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Halonix: A PE run company

This is a "notes" post about a company I was tracking. I now feel the need to use the blog to note down things.

Halonix (earlier Phoenix Lamps) is a lamp manufacturer. They have two divisions, Auto lamps and general lighting (CFL types). In Auto they’re very big and the op is very profitable. General lighting is a loss-leader.

Actis wanted to sell the auto lamp business, but no one cared about the gen-lighting biz, and Actis proposed they would actually buy out the loss making General lighting unit and sell the rest. Philips was interested in paying Rs. 300 cr. which is a darn good deal because the company’s market cap at that time was about 220 cr. (2.8 cr. shares, Rs. 80 or so per share).

Actis, a PE fund, acquired Halonix in 2006 buying out most of the promoter stake at Rs. 190 per share. They tried offering the public Rs. 155, saying the higher price for promoters was for a non-compete, but SEBI said no way. Then everyone got Rs. 190 per share.

Current Price: Rs. 76 per share. Four years and a 60% fall. That hurts.

On April 13, I wrote this:

1) According to NSE
http://www.nseindia.com/marketinfo/companyinfo/eod/results.jsp?param=01-OCT-201031-DEC-2010Q3ANNNEHALONIX&seq_id=82300&viewFlag=N
and
http://www.nseindia.com/marketinfo/companyinfo/eod/results.jsp?param=01-APR-201030-SEP-2010H1ANCNEHALONIX&seq_id=79706&viewFlag=N
First nine months have seen net loss of about 2 crore. Loss includes depreciation of 10 crore, but even with that we can see just 8 cr.

(This is the whole company, not just the auto division)
– the Auto div supposedly made 26.27 cr. net profit in the first nine months, which is a good thing (but remember that the demerger has not yet happened.
– Auto div is making NP of about 7 to 9 cr. a quarter. But that is aided by deferred tax benefits, which they may lose on the demerger.

2) EPS growth is not very good in a time when auto industry has done remarkably well. I wonder if it will do well when interest rates keep going up and auto is impacted in a bad way.

3) Last FY there was a net loss of 20 cr. including 13 cr. in depreciation. before that (08-09) was pretax, pre-extraordinary item profit of 5 cr,. including 11 cr. of depreciation. I think we have to look at the figures carefully; P/E should always be a multiple of net earnings after depreciation, interest and tax. That is very low even in FY 08-09 at +1.26 cr.

4) Actis owns 66% of Halonix. It’s now buying the subsidiaries – if an Indian promoter did that we would be very suspicious as to why is the general lighting business which is nearly 52% of the overall company, being sold to the promoter itself at no (or very low slump sale) cost? Havells has expressed desire for it.

Still, the answer seems to be to divide the businesses appropriately. We don’t know the consideration paid, it hasn’t been decided yet or fairly valued.

5) Actis was in Oct looking to sell its stake at $56M. They own 66%, so that values the co at 85M, which is around 380 cr. Current market cap is 280 cr. which is a decent ride up. Another news story says Philips may be interested to buy in at 300 cr for Actis Stake, that values co at over 400 cr. (Not bad at all)

6) There are some exec compensation issues, with MD getting paid far more than allowed, noted by the auditor. No permission has been granted yet for such comp.

Overall, I think there is some money on a merger arbitrage, we just don’t know when it will happen or whether it will happen.

The demerger is good for the co – but it was decided a year back, approved in a board meeting months ago, and why has it not yet happened? I don’t like that – they are probably looking to sell their stake before they do a demerger, which woudl be bad for corporate governance.

FY 2011 Results

Update: FY 2011 results are out. Losses at 10 cr. versus a loss of 20 cr. last year. Auto lamps made 71 cr. EBIDTA, general lighting lost 10 cr. EBITDA, and the rest was eaten up by interest, depreciation etc.

They called off the demerger and the sale. My hunch was right – this transaction has been approved but the subsidiary was not demerged, and I had a strong feeling that something was wrong – and it turned out they cancelled the sale on May 20. Back to good old times.

Halonix was supposed to buy Luxlite and Trifa, two group companies of distributors in Europe. That has been cancelled. Halonix has paid them unknown sums of money (no one is revealing how much) and guaranteed about 2.7 million euro for their working capital. (about Rs. 15 cr.) Now they’re hoping to get it back:

During the year 2010-11, the company acquired 100% shareholding of International Lamps Holding Company S.A (ILHC) and through ILHC two downstream subsidiaries namely Luxlite Lamps Sari in Luxembourg and Trifa Lamps GmbH. The Company, including through its wholly owned subsidiary ILHC and downstream subsidiaries Lolita Lamp Sari and Trifa Lamps GmbH, entered into an Agreement to acquire their business, with Luxlite Sari and Trifa Gluhlampenwerk am Trifels GmbH. Halonix Limited has extended Corporate guarantee and SBLC aggregating to Euro 2.7 million to Trifa Lamps Gmbh for its working capital requirements. Since the transaction has not been consummated in terms of the agreements signed. The Board of Directors of Halonix Limited has passed a Resolution on May 20, 11 whereby this acquisition of overseas entities has been called off. This has also been notified to the Assignor and the Escrow Agent. Accordingly, as per the terms of the Agreement, the transaction shall get RESTITUTED and the Seller shall be required to refund the purchase price towards sale and purchase of the Sale Shares / equity investment and / or unsecured loans made by the Purchaser to the Company. The Management of the Company is of the opinion that all the dues from Luxlite…

The report isn’t complete, but they’re saying they’ll get the money back, we’ll see.

MD Resigns

Update: MD Rajesh Kochhar, hired away from Wipro Lighting by Actis to run the show at Halonix, has resigned from Jun 30, 2011. That can’t be fun. Oh, he was overpaid, the auditors had noted it, as mentioned above.