Sah Petroleum – Why this GENEROUS gift to MINORITY shareholders?

Summary

I have covered the stock in detail here. Recently, company has announced GENEROUS bonus issue in the ratio of 23 shares for every 19 shares held by minority shareholders to meet the SEBI regulations on minimum public shareholding norm. Infact promoters stake will be reduced from 89% to 75%. At the current market price of INR 24, adjusted for bonus issue, one can acquire shares at around INR 11 per share. As on Mar-2013, company has net cash per share of INR 11.6. Despite the fact that now Sah petroleum is trading below liquidation value I have decided to exit the stock completely before ex-date of bonus for three key reasons 1) Bonus issue by promoters indicate VERY LOW PROBABILITY OF EXIT IN NEAR FUTURE 2) Recent change in board of directors indicate HIGH PROBABILITY OF FULL BLOWN WAR BETWEEN PROMOTERS 3) Entry of short term investors and steep depreciation in INR indicate the HIGH PROBABILITY OF STEEP DECLINE IN PRICE post ex-bonus date.  See the mind mind summary here and here.

Reasons in detail

Bonus issue: I could not understand why company decided to go for bonus issue instead of delisting or IPP or rights issue or for that matter any scheme like Gokaldas Exports or Gillette India. But the point that they decided to go for bonus issue indicate the possibility that they do not see the possibility of EXIT FOR MORE THAN TWO YEARS or in promoters view possibility of finding a suitable buyer is VERY SLIM. Else they might have borrowed money from the market and go for delisting. Even if they valued Sah petroleum at generous valuation of 1.6x BV or 7.5x EBITA, they needed just 26 crs for delisting [Cash & Cash equivalents available with company is around 55crs.]

Possibility of dispute among promoters: One thing which always puzzle me is that despite acquiring 62% stake in the company, Navis group has left the top management and board intact and has merely introduced ONE nominee director on the board. There was no change even in auditor. But in March 2013, board was recast totally. Two existing independent directors resigned and two more nominee directors and FOUR more independent directors were inducted on board. My GUESS is that the independent directors were inducted on INSISTENCE of NAVIS group.  As per Shareholding agreement, Navis group had always enjoyed right to appoint MAJORITY OF NON-INDEPENDENT directors, but that right was exercised after five years. It appears to be that Navis group might also attempt to change top management. As per the open offer document, Sah group enjoys certain RIGHTS TILL THEY CONTINUE TO HOLD 8.3% STAKE IN THE COMPANY. Now what are these ‘OTHER RIGHTS’ are not very clear in the offer document of 2008. There is a possibility of a FULL BLOWN WAR between Sah group and Navis group and strategic sale might get put on hold for extended period of time. Going by experience of JRG securities, in case of dispute between promoters, business will be impacted adversely and legal remedies will be of no use. [This risk was always present and the rumors of tension between promoters are going on for long time, but the drastic change in board of directors reduces my comfort level]

Steep depreciation in INR and entry of short term investors: I GUESS that the bonus issue has attracted lot of short term investors who plan to EXIT ex-bonus. But the question is WHO WILL BUY EX-BONUS AND WHY. Even cum-bonus price could not rise above the net cash value. Over the last quarter INR depreciated by more than 10% and Sah petroleum holds around INR 160cr in trade payable which are denominated in USD. In the past company had rarely hedged 100% of its exposure. So there is high probability that next two quarter result will be impacted adversely by FX losses and high raw material prices. When all the short term traders try to EXIT together in face of weak results, share price can decline steeply. 

To be frank, there is not a one point which in ISOLATION might justify the EXIT, but taken together all the above points indicate to me possibility of no stake sale for EXTENDED PERIOD OF TIME and STEEP DECLINE IN PRICE post bonus. There is an equal probability that price may not decline and one may be able to exit at decent profits. But I never acquired shares with that purpose.  As Ralph Wanger mentioned in his book “Zebra In Lion Country”, “Have a reason for buying every stock you own. As soon as that reason comes into doubt, ask yourself if it isn’t time for a change”. My reason for buying was realization of value on exit of Navis group within next 2-3 years and this has come under doubt now. I think when in doubt its better to sell.

Disclaimer

  • All the posts on this blog, including this one, are for educational and discussion purposes only.
  • None of the material posted should be regarded as advice to buy/sell any stock. I do not have any proven stock performance record to talk about.
  • As a professional investor, I may have positions in stocks discussed.
  • Main objective is to seek contra views and not to recommend any particular stock as buy or sell.
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One Response to Sah Petroleum – Why this GENEROUS gift to MINORITY shareholders?

  1. Pingback: Amitabh Singhi: Follow Graham to Survive | Contrarian Edge

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