Videcon Intl: Optical illusion

Videcon Intl minority shareholders unlikely to benefit now

Videocon International shareholders will get one share of Videocon Industries for every five shares they own. But it's still a mystery what percentage stake they will own in the merged entity, what with an abundance of merger and acquisition activity happening in the group.

After announcing the acquisition of Thomson's tube manufacturing units for Rs 1,265 crore late last month, the Videocon group has now announced the acquisition of Electrolux's Indian operations.

What's interesting about these deals is that both Thomson and Electrolux are reinvesting proceeds from the sale into Videocon Industries, which will be the group's flagship company after all the M&A activity is completed.

Videocon Industries' current equity stands at 4.04 crore shares of Rs 10 each, which includes its recently completed GDR issue, representing 0.75 crore underlying equity shares.

Further, Thomson will be issued 2.7 crore GDRs (representing 2.7 crore equity shares) and Electrolux will subscribe to 0.94 crore GDRs. Put together, Videocon Industries' equity base will expand to 7.68 crore shares.

The company's equity would expand further to 9.33 crore shares, after Videocon International's merger with it. Based on this number, Electrolux should have got a 10 per cent stake in Videocon Industries' post-merger equity.

Electrolux has, however, announced that it will end up with a stake of only about 5 per cent in the company, which means that Videocon Industries' equity after all the M&A activity would be close to 18.8 crore shares.

It turns out that Videocon Industries would also merge with Petrocon India Limited, which holds a 25 per cent stake in Raava oil fields in the Krishna-Godavari basin that gives an output of about 50,000 barrels of oil per day at a very low operating cost.

This also gives net cash accruals of more than Rs 400 crore per annum, according to Videocon.

Assuming that Electrolux would get a 5 per cent stake in Videocon Industries through the 0.94 crore shares it holds it appears that additional shares amounting to 9.5-11 crore shares would be issued at the time of the Petrocon merger, depending on whether the 5 per cent stake that Electrolux refers to is pre- or post-merger.

Considering that Thomson got a 14 per cent stake through its acquisition of 2.7 crore shares in the company, it looked like the Petrocon merger had added 12.5 crore shares to the company's equity.

Since Videocon Industries' equity has expanded by such a huge extent, what it means for Videocon International shareholders is that they would end up with a minuscule stake in the merged entity.

To be precise, minority shareholders in Videocon International who had a 55.5 per cent stake in the company's diluted equity would end up with only a five per cent or so stake in the merged entity.

True, the minority shareholders now own a stake in a larger pie, but it remains to be seen whether the pie will be big enough to compensate for the drop in the share.

On a stand-alone basis, Videocon Industries had a net profit of only Rs 3.18 crore in the nine months ended March 2005. In the same period, Videocon International had a profit of close to Rs 150 crore, of which minority shareholders had a share of Rs 83 crore (55.5 per cent stake post the issue to Thomson).

On an annualised basis, this works out to a profit share of Rs 110 crore. With a 5-odd per cent stake in the combined entity, annual profit of the combined entity would have to be more than Rs 2000 crore, for current minority shareholders of Videocon International to have a profit share of Rs 110 crore.

For the near term, that's highly unlikely.

Varun Shipping

Shipping freight rates in the spot market have eased considerably over the past few months. Varun Shipping, which was first off the block, has, however, beaten forecasts and reported a 16.84 per cent sequential growth in its operating profit to Rs 63.89 crore in the June quarter.

As a result, the stock gained about 5.25 per cent, in marked contrast to the 1.95 per cent fall in the broader market on Thursday.

Varun Shipping, like other Indian players, focuses on transporting petroleum products, and freight rates in this segment like the spot Aframax have dropped 32 per cent on a sequential basis.

The company has, however, grown its income from operations by 6.6 per cent on a sequential basis in the June quarter and senior company management pointed out that they have enhanced their presence in more profitable areas like the Caribbean and the UK market, which enabled them to get better realisations than those prevailing in the spot market.

In addition, the company has expanded its fleet both in FY05 and in Q1 FY06, which has helped them transport enhanced volumes.

Varun has also reduced its operating costs on a sequential basis thanks to the cooling off in the industry. For instance, repairs and maintenance has shrunk sequentially by 14.04 per cent in the June quarter and in the case of port expenses, there was a fall of 21.54 per cent.

As a result, operating profit margin sequentially expanded 477 basis points to 54.43 per cent in the June quarter. Interest cost and depreciation have, however, risen sequentially owing to fleet expansion.

As a result, there was a 11.74 per cent sequential decline in its profit before tax to Rs 27.06 crore in the June quarter. Going forward, the company plans to shortly add to its fleet but its ability to grow earnings could be limited by weaker freight rates.

With contributions from Mobis Philipose and Amriteshwar Mathur