Operating in the market, you must have come across the term Indian Subsidiaries. Do you know what subsidiary means?
A subsidiary company is one which is owned or controlled by another company, which is called the parent company. Let's take an example.
Everyone must have drunk Nestle's coffee, right? Nestle India is a subsidiary of its parent company Nestle, which is a Swiss Multinational Company. Other examples of Indian subsidiaries include Disney India, India Yamaha Motor, Maruti Suzuki, etc.
This parent company holds 50.44% in the GMM Pfaudler, and at the same time, it is the global leader in glass-lined equipment technology. This announcement did not create that much Inquisition, but it gathered the attention of the whole business world when on 21 September the company declared an offer for sale.
Giving a steep 33% discount, the GMM pfaudler OFS has been priced at Rs. 3,500 which was Rs. 5,421 on the closing of 21 September. Obviously, the news had created waves of curiosity on the internet, especially among those who have already invested in the company. So let's have a deeper insight into this curious case.
What is an Offer for Sale?
OFS stands for Offer For Sale. An Offer For Sale is a simpler method wherein promoters in public companies can sell their shares and reduce their holdings in a transparent manner through the bidding platform for the exchange.
Earlier, the segment of OFS was just for the promoter group entities of listed companies. But now it has extended for non- promotions of eligible companies holding at least 10% of the share capital of the company.
GMM Pfaudler OFS Analysis
Soon after the news surfaced on 21 September, all the investors and business enthusiasts straight went to make the analysis of the GMM Pfaudler OFS. So let us analyze this offer for sale and see how it will impact the stock valuation of GMM Pfaudler OFS.
The current promoters of the company are Pfaudler Inc, Millars Machinery, and Urmi Patel. They will be the sellers of the stake. With this pattern of stake sale, there will be a steep downfall in the promoter holdings from the current 75% to 47%.
These promoters of the company are planning to sell up to 40.93 lakh shares at a floor price of INR 3500 per share for INR 1433 crore. As said earlier, it is a steep 33% discount. This Offer For Sale is at 53x PE of FY21 EPS.
As per the planning of the company, it is hoping to acquire 26% in its parent company Pfaudler, which is based in the US. Currently, Pfaudler owns a stake of 50.44% in GMM Pfaudler. As per sources, the reason for this big step is to raise urgent funds.
According to the estimates, this acquisition would cost around 2740 crore, which would hopefully be funded by accruals worth INR 1000 crore and debt of INR 1740 Crore.
Now, if we talk about the valuation of GMM Pfaudler, the stats so far in the last year are almost unbelievable. If we sneak into the 52 week high/low, then it is noticeable that the stock has shown a stellar performance this year.
The highest trading that the company was trading at is 149x; however, post the announcement of OFS, the stock went 10% lower circuit continuously for two days.
As of now, GMM Pfaudler is trading at PE of (-)108x. And if we check out the sales and profit CAGR over 10 years, then it is definitely a euphoric valuation.
After taking a glance at the pattern of shareholding of GMM Pfaudler, it is apparent that the institutional investors have less share in the shareholdings.
What The Investors Must Learn From This Whole Scenario?
Usually, an OFC is priced at a small discount to the existing share price. But the breathtaking discount which GMM Pfaudler has given is one of the steepest till the date. But we require that it must be seen in the backdrop of the sharp runup in the stock.
If we have a closer insight into the Securities Lending and Borrowing (SLB), it is found in the stats that large borrowings occurred in the stock during the last week. And the matter of suspicion in this scenario is that the OFS announcement was made soon after this.
The most important lesson for the investors here is that there are significant risks to just riding the latest wave or fancy in the market. Who would have imagined that a large stake sale by an existing shareholder would bring a reality check to the valuations?
Now it is like there is no stopping for the shares of GMM Pfaudler, especially as some popular fund managers back them. Usually, the valuation keeps moving upward owing to the short supply of the shares, when the demand for a low free float stock is high.
It will be very interesting to see if there is downward pressure on the prices as after the OFS announcement, the supply of shares in the market has increased substantially.
Many have bemoaned this unusual discount on the OFS of GMM Pfaudler, but for investors, it is not a proper, gentle reminder as they have to pay heed to the valuation as well.
What The Promoters Have To Say On GMM Pfaudler OFS?
There was a buzz that there are chances that the minority shareholders might exit the company after the declaration of the dubious Offer For Sale. Clarifying all these doubts the Managing Director Tarak Patel, said that the promoter group, The Patel Family, had no plans to exit the company.
Tarak Patel said in an interview to a news channel that the Patel group has sold barely 2% of its stake in the company and the reason for the same was to fund the acquisition of parent company Pfaudler's stake in the company.
Patel further said that a big chunk of the shares in the OFS was from private equity player Deutsche Beteiligungs AG ( DBAG), which owns Pfaudler Inc. After the OFS, the DBAG will hold around 30% stakes in the company and the Patel Family will hold 22%.
Parel also revealed that there are no plans either by the Patel family or by DBAG to sell any more shares for the next three years. Instead, he said that the Patel family would be looking to raise around 30 percent stakes in the company over time.
Talking about the unusual price, Patel said that the price had to be this because they were looking for a price that would interest investors. He said that this time there would be people investing from the US as well.
In conclusion, the acquisition of the Pfaudler stake will be made through GMM International, a new company, which is to be set up soon.
GMM will acquire 54 percent in the company, it will be like 34.4 percent directly and 19.6 percent through its subsidiary Mavag AG. After this, the owner of Pfaudler group, Pfaudler Inc, which is regulated by DBAG will be left with a 20 percent stake, and Indian Promoter Patel Family will be at an edge by acquiring a 26 percent edge.
It has been decided by the promoters that $10 million of internal accruals and $17.4 million of taking on debt will be used to fund the further acquisition.
The future of the company depends upon how its results turn out for the upcoming quarters. If the results turn out bad, the stocks will decline as the promoters have already reduced its stakes.
But what will happen next in the market is unpredictable. No one can say whether the plans of the promoters of GMM Pfaudler will be executed or not. Whether they will succeed in getting ownership over its parent company? Will the funds generated for this step be used in a wise manner and for the right use?
This is something that we will have to wait and watch.