Pritam SangwanStylam Industries Limited (SIL) incorporated in the year 1991 is one of the largest manufactures of laminates sheets for both home and industry use. The company’s 70% revenue comes from export market. The current market cap is approx. Rs 580 crore and equity shares of the company are listed on BSE.
Golden Chem-Tech Limited (GCL) is an unlisted public company which manufactures chemicals & adhesives and has diversified for the manufacturing of the Acrylics Solid Surface in 2016. The manufacturing of the Acrylics Solid Surface will commence from 2018.
About the transaction:
- Amalgamation of GCL into SIL with an appointed date of closing of business hours on September 30, 2017.
- Purchase consideration is discharged by issuing 100 equity shares of Rs10 each of SIL for every 371 equity shares of Rs. 10 each of GCL. Total fair value of the GCL is Rs 22.84 crore.
- Both GCL and SIL are group companies.
- Rational of the scheme being GCL is recently diversified into manufacturing of Solid Acrylics Surface panel and is well recognised part of the building material industry and this product is complementary to the product and other building material i.e. laminates which is manufactured by SIL.
Shareholding Pattern
Table 1: Pre and Post Arrangement Shareholding Pattern.
| Particular | Pre-merger | Post-Merger | |
| SIL | GCL | SIL | |
| Authorised Share capital | 8,55,00,000 | 1,15,40,000 | 9,70,40,000 |
| Paid-up capital | 8,16,62,000 | 1,14,20,500 | 8,47,40,300 |
| No of shares (FV Rs 10) | 81,66,200 | 11,42,050 | 84,74,030 |
| % Holding | |||
| Promoter Group | 52.71% | 100% | 54.42% |
| Public Shareholding | 47.29% | – | 45.58% |
Financials
Table 2: Financials as on Sep,17
| Particulars | SIL | GCL |
| Amount | Amount | |
| Shareholders Fund | 1,34,79,16,420 | 7,36,74,987 |
| Long term Liabilities | 60,27,53,247 | 27,75,11,581 |
| Total Liabilities | 1,95,06,69,667 | 35,11,86,568 |
| Non-current Assets | 1,93,81,45,416 | 31,51,91,238 |
| Net Current Assets (CA – CL) | 1,25,24,250 | 3,59,95,330 |
| Total Assets | 1,95,06,69,666 | 35,11,86,568 |
| Profit & Loss Extract | ||
| Total Income | 1,55,16,19,119 | 5,70,07,873 |
| Total Expense | 1,40,32,41,771 | 5,61,16,699 |
| PBT | 14,83,77,348 | *8,91,174 |
| PAT | 9,21,55,166 | 23,89,839 |
| No of shares | 81,66,200 | 11,42,050 |
| EPS | 11.28 | 2.09 |
| Current Market Price | 706.5 | |
| PE Ratio | 62.61 | |
*considering loss on sale of assets worth Rs 19 lakhs.
Margins:
| % Margin (Based on Mar-17) | SIL | GCL |
| EBITDA | 14.88% | 18.37% |
| EBIT | 13.01% | 12.80% |
| PBT | 9.64% | 6.91% |
Valuation:
As per the valuation report, SIL is valued at Rs 605.9 crore based on weighted average market price per share and GCL is valued at Rs 22.84 crore which is 3.1 times of its book value and over 4 times its sales.
| Valuation of SIL and GCL for merger | ||
| Particular | SIL | GCL |
| Fair Value per Share | 742 | 200 |
| No of shares | 81,66,200 | 11,42,050 |
| Fair Value | 6,05,93,20,400 | 22,84,10,000 |
Merger Impact
Both the companies cater to the same customers and products manufactured are complementary to each other. GCL has just completed the project for manufacturing of Acrylic almost out of debt. As soon as production starts, there will be loss because of high depreciation and interest cost on standalone GIL. Post-merger, it seems there will be definite savings in terms of interest and marketing cost and also tax savings for the merged entity.
Other points to be considered
- As on Sept-17, GCL has approx. Rs 10 crore outstanding for a period of more than 6 months, continued from Mar-17, raises serious concern over the recoverability of the debt.
- During the first half of 2017-18 before the valuation, GCL has sold major machinery which is almost 40% of total Plant and machinery, it seems company is closing down its adhesive business and wants to continue only on manufacturing Acrylics Surface panel.
- GCL has also secured term loan amounting to Rs 10.8 crore (Sept-17) for which land of SIL is given as a collateral.
- There is a loan from directors amounting to Rs 8 crore (approx.) as on Sept-17 in the books of GCL, post-merger directors will seek to be paid in cash.
- There is almost Rs 1.73 crore dues recoverable from government in the books of GCL, recoverability of the same is doubtful or will take a longer time.
- There is MAT credit of Rs 41 lakh in GCL books, will not be allowed to carried forward in merged company.
- There is almost 22.6 crore capital work in progress, assuming same is for the new manufacturing plant of Acrylics Surface panel.
- Valuation report of merger is not available, only minimum issue price for the shares of SIL certified by a CA is available and fair value of GCL is certified by the management.
- SIL has made a preferential allotment and raised over Rs 50 crore in first quarter of June-17 at a price of Rs. 601 per share
Conclusion
SIL raised about Rs 50 crore for expansion and still the capacity to be created out of the fund is yet to go into production. The promoters seem to face severe management and financial challenges to operate two separate entities in the same space not to talk about compliance challenges. The merger seems to be out of compulsion for the promoters and only time will prove whether it will benefit public shareholders in future.
