GTL debt restructuring analysis-investors still at risk

When the GTL debt restructuring was announced, the GTL stocks had rose around 20%-40% in anticipation of a sweetheart deal and some opportunity for equity holders to salvage something. But the debt restructuring details contained in the postal ballots(http://www.moneycontrol.com/livefeed_pdf/Feb2012/GTL_Ltd_160212.pdf and http://www.moneycontrol.com/livefeed_pdf/Feb2012/GTL_Infrastructure_Ltd_160212.pdf) do not inspire much confidence for equity investors to accumulate their position. My reasons for stating this are given below.

1. GTL Infra has outstanding FCCBs of $228MM, redeemable @40% premium in Nov,2012. Though the company is in talks with the holders to restructure those FCCBs, the outcome would merely mean significant dilution given that the conversion price is far above the existing market price. Of course, since the banks have agreed to convert 25% of their debt into equity, the FCCB holders may follow suit but I would not bet on it. 
2. The banks have a conversion option on their debt in case GTL Infra/GTL Limited default on the repayment as per CDR LoA. This increases dilution risk, and it is not very clear whether SEBI will allow favourable pricing to the banks in future. This would lower the potential upside for the stockholders, as banks would prefer conversion later on. We need more clarity on this.
3. Dilution is significant under the CDR. I applied the pricing as per the SEBI ICDR Regulations 2009, and my estimate came to Rs 11.8 for GTL Infra, and Rs 53 for GTL Ltd taking the stated record date. I assumed that the conversion price would be same for the next two tranches BUT since that is taken on trailing six months basis as per SEBI norms, it may be higher(thus reducing dilution later). But banks seem to have wanted maximum conversion upfront under the existing lower prices. Interestingly, even the market seems to have converged to that price, but the shares increase alone will be around 70%-100% for both companies, diluting existing shareholders.
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5. GTL/GTL Infra have, in anticipation of the CDR, reversed certain interest expense and charges, thus making credit analysis tougher and complicated. 
6. As if the holding structure was not tough already, the GTL promoter got back his shares from ICICI in return for some debt returning to CNIL's books. This really complicates further analysis till a balance sheet is available, which would take till June at the bare minimum. If only proforma balance sheets were mandated by SEBI!

Hence, due to the complexity of the whole deal and the limited upside(read my earlier posts on GTL group companies where I felt it was fairly valued), investors can seek better opportunities.

SP Tulsian's buy on GTL Infrastructure-justified but for the wrong reasons

Whatever the grand old king of Indian stock markets(SP Tulsian) says makes news, so his comments on GTL Infrastructure was no different. You can read them below but the basic rationale was that the asset value of the towers would be more than enough to cover the debt and leave 60% odd upside for shareholders. 
http://www.moneycontrol.com/news/market-outlook/sp-tulsianpowerinfra-stocksgtlaptech_637010.html

This company triggered quite a few red flags from my side namely

1. Since the promoter(Manoj Tirodkar) was caught up in the Ketan Parekh stocks(K10) earlier and the other stocks involved like Satyam/Cybermedia etc have gone nowhere/crashed. So call it poetic justice or whatever, maybe this was come back time
2. the company has been in CDR since Aug-11. The results are yet to be announced formally.
3. Income Tax authorities raided the company(search) in Oct10 but the company claiming it subjudice did not make any provision in its accounts, which were finalized In Nov11. But on Dec20(2011), the Minister of State of Finance gave a written reply on the floor of the Lower House, that GTL Infra had admitted concealing taxable income of Rs 500.65 crores. Now, they have deferred tax of Rs 67 crores(standalone basis) or Rs 167crores(on consolidated basis). But India not having group taxation, even setting of Rs 67 crore deferred tax asset against that loss, it would still amount to a tax liability of atleast 20% of Rs 400 odd crores=>Rs 80 crores, to say nothing of a penalty which can extend to 3x taxable income. This episode raises issues of WHY did the company not provide for this in accounts despite offering that income for tax. Either GTL or the company is lying If the latter is true, it does not reflect well on the governance.
4. Hard to access investor relations site: When I clicked on the links to download latest annual report/IR ppts, there was an error in both chrome and mozilla. Plus they have this weird norm of having the user enter his details for every download! Not good
5. Delayed annual report/finalization of accounts:-The annual report was finalized only in November last week, and can be downloaded here(http://www.bseindia.com/bseplus/AnnualReport/532775/5327750311.pdf). Makes interesting reading especially the consolidated accounts, which remove the complicated group structure that lead to off balance sheet debt
6. As the table below shows, even at these low valuations, GTL Infrastructure commands an EV/EBITDA multiple comparable to the best in the industry-mature USA operators. It is doubtful whether the industry economics justify an higher multiple for GTL. So even on a deal related valuation, one should check chance of upside

The above points would show that on an asset play basis, the company would face tax, and paying the old tax arrears. Plus lured by the sale proceeds, the taxman may increase the penalty to the maximum permitted by discretion.

However, the positives for the stock are, on a going concern basis

1. Some towers(company does NOT disclose how many) are under construction, and will add to the EBITDA when operational. The figure of 32,650 towers includes work in progress too.
2. When they had purchased towers from Aircel at EV of Rs 43 lakh/tower, Aircel had promised GTL 20,000 tenancies @ Rs 3.5lakh(approx) per tower for 3 years viz=>Rs 700 crores/year for 3yrs=>Rs 2100 crores tenancy. Of that, Aircel has fulfilled only 10% of that commitment. As the gross margins are very high in the industry, the more Aircel fulfills that commitment, it will be pure gravy to the bottomline. For example, even 200 Cr/yr from Aircel EBITDA would give a huge valuation boost to the company! But this depends on how effectively GTL can enforce the deal. Expect Aircel to try wriggling out. Some legal battles would be interesting here.
3. Banks own nearly 20% of the company after invoking promoter's pledge. Hence, the CDR will hopefully not squeeze the shareholders too much

Bottomline:-The stock appears interesting but unless the governance cloud is settled, very risky. At the Dec27th AGM, I intend asking some directed questions to decide what to do next.