Sunday, February 26, 2012

Amrit Corp/Amrit Banaspati-still not deep value post Bunge edible oil buyout

As a former investor in Amrit Banaspati, I still track the edible oil sector occasionally, and remembered the Amrit Group with fondness due to the wealth they have created post the family demerger into three companies(Amrit Corp/Amrit Banaspati & ABC Paper-the last one is owned by a different branch of the family). The promoters of Amrit Corp and Amrit Banaspati did seem focused on their edible oil and dairy businesses respectively. Imagine my surprise then, when I read the announcement of Bunge(the same Bunge of the global agribusiness giant ABCD but I digress). In that, Bunge purchased the edible oil business as follows in two connected transactions, which closed in Feb12
  1. Edible Oil plant/brands from Amrit Corp for Rs 220 crores cash, and assuming the debt of Rs 40 crores and letting them keep Rs 25crores cash=>Rs 285 crores deal value in all. Structured as a slump sale under tax laws, leading to a profit of Rs 231 crores for tax purposes over book value
  2. Purchasing a brand from Amrit Banaspati for Rs 104 crores. Structured as a straight assignment
The share price did shoot up, but way below the implied deal values. I decided to understand why, and delved into the transaction details and post deal balance sheets, resulting in the table below for which I
  1. factored a tax rate of 20% for both transactions
  2. Did not assign a value to residual fixed assets/business assuming them to be loss leaders. That assumption seems fair since Bunge would have purchased the core of the business anyway.
  3. Did not do simultaneous equation for Amrit Corp's 23% stake in Amrit Banaspati, instead just took the value at mcap without holding company discount.

The above upside would come only
  1. IF the promoters can return the cash(unlikely since they own 70% and would prefer to take it out in other means rather than incur 19% dividend distribution tax) OR
  2. If they can grow the money at an ROE exceeding the opportunity cost of shareholders(WACC)
Both options seem unlikely, and for such a slim margin, buying into these companies does not seem worth it. Another classic example of a cash trap/value trap and holding company discount. 

No comments:

Post a Comment