Thursday, 10 May 2012

Delhi Diary

Where would one normally find bouncers ? Usually discotheques. 

But the place I went to recently had a different setting. It neither had neon lights nor did it looked like a disco. However, more than the numberof ordinary people in the room, there were bouncers or should I say pehelwans. I read the banner carefully and verified with the gentleman sitting next to me. It was indeed the venue of the AGM of R Systems International Limited.

It baffled me that why does a company need bouncers ? Sure we have heard and seen shareholders baying for each other's blood for a box of Haldiram's sweets. But never did any company had to employ bouncers to solve such crises. The crisis in R Systems is much graver than that. This company is facing a hostile take over bid from one, Mr Bhavook Tripathi. I had earlier written about it here and here.

In the agenda items of the AGM, the management had proposed a special resolution which envisaged alterations in the articles of association of the company. The proposed amendments were that nobody except the promoter group can take any decision regarding merger, liquidation of any asset, providing any loan to any other entity, special dividend , removal of executive directors etc. Basically all the ingredients of making the company unattractive for any hostile takeover bidder. But the defeat of this special resolution was a forgone conclusion as Mr Tripathi holds 32% stake in the company and the special resolution would have been vetoed out. Sensibly, the company decided to withdraw the special resolution before the AGM to save face.

Meanwhile SEBI has not processed the open offer made by Bhavook Tripathi and even the committee of independent directors of R Systems has not come out with the recommendations on the open offer.

Though on the face of it the promoters of R Systems own 49% in the company and it is difficult to dislodge them but the discomfort in the behaviour of the company and the promoters seems to tell a different story.

Even Ravana (original character, not Abhishek Bachchan) used to think he is invincible till his younger brother Vibhashana revealed the secret of of his death to Rama. Who knows what secret about R Systems does Bhavook Tripathi has up his sleeve ?

Disclaimer : This does not constitute investment advice and I don't have any position in this stock on the date of posting this entry.

Monday, 7 May 2012

Picking pennies in front of a steam roller ?

At any given point of time, I like to keep around 10-15% of my portfolio in special situations which are not linked to the gyrations of the market. There are triple benefits which I see in process : the tendency to immediately use all of the cash to buy equities is perturbed, the regret of seeing severe draw downs of portfolio in case of a severe market crash is also lesser and thirdly and most importantly I get excitement, happiness and pure joy of spotting an arbitrage and working it out. (There are other workouts like Sudoku and Rubik's cube but I don't find them exciting as I am unable to solve them and also there is no money to be made)

Over the last few years, my thinking has evolved over working on a limited number of special sits and not spreading too thin on a number of them. The criterion which helps me select is that the opportunity should provide at least an annual IRR of 15%, it should have very low correlation to the market, it should have minimal risk and it should be good enough to put a minimum of 3% of my portfolio. If any of these criteria is unmet, I give the idea a pass and wait for the next one to pop on my screen. One source of such ideas is the BSE announcements. I religiously read all the BSE announcements and if I miss it someday, my calendar reminds of those dates which appear as a backlog.

One interesting announcement came on April 26th, 2012 about the NCDs (Non Convertible Debentures) of Jyoti Structures Limited. Jyoti Structures,  a company into the business of telecom infrastructure had come out with a rights issue of 1.02 cr NCDs in Feb 2011. The NCDs had a face value of Rs 120 and carried a coupon rate of 7% to be paid quarterly from the date of allotment till the date of redemption which was 15 months from the date of allotment. Accordingly the date of redemption is May 14, 2012. Between Feb 2011 and now, the NCDs traded in the range of 100-110 bucks thus implying an IRR of more than 20% at different periods of time but the financial position of the company didn't excite me much. The risk of interest not being paid and the possibility of a default on redemption made me stay away from the issue.

On April 26th, the company announced the record date (May 6th, later revised to May 10th, 2012) for the redemption of debentures along with the final payment of interest. The interest along with the redemption amount total up to Rs 122.10 per NCD. The total amount required for payment is 124 crs. One look at the Sep 2011 balance sheet shows that the company had around 580 crs of loan (most of it working capital) and around 1000 crs of net current assets. Apart from it, the company has around 70 crs of investments. Overall, it should not be difficult for the company to raise additional working capital loan of 124 crs against the current assets and redeem the debentures. Additionally, the company has kept up with all the quarterly interest payments on the debentures. It seems that the company is both able and willing to redeem the debentures.

The market price of Jyoti Structures N1 is 120.50. The redemption date is May 14, 2012. Buying an NCD now at 120.50 will yield 122.10 with an average holding period of about 7 days. That's an absolute return of little over 1%.

I see little risk of the payment not being made as the record date has already been announced. But there is never a sure thing. So I am keeping this limited to 4% of the portfolio.

Do you spot a steam roller in sight while I am busy picking up pennies?

Disclaimer : This is not an investment advice. My opinions and views are more or less always biased. If I see some steam roller in any of my ideas, I will surely run away and blog about it later, if at all.