Holcim: Differing valuations

The Holcim open offer values ACEL much higher than ACC

Holcim, for now, has stuck to the open offer price of Rs 370 for ACC shareholders. The ACC scrip is over the Rs 370 level, which means the market still expects Holcim to raise the open offer price.

ACC investors would be interested to know that shareholders of Ambuja Cement Eastern Ltd have got a much better deal with their open offer at Rs 70 per share.

Based on the open offer prices and the net debt positions as on March 31, 2004, the enterprise values of ACC and ACEL work out to roughly Rs 7950 crore and Rs 1,450 crore, respectively.

But ACC's production capacity is much bigger than ACEL's. On a per tonne basis, therefore, it has been valued at around Rs 4,350/tonne, 40 per cent lower than ACEL's valuation of Rs 7,250/tonne.

Needless to say, ACEL's valuation is much higher than the industry average. In dollar terms its valuation works out to around $166/tonne, compared to $100/tonne for ACC.

But just consider the $200 million Holcim paid the private investors who held 40 per cent in ACIL, the vehicle through which the stakes in ACC and Ambuja Cement Eastern Limited were held. On a per tonne basis, the payout works out to $116.84/tonne.

On a per share basis, assuming that the private investors' effective stake of 37.6 per cent in ACEL was valued at Rs 70 per share, it would mean that their effective stake of 5.53 per cent in ACC was valued at Rs 392 per share. The difference probably reflects the premium on the block deal.

Trent PCD-Value for money

Trent is using the PCD (Partially Convertible Debenture) route to raise about Rs 118 crore. Shareholders will get one PCD worth Rs 900 for every 10 shares held in the company.

Of the Rs 900 investment per PCD, Rs 500 will go towards investment in a non-convertible debenture, redeemable after five years. In lieu of the balance investment of Rs 400, the company will issue one equity share.

The current share price of Trent is Rs 565 and after accounting for the 10 per cent dilution in equity the price should theoretically be around 509 per share.

If current price levels hold at the time of the allotment, investors would make an instant gain of Rs 109, a return of 27 per cent. In that case, they would be effectively investing only Rs 391 in the non-convertible debenture.

With the NCD yielding 5.5 per cent on its face value of Rs 500, the effective yield on the investment of Rs 391 would be 7 per cent. In comparison, a five-year fixed deposit with a bank would fetch only around 6.25 per cent.

There's more. Subscribers to the PCDs will also be issued a warrant, which will give them the right to buy one share (per PCD) against a payment ranging between Rs 650-750 per share in the third, fourth and fifth year after allotment. This gives room for further upside.

At current levels, Trent is valued at around 25 times estimated FY06 earnings, which is not inexpensive. However, given that the retailing industry in India has enormous potential for growth, the stock is expected to continue enjoying a high earnings multiple. There could be further upside should the government allow foreign direct investment (FDI) in the retail sector.

Tata Power

Tata Power Company Ltd (TPC) has launched a $200 million, 5 year, 1 per cent coupon FCCB offering. The FCCBs are convertible at a 50 per cent premium to the stock's closing price on February 8, with a yield to maturity of 3.88 per cent, compounded semi-annually.

Earlier, Reliance Energy had has issued a five year zero-coupon FCCB aggregating US$ 178. 058 million. (approximately Rs. 800.19 crore).

These bonds had a conversion premium of 30 per cent to the prevailing market price as on 1 March, 2004, and a yield to maturity of 2 per cent.

A pick up in US interest rates coupled with a higher premium on conversion, has led to a higher YTM for the Tata Power issue. The Tata stock however, ended down 0.6 per cent in Wednesday trading.

The funds raised are to be utilised by TPC for the setting up of a 1000 Mw coal-fired power project in Vile, Maharashtra and for the proposed 1000 MW thermal power project, planned with Damodar Valley Corporation.

Clearances for the Vile project are still awaited. TPC had earlier declared a 25.59 per cent drop in its net profit to 137.27 crore, largely due to MERC's earlier order which had reduced tariffs by about 12.4 per cent.

However, the company is expected to perform better going forward, given its on emphasis on expanding capacity "" its power plant at Jojobera with 120 MW capacity is expected to be fully operational by September.

Also it has been working on improving the fuel mix in a bid to control costs coupled, with its divestment of non-core assets like Tata Petrodyne for Rs 360 crore.

With contributions by Mobis Philipose, Shobhana Subramanian and Amriteshwar Mathur