Stylam 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.

The merger seems to be out of compulsion for the promoters and only time will prove whether it will benefit public shareholders in future

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.

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