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Nandan Denim Will Issue Warrants At Rs. 200 to an FII Fund When Its Current Price is 130

Nandan Denim Limited will issue warrants worth Rs. 50 cr. to Polus Global Fund, which will have to convert it at Rs. 200 per share. This is a “warrant” for which Polus will pay Rs. 12.5 cr – or 25% – upfront. They pay the remaining on conversion anytime within 18 months. The stock shot up 12% in trade today to reverse a short term downtrend it was seeing. Note: This was a Capital Mind Premium portfolio stock (we were in at 108, out at 140 in our momentum portfolio)

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The fund owns stakes in a couple of Zee companies, Radico Khaitan, Mandhana and ABG. (The press release also mentions Omaxe, Era infra, Gujarat Apollo, Tata Global and IDFC too)

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From Capital Mind Snap:

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None of these companies have been great performers in the recent past, with the exception of Sangam India which has gone up about 300% this year. Polus picked up 200,000 shares of Sangam in June, apparently at Rs. 129 a share, and the stock is at Rs. 267 today. Sangam is in a similar business (textiles) and makes PV dyed yarn in India.

Nandan Denim is a denim manufacturer and the second largest in India, and has had phenomenal Q1 results. The devaluation of the rupee, too, in Q2 will hold it good, and it is rapidly expanding capacity. It will spend Rs. 612 cr. on capacity expansion, which is financed with 70% debt and as part of the equity, it has its own accruals plus the money that comes in from Polus.

Why Rs. 200 per share? When the current price was 115?

This is a part that usually gets me uncomfortable. Why would they raise money at Rs. 200 per share? Why is Polus okay with paying a Rs. 200 per share when the current share price is Rs. 130 – even after that 12% increase? Can’t they buy the same 25 lakh shares from the market itself?

The answer usually is that if they tried to buy into the company, the price would probably go up beyond the 200 rupees per share anyhow. Nandan denim has 4.5 cr. shares ouf which 60% are with the promoter. Only about 1.7 cr. shares are held by the public. To get 25 lakh shares they would have to gobble up 15% of the non-promoter market share, and that might drive the price up anyhow.

But the important point is: they pay just Rs. 12.5 cr. now – and get to convert anytime in the next 18 months. If they don’t convert, the company keeps the money anyhow. This is better than an FCCB where the conversion is optional, but the company has to return the money if not converted.

On the other side – the company gets only Rs. 12.5 cr. now, and that might not help it too much with the capex. The deal will only give the rest of the money IF Polus converts – and if it really wanted to convert, it would have bought shares right now as an institutional placement, not as a warrant. This is where the jigsaw puzzle has a missing piece.

Nandan’s business is good, and based in Gujarat where there is a significant textile presence, port activity and proximity to the raw material. The company has shown excellent results recently (30%+ growth in EPS) and is at a  P/E of less than 12 even now. Is it a good time to expand capacity using debt? Interest rates seem to be coming down, and with the dollar at 65+ this might still have juice in it.

Disclosure: Not invested, but as mentioned before, was a CapM portfolio stock . This is not advice.

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  • Biplob says:

    Maybe both the company & the investors want to wait & watch.
    The company:- Should or shouldn’t I invest : If Renminbi is going down too much, investing now maybe bad idea, but need the money to lower the debt/buy some very necessary machinery.
    Investor:- The company’s prospects is good, but have to wait for China’s wage rate (& European purchasing power) to determine if it’d be profitable to invest in Indian textile manufacturers.

  • Keshav says:

    This post has got more interest in Twitter. Many folks believe that the transaction looks fishy. Looking to simple logic , it does looks fishy and raises many questions . However to me , the special announcement by company after putting it in Annual report looks more fishy. Why does this resolution in proposed AGM needs a special post ? Is some one trying to raise the price of Stock? Why stock crashed from 150 to 100 odd levels ? Who has bought at 100 ? Is there short term play in the stock ? These are more worrisome than the price of investment itself.
    Now coming to investing at Rs 200. If some FII has bought 1Lac + share and wanted to buy more , it will do enough scrutiny of the company. I am believing the committee which has agreed to pay Rs 200 for stock, took decision in board room not in Bar .:) I always say that “Value of business is for Buyer to figure out not the seller.” If FII has some black money channel to make it white, then bets are off. However if it is genuine money, I will not see it as worry signal.
    If we go by AR2015 disclosures, there is plan to do capex of Rs 600 Cr for expansion with 30% equity. Now it comes to Rs 180Cr. If as promoter you approach banks for 70% finance on project proposal, Bank will ask you to show commitment of some money. Rs 12 Cr, will be some where 3% of debt financing, which come to administrative charges. Can it give promoter to start preparing business proposal, make three phase capex and start with 200 Cr trans ?
    What worse can happen to stock price ? I have no idea of it. It can be less than Rs 200 or Rs 100 also. Will FII subscribe to preference allotment ? They should. If not company is getting free 12 Cr.
    Just my two cents. My views pure based on reading AR and analyzing as business man. I hold shares of the company so biased as well.
    Would like to know comment from corporate finance. I am not expert on it.