 30% in less than 2 years or a flat return of more than 60%. On face of it, it may appear to be a genuine case and possibly there may not be any collusion between promoters and other entities. But there is a VERY HIGH PROBABILITY that with the help of these 15 entities company can easily delist at less than 0.7x its book value. Though, this valuation is not justified looking at huge FCF generated in the recent 5-6 years.
Failed delisting attempt of 2010: In 2010 promoters tried to delist at INR 220 [Effectively they agreed to raise price merely by 5% after two years though networth has increased by more than 18%] In 2010 when the company attempted delisting, MF together held 7.5% stake and the discovered price of INR 320 was merely 1.1x BV and 8x TTM PE, which was quite reasonable, but promoters refused to accept the discovered price. So this time when the INDEPENDENCE of these 15 entities is SUSPICIOUS, I do not think there is very high PROBABILITY of discovery of true value in delisting. It is possible that its just my ILLUSION and too much PESSIMISM. I think investment is a game of probabilities and in my view probability of higher price is very less , So better to STAY AWAY…..
1) Religare Fininvest acquired majority of its stake during Sept-11, when MFs which were stuck after its earlier failed delisting attempt, were eager to exit.
2) Despite huge free cash flow, company has not paid any dividend in the last four years. Company which has generated FCF of more than 400 crs in last 6 years, paid less than 40crs as dividend in the past 15 years.
3) Entire FCF over the years was invested [?] in NCD of real estate companies, partnership firms [on an investment of 270 crs, it earned profit of less than 4 crs. Merely 2% return] and other listed companies.
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