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October 21, 2012

Sah Petroleums Ltd : A Safe Delisting Play

Note : SOLD ALL Holding  Dec 2015 with avg price of 80 ( equivalent after bonus share to non promoter = 177 against discussed price of 27 )      
   The government had stipulated that by June 2012 all listed companies should have at least 25% public shareholding, which means promoters should not hold more than 75% in these companies. We are now in the critical final months required for a promoter's decision. So , all the delisting candidates are trading on huge premiums specially MNC because of strong parent companies . As per times of India Article  Click Here "The candidates' P/B (price-to-book value) is 2.9x, have a P/E (price-to-earnings) of 32.3x and an EBITDA (earnings before interest, taxes, depreciations and amortization, or popularly gross profit) multiple of 14.2x, all well above the broad market,"

        So , I decided to find bargain hunting bet in delisting candidates. I used a filter on “EV to EBITA” instead of usual PE for finding still cheap bets. I came across following list.

Company
Mcap
PE
Promoter Shareholding (%)
EV to EBITDA
Surat Textile Mills Ltd
34.2
1.6
80.85
1.12
Rama Phosphates Ltd
151.78
5.3
81.46
2.49
Sah Petroleums Ltd
114.62
NM
86.89
2.82
Madras Fertilizers Ltd
289.98
NM
85.27
3.75

           I zeroed on “Sah Petroleums Ltd”  due to various reasons including almost zero debt , high promoter holding , foreign  quality promoters , turnaround candidate , low dirt cheap valuation and visibility of IPOL brand .


Sah Petroleums Ltd Background :
                  Sah Petroleums Ltd is one of the leading manufacturers of industrial lubricants in India. The company manufactures wide range of industrial and automotive lubricants, specialties and process oils under the brand name of IPOL. Their manufacturing facilities are located at Thane in Maharashtra and Nani Daman in Daman & Diu. The company has one of the largest in-house storage farms in the private sector in India for storing oils sourced from all over the world. They also all India sales and service network operating from their offices / depots / CFAs located in Mumbai, Pune, Vadodara, Indore, Jabalpur, Jaipur, Delhi, Ghaziabad, Faridabad, Kaithal, Chandigarh, Patiala, Kolkata, Jamshedpur, Hyderabad, Bangalore and Chennai. Their products are exported to Sri Lanka, UAE, Kenya, Chile, Argentina, Malaysia and Indonesia. The company`s product categories include automotive lubricants, including automotive oils, automotive greases and automotive speciality oils; industrial lubricants, including industrial oils, industrial greases, metal working products and industrial speciality oils; process oils, including rubber process oils and secondary plasticiser for thermoplastics, elastomers and plastics; transformer oils, and white oils.

Prima facie name of the company looks like an Indian company but majority stake is held by foreign investors (Navis Capital Partners)


















Navis Capital Partners holds majority stake around 62% , while Indian promoters hold around 25 % .


Navis Capital Partners Background:

               Navis is one of the longest standing private equity groups in South and Southeast Asia. The firm manages several private and public equity funds totalling USD 3 billion, and whose investors include a number of well-known US, European, Middle Eastern and Asian commercial and investment banks, pension funds, insurance companies, corporations, foundations, as well as a number of high net worth individuals and family offices. Navis has one of the largest private equity professional team in Asia, comprising 60 individuals, supported by 30 administrative staff, in seven offices across the region.
Click here for getting complete portfolio details of Navis Capital Partners.  The Navis Asia Navigator Fund has outperformed 92% of its peers in the past three years (Source ) .


Open Offer History :
               The Navis Capital Partners fund has acquired stake in the Sah Petroleums Ltd through three steps - open offer (20%), preferential allotment of shares (27.3%) and the rest through acquiring the promoter’s stake in year 2008. Under the preferential allotment of shares, the fund had bought 12 million shares of Sah Petroleums at a price of Rs 26.65 per equity share, an aggregate sum of Rs 32 crore. 
The open offer for the company was for a 27.5% stake (20% of diluted capital), in which Navis had offered Rs 48.5 per share. The share price of Sah Petroleums was trading around Rs 8 before the announcement of preferential allotment of shares, and Navis had paid more than triple of that and open offer price was almost 6 times. ( Source).  G. Maran, ED, Unifi Capital declared this open offer as their most profitable offer for his company. ( Source)


Chances of delisting of Sah Petroleums :
               Sah Petroleums Ltd is run by Indian promoter but majority control is held on by foreigner promoters that is Navis Capital Partners . Foreign promoter has a strong background so if they choose to delist then that will not be a major issue for them. There are few obvious advantages for them to go for delisting instead of reducing stake. There is always less headache to sell un listed company than listed one since this fund is not going to hold Sah Petroleums Ltd for forever.  I am not sure about Indian promoters but the foreign promoter of Sah Petroleums Ltd will be benefited by choosing delisting option. Most of their portfolio is from unlisted space.  SEBI has provided following route to reduce stake.
a.       Issue bonus shares or rights issues in which promoters will not be allowed to participate
b.     Offer for sale (OFS) 
c.      Institutional placement programme (IPP) 
I don’t think promoter will dilute stake by bonus or right issue and even if they choose OFS then that should be quite high to current price because they have brought @ 48 through an open offer that too 4 years back.
     
            Delisting case of Sah Petroleums Ltd is quite similar to Thomas Cook (India) Ltd (Both acquired by fund, has around 87% promoters holding etc.)  except to  Thomas Cook (India) cannot delist because “The acquirer, whose shareholding exceeds 75% pursuant to an open offer, cannot make a voluntary delisting offer under the SEBI Delisting Regulations, for one year from the date of completion of open offer.” This is well explained by Kiran ( Most improved value investing blogger in recent past)  Article
               Thomas Cook (India) Ltd is trading with premium (EV to EBITDA 10.7) and just below the open offer of 65.48 even though there is uncertainty of eligibility for delisting. If there is certainty emerge then It can rally from current price. However , Sah Petroleums Ltd is just trading on  EV/ EBITDA of just 2.8 .
 Most of the delisting candidate companies are expecting June 2013 timelines to be further extended but in recently Sebi chairman UK Sinha warned those companies. Read

What if no delisting?
              If we leave delisting aspect aside , then also Sah Petroleums Ltd is very good candidate for turnaround .
               How can it turnaround?
                              Every year topline of the company is growing but the bottom line is quite inconsistent.  This is mainly due to fluctuation in crude oil prices and currency. This issue is quite visible in other companies of the same sector except few excellently manage companies like Castrol.
                              Last year Sah Petroleums Ltd has shown PAT of just 6 lakh but Profit before “Interest, Depreciation & Tax” was around 31 crores. The PAT was down because of “Interest & Financial Charges” of 28.15 crores. If a company has debt of only 1.54 crores then how come “Interest & Financial Charges” of 28.15 crores ? To get the answer refer following screen shot from the annual report.








Sah Petroleums Ltd had lost around 21 crores on currency trading, few crores of bank charges and some interest expenses (not for company debt but it is for “Acceptances” / derivatives).
This 28.1 crores was for the whole year but in Q1FY13 it has 14.41 crores only in single quarter.

 
              




          

               
Whenever INR will become strong or stabilize then Sah Petroleums Ltd will start to perform better on bottom line front. We have seen some gain and stabilization in INR from last one month. So, I believe the turnaround in the bottom line is around the corner.

No delisting , NO immediate turnaround then ?
               Apart from delisting and turnaround it also good candidate for Value buy or Value Trading (Term introduced by Rohit Chauhan Read )
               Sah Petroleums Ltd is trading around Rs 27 and mcap is around 120 crores. The company does have cash of around 30 crores and investments in short term MF of around 45 crores and negligible debt of 1.54 crores. So effective if we do not give any discount to investment value then the company is only available for 120-30-45 = 45 crores. Sah Petroleums Ltd is effectively available only for 45 crores against last year PBITD of 30.80 crores and sales of around 550 crores. Doesn’t it dirt cheap? I agree company shows inconsistent bottom line and don’t deserve high valuation. But current valuation is dirt cheap and that too when promoter (Navis Capital Partners) is a financially strong multinational company (private equity player) with a good history.
               Apart from this company have brand IPOL which is known as value for money. When I visited a few shops in Pune I can see availability of IPOL Lubricants as per dealers it is not in the top 3 selling brand for them but it is definitely value for money. Who knows, one day Salman Khan starts endorsing IPOL brand and his fans start using it J.
                The Company has a marketing network setup all over India. The company markets its products through its sales offices / depots located at Pune, Delhi, Faridabad, Chandigarh, Chennai, Bangalore, Hyderabad, Baroda, Kolkata, Jamshedpur, Jaipur, Indore, Mehsana, Jabalpur, Patiala, Gaziabad and many Clearing & Forwarding Agents at different locations in India.

Concern :
               Last year company imported around 286 crores of raw material and had sell export of 210 crores. If I get some platform then I would like to ask why they need so much currency trading / hedging ? May be because of some balance sheet items like Sundry Debtors, “Loans and Advances” and “trade payables” etc.  Secondly , Debtors ratio of 4.62 is a bit lower than my comfort level ( >5 ) ,but it is constantly improving every year.Another concern I have already mentioned is steady top line growth but inconsistent bottom line.


My Course of Action :
1.     If the promoter of Sah Petroleums Ltd chooses to go for delisting and it gets successful then I can easily make minimum 80 to 100 % . I apologize for speculation on expected return , but do you think that is impossible?
2.     If promoter dilutes stake above market price and rally comes then I will decide on my exit plan.
3.      This is good company available for dirt cheap price, but I may not prefer to invest in this stock with a time frame of more than 2 years. There are lots of other quality small /mid cap companies available in the market for long term investments. I will wait around 2 years max for turnaround or value realization. If no turnaround occurs in the next 2 years then I will exit from this counter and invest in some other safe bet (Mr . Market has every right to prove that too unsafe J)

I believe this stock pick is a type of 

·       Bargain value pick with margin of safety and catalysts (Delist / Turnaround) -- Seth A. Klarman
·       "Head I win (Delisting/Turnaround); tail I don't lose much. (Due to Dirt cheap valuation, brand, promoter quality)" -- Mohnish Pabrai.


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