Perfect match

Swedish Match's open offer price is well above fair value

ITC has acquired a 74 per cent stake in leading match company, Wimco, through its 100 per cent subsidiary, Russell Credit Limited.

Besides, it has also bought preference equity worth Rs 92 crore in Wimco and in Wimco Boards (Wimco's subsidiary) from Swedish Match.

ITC hasn't disclosed the price at which it acquired the equity stake from the Swedish Match group, but it would be substantially lower than Wimco's current share price of Rs 56 a share.

Although Swedish Match has sold its stake to ITC, it still has to honour Sebi's requirement of a 20 per cent open offer to minority shareholders, which came into the picture when Swedish Match raised its stake to 74 per cent (from 52 per cent) by buying out the Jatia family in July 2000.

Sebi had fixed the offer price at Rs 35 per share, apart from which there was interest payable at 15 per cent per annum from September 2001. The interest accrued till now is Rs 24.24, making the offer price Rs 59.24 per share.

But the true value of the company would be far less, since things have been going from bad to worse. On a consolidated basis, Wimco's reserves stood at a negative Rs 83 crore at the end of FY04. In FY05, things got worse, with operating loss increasing to 5.9 per cent of consolidated revenues, from 1.2 per cent in FY04.

The reserves position didn't get worse, thankfully, since the company reduced the paid up value of its equity by Rs 46.8 crore. But reserves still continue to be negative at Rs 43 crore on a consolidated basis.

It's important to note here that a big chunk of the accumulated losses now pertain to Wimco's subsidiary, Wimco Boards, which had made a failed attempt at setting up a paperboards manufacturing unit. Post the reduction in the paid up value of its equity, Wimco's match business had negative reserves worth only Rs 9.5 crore.

Although the acquisition is tiny compared to ITC's overall size, its own matches business will get a boost from the additional capacity. From investors' point of view, the current open offer price is rather attractive.

Any hopes of ITC paying a higher price when it makes the delisting offer later may not materialise since ITC won't be constrained like Swedish Match which also has to pay an interest component.

Polymer price hikes

The price hike made by Reliance Industries Ltd (RIL) for its polymer products repertoire are by and large lower than the recent hikes seen in the international market.

For instance, polyethylene prices have been raised about 7.5 per cent and for polyvinyl chloride the rise was 7.3 per cent vis-a-vis an approximately 9.5 - 10 per cent jump in international polymer prices over the last three-four weeks, point out analysts.

The main reason for higher polymer prices is the surging price of naphtha "" the price of this input has jumped about 5.7 per cent in the international market in June alone.

In earlier quarters, higher polymer prices had led to reduced demand but this time, strong demand from user industries is expected to ensure adequate offtake from petrochem players.

RIL has also hiked prices of partially oriented yarn (POY) and polyester staple fibre (PSF). Margins in the POY business are currently at about Rs 20 per kg compared with Rs 16.64 per kg in Oct '04 and are expected to improve further, going forward.

That's because global supply is expected to lag demand between CY '05 to CY '07 "" global demand is set to increase by over 8 per cent, while capacity is set to expand by only 7.5 per cent, say analysts.

In addition, increased pressure on Chinese textile companies to reduce exports to the west is expected to result in Indian players demanding increased quantities of PFY.

IDFC public float

Perhaps the most important point about IDFC's initial public offer-cum-offer for sale is that it is a play on the potential for infrastructure development in the country.

That potential has led to a 60 per cent growth in the company's outstanding infrastructure loans in FY05. The company's loan book is now almost ten times its investments, and in FY05, interest income from infrastructure operations was Rs 529 crore, while total income from treasury operations was Rs 36.8 crore.

While cost of funds in FY05 was 6.5 per cent, the company points out that it isn't at a disadvantage compared with banks, because it doesn't have the branch network and administrative overheads that banks have. IDFC's Return on Assets, at 4.48 per cent, is well above that of banks.

Nevertheless, spreads have been declining""""from 3.82 per cent in FY04 to 2.4 per cent in FY05. Net interest margin in FY05 was 4.01 per cent, well below the 6.32 per cent in the previous year. Net interest income too was lower in FY 05. And although the company's net NPA is zero, infrastructure projects have a long gestation period, and IDFC's portfolio is not "seasoned."

Also, while net profits for FY 05 was Rs 304 crore, Rs 111 crore of that was on account of profit on sale of investments in infrastructure companies. That could, however, be a recurring item, given the unrealised gains of Rs 220 crore in the company's balance sheet.

At 12.5 times FY05 earnings on post-issue capital at the top end of the price band, the issue is not expensive. With a pre-issue capital to risk assets ratio of 28.65 per cent, there's plenty of scope to increase lending, and the proceeds from the fresh issue will add to that. And, at the end of the day, it is higher lending volumes that will drive growth at IDFC. The issue should have no difficulty sailing through.

With contributions from Mobis Philipose and Amriteshwar Mathur