e-Serve: Agreeing with investors

Citigroup is paying 27 times trailing earnings for e-Serve

e-Serve International's delisting experience shows that Sebi's new deslisting regulations work after all. The reverse book-building method, it seemed, was unviable as it was open only to shareholders of the company being delisted, and hence restrictive.

Left to themselves, it was expected that shareholders would often demand a price that would not be acceptable to the acquirer company.

In e-Serve International's case, Citigroup was willing to pay up to Rs 800 per share, but minority investors came up with a price of Rs 975 in the reverse book-building process. At Rs 975, investors were demanding a 54 per cent premium to e-Serve's last traded price before the delisting news was out.

As things have turned out, Citigroup has agreed to investors' terms. It would now have to shell out Rs 672 crore for the offer, 22 per cent more than the Rs 550 crore outflow it had envisaged earlier. Based on FY04 earnings, the valuation works out to 27 times.

But based on future projections, the valuation may not be much. The company has been scaling up operations at a fast pace (exports have grown 122 per cent since FY02 and now account for almost 50 per cent of sales), and since investors would now not be able to participate in the future growth story, it's only fair that they should be compensated accordingly.

Overseas bond yields

Although bond yields in the local market have risen rapidly, US bond yields are at four-month lows. Bankers say that the main reason behind spreads coming down is too much liquidity flowing into the US market after the Fed signalled the beginning of a rate tightening cycle.

Ironically, this led to a market flush with liquidity, pushing bond yields in the US down, rather than a firming up of rates. During the fortnight since July 30, the yield on the 5-year US treasury bonds has gone down from 3.78 per cent to 3.47 per cent while that on ten year bond has fallen from 4.56 per cent to 4.28 per cent.

Soft US economic data could have led to an improved outlook for bonds. Also, with much of America and Europe being in holiday season, the amount of the corporate paper floated recently has been lower. Therefore, too much liquidity is chasing too few instruments.

Indian paper in overseas markets is also quoting at softer rates. For instance, dealers point out that National Thermal Power Coproration which had raised 7-year funds at a spread of 210 bp over Libor is trading at 180 bp.

The spread in the case of Industrial Development Bank of India has come down to 175 bp from 185-190 bp during the time the funds were raised. This might be a window of opportunity for Indian corporates to borrow at fine rates overseas.

Tailpiece: It was not just analysts and the stock markets who were taken by surprise by the price cuts announced by Tata Steel and other steel companies.

At a press conference, B Muthuraman, managing director, Tata Steel pointed out that when they informed their customers their initial reaction was that Tata Steel had revised their prices upwards. Muthuraman said they had to be patient with their customers and repeat several times that they had in fact cut their prices.

Hindalco and Indal merger

Hindalco has announced a merger of all the businesses of Indal with itself, except for the aluminium foils division at Kollur in Andhra Pradesh. Hindalco had already acquired approximately 97 per cent stake in Indal and, as a result, Indal's results were included in its consolidated results.

Also, the marketing synergies between both companies have been more or less been effected and were reflected in the parent company's results. Hence analysts point out that all that the merger does is to enable the parent to save on administrative expenses as well on sales tax for inter-company transactions.

The aluminium industry is currently enjoying buoyant conditions "" average spot aluminium prices are about 22-24 per cent higher year-on-year and are expected to remain strong, given the sustained strong demand from the Middle Kingdom's industrial sector.

Indal is implementing an expansion of its smelter capacity to 100,000 metric tonne and this move is expected to help the parent expand its market share in the high end aluminium market.

Hindalco is a dominant player in most of the high end categories like rod, foils and extrusions. In Q1FY05, operating margin of its aluminium segment rose 306 basis points to 33.57 per cent, compared with a flat trend in margins for its nearest rival in the public sector, whose remained around 23.5 per cent.

With contributions from Mobis Philipose, Anindita Dey and Amriteshwar Mathur