Should investors look for potential delisting stocks? - The 5 Minute WrapUp by Equitymaster
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Should investors look for potential delisting stocks?

Jan 16, 2012

In this issue:
» Will the US economy rebound?
» Iron & steel tops list of restructured debt
» Will India be able to unlock its demographic dividend?
» Is India's rural demand slowing?
» ...and more!
---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.

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00:00
 

While the IPO (initial public offering) market has dried up, the markets are abuzz with delisting offers. As you may know from the term itself, delisting means a listed company removing its shares from trading on the stock exchanges. There can be several reasons why companies delist their shares. In general, companies delist when companies don't need further capital, or when they want to expand or restructure, or are acquired by others, or promoters want to increase their stake, etc.

Walt Disney has put forth a delisting offer for UTV Software shares with a price band of Rs 835-1,000. Similarly, companies like Khorakiwala family-owned Carol Info Services, Japanese auto component maker Exedy India, Sweden-based parent's Indian unit Alfa Laval India and Patni Computer Systems have all announced plans to delist their shares from the Indian stock markets. In the coming months, several other multinational companies (MNCs) are expected to come out with their delisting offers.

It goes without saying that the stock prices of all the above mentioned companies have sky-rocketed in recent times and are trading at a significant premium to either their floor price or offer price. Many investors find such delisting opportunities a lucrative way to make quick bucks. So would it be a wise strategy to invest in potential delisting candidates? Though there is no denying that investors have made handsome gains on these stocks in the short term, we would suggest investors to refrain from making such speculative bets. The announcement of delisting offers usually attracts a lot of speculative interest. Stock prices tend to shoot above the roofs and investors anticipate even higher premiums by promoters. But you cannot ignore the high amount of risks involved. As per regulation, a company seeking to delist has to buyback more than 90% of its total outstanding shares. For any buyback to be successful, both promoters and investors have to agree on a price. If the investors demand too high a price and the promoters don't agree, they are free to call off the delisting offer. What would happen to the stock price then? They would come crashing down and leave a lot of investors with burnt fingers.

We believe serious long-term investors should keep away from such speculative bets. Instead, stick to the fundamentals of value investing. Buy great businesses at a discount and you are pretty much on your way to a good fortune.

Do you think it is wise to invest in delisting candidates? Share your comments with us or post your views on our Facebook page / Google+ page.

01:26
 Chart of the day
 
The steel industry has been under pressure for some time now. This is due to weak global demand, mainly due to the euro crisis, scarcity of iron ore due to mining clampdown in Karnataka and Orissa and high coking coal prices. All these factors are forcing steel makers, especially smaller ones, into debt restructuring. Corporate debt restructuring (CDR) aims at preserving viable corporates that are affected by certain internal and external factors and minimise the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. As today's chart of the day shows, the share of iron and steel in the aggregate debt restructured by this process as on September 30 was the highest at 30.9% with 28 cases. To add to the woes of steel companies, many banks have started to restrict sanctions of fresh loans to the sector because of fear of increase in non-performing assets (NPA). Thus unless there is some clarity on mining issues and global pickup in demand for steel, the sector may see more cases of companies undergoing debt restructuring. After iron and steel, the sectors with the highest proportion of restructured debt include textiles, sugar, cement and petrochemicals.

Data source: CDR Cell
Data as at end of Sept 2011

02:06
 
Uncle Sam may be down for now but it will be a mistake to assume that the knockout punch has been delivered. By Uncle Sam, we mean the US of A. A leading daily has pointed out how there are tell-tale signs of the US economy making a comeback. The private sector seems to have pressed the recruitment button with full gusto and the oil imports have also come down dramatically, thanks mostly due to the shale gas revolution that is currently underway. The more than US$ 2 trillion cash surplus with the private companies cannot be overlooked either. Hence, in view of these factors, a lot of experts are being forced to make the bet that the world's largest economy is certainly showing signs of turning the corner.

But wait? We seemed to have looked only at the positives. What about the accounted and the unaccounted for deficits the US economy will continue to face and also the needless wars that it keeps going into. Besides, the housing sector is not completely out of the woods yet. Thus, as can be seen, there are just as many wealth-destructive forces lying in wait as there are wealth-creating for the US economy . And hence, years of below par growth may not be a very bad option to consider rather than being a total optimist or a total pessimist. What say?

02:53
 
Among many factors that are expected to drive India's growth going forward, favourable demographics is one of them. This means that compared to the developed world where the average population is aged, India will have the benefit of a large chunk of young working population. But the question is, will the swell in youth population automatically translate into gains in GDP, if not all are gainfully employed? That is the big challenge that the country faces. Having a young population is fine, but most may find it difficult to secure jobs if they do not possess the requisite skill sets. And for this, emphasis will have to be put on education.

The statistics so far are not encouraging. India has a higher education gross enrollment ratio of only 12.4%. The remaining 87.6% drop out at various points in school. Only 2.5 m out of a total of 7 m that reach class XII go on to a university. The reasons for this largely depend on affordability and accessibility. There is no doubt that investments will have to be made into education although the stretched finances of the government raise considerable doubt about whether it will be able to do so. But it goes without saying that rising unemployed youth is a dangerous trend that could lead to great unrest of the kind we recently witnessed in the Middle East and so it is not an issue that the government can ignore for long.

03:43
 
Rural India which had been powering FMCG sales since the past three years is widely feared to be the latest victim of rising inflation. The biggest rural retail chain and arm of DCM Shriram Consolidated 'Hariyali Kisan Bazar' saw sales tempering in the past three months. The slowdown has been attributed to falling income from crops like onion, potato, tomato and other vegetables coupled with rising costs of fuel, fertilisers and labour.

The 230 Hariyali stores have a presence across the states of Punjab, Haryana, Uttar Pradesh, Uttarakhand, Madhya Pradesh, Rajasthan, Maharashtra and Andhra Pradesh. Hariyali Stores typically sell agri-inputs, cattle feed, FMCG products, plastic furniture, automobiles and services such as banking and crop insurance. As per data from Hariyali Stores, there has been a general slowdown in rural purchases including staple food whose off-take is in lower quantities.

However, not all data points to a rural gloom. For example, there has been no slowdown in growth of ITC's Choupal Sagars which are large-format rural malls with 24 stores. The Choupal Sagars have operations in Uttar Pradesh, Madhya Pradesh and Maharashtra. Even market survey conducted by market research agency IMRB (Indian Market Research Bureau) quelled fears of a slowdown. As per the survey which was conducted across 30 product categories, the rural FMCG market grew 10% by volume and 12% by value during the period January-October 2011.

04:29
 
In the meanwhile, the Indian stock markets traded in the red for most part of today's trade. At the time of writing, BSE Sensex was down by 30 points (0.2%). Barring IT, FMCG and metal stocks, all sectoral indices faced selling pressure. Asian stock markets too displayed negative investor sentiments. China (down by 1.7%) was the biggest loser among these.

04:45
 Today's Investing Mantra
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball." - Warren Buffett

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6 Responses to "Should investors look for potential delisting stocks?"

Vishal

Feb 10, 2014

We Buy Delisted / Unlisted / Physical Shares, Kindly Contact If anyone Want to Sell It. Vishal 097260 56080

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Manoj

Dec 11, 2012

If we suspend our belief in perfect markets, a proti-making company should not be allowed to delist unless the promoters and majority of shareholders agree. Then too, regulator should force promoters to buy out all small investors (shareholders) at prices which are higher of (a) market price (b)issue price+interest. As I see it, the promoters raise capital from the market and invest. After this the market exists to equalize the power of big and small shareholders. Just because a company has been profitable, and profits distributed selectively through accounting, should not give a right to the promoter to cheat other shareholders out of their right to earn proportionately. Similarly, promoters of unprofitable company should never be allowed to delist without a stringent audit of how investors money was employed.

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sunilkumar tejwani

Jan 16, 2012

the best way to make money will be to invest where there are chances of a DE-listing but so far the company has not announced any such plans, but provided the current valuations are reasonable enough, so as to make the best out of it.Whether the company intends to buy back or not, the earnings growth should compensate/ give better returns in the short to medium term. Although this is a guessing game but not too difficult to spot such companies which are potential candidates for a De listing offer. Especially multi nationals where the parent companies hold more than 65 to 75% & which have a strong earnings (huge piles of cash) sitting on their books.It is foolhardy to buy where the De listing offer has already been made & the stock prices are quoting near or above the offer price.

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Srinivasan

Jan 16, 2012

Sir,

you are right in that the stock prices are likely to come down crashing if the delisting plans do not go through.

however, this is only one aspect to the whole scheme.

if you notice carefully most of the delisting candidates, if not all, are well run MNC companies with good balance sheet, consistent profit making, dividend paying and well managed ones.

if one can take a small exposure commensurate with one's risk appetite in such companies way prior to such delisting plans then the portfolio suffering due to risk of price crash is minimal indeed.

kind regards

Like (1)

Shiva Prasad

Jan 16, 2012

I think it is a good idea to identify MNC stocks where the parent is holding more than 75% of equity and wait patiently for delisting. Normally, the dividend payout during he waiting period is between 4 to 5%. Further, these stocks don't tank more than 10% during the downturn.

Like (1)

shrikant

Jan 16, 2012

What happens if investor do not surrender shares?

Like (2)
  
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