The anatomy of Private Equity (PE) funding in a public listed company.
A thread 👇 (1/n)
PG Electroplast Limited, a contract manufacturer of various kinds of electrical goods and appliances, recently announced an 80 crore fund-raise through preferential allotment of equity shares and compulsorily convertible debentures (CCD) to Baring PE and family funds. (2/n)
Such transactions are a great way to understand Private Equity deals in a public setting. Because of disclosure norms for listed companies, everything related to a fund infusion in a listed company is made available to the public. (3/n)
Britannia Industries undertakes an innovative corporate manoeuvre frequently – issuing bonus debentures. It securitizes part of its reserves as bonds, pays interest at 8% or so for a few years and then gives the securitized amount to shareholders as principal.
A thread 👇 (1/n)
This is not an entirely new concept, in 2015, NTPC issued bonus debentures to all shareholders worth over INR 10,000 crore. These were issued at face value INR 12.50 and 8.49% interest (INR 1.06) per annum. (2/n)
What are bonus debentures, though? We have all heard of bonus shares. Companies often convert a part of their reserves into free shares for shareholders. This does nothing more than increase the float and a misplaced sense of increased wealth. (3/n)
Hindu Businessline reached out to JSPL over the weekend, who supported the logic of related party loan with an interest rate of 5% being paid to JSPL. Can I get a loan at 5%? Even GoI pays more than 5% on its bonds and it has sovereign rating.
Also to be noted is that the loan is proposed to be unsecured, which entails a higher interest rate due to higher risk if JPL goes belly up. JPL has a long term credit rating of BBB, which puts it in the category of debt that good banks will refuse to touch without collateral.
Family-run listed companies with diverse promoter businesses sometimes decide to take minority shareholders for a ride. Here's a live example.
A thread 👇 (1/n)
Jindal Steel and Power Limited (JSPL) has a subsidiary, Jindal Power Limited (JPL), with 3400 MW of power generation assets. These assets cost JSPL INR 4.4 crore per MW, totaling approximately INR 14,950 crore in capital expenditure. (2/n)
JPL generated INR 960 crore cash profit in FY19-20, and is on track to achieve approx. INR 2000 crore of profit before tax and interest on an annualized basis. By all means, this is a mature business generating excellent cash flows for JSPL. 96% of JPL is held by JSPL. (3/n)
I've been interested in power transmission INVITs since the first came out with an IPO in 2017, India Grid Trust. Powergrid INVIT is another that debuted recently.
A thread on how to compare the two 👇 (1/18)
@GhanishtNagpal and I analyzed India Grid Trust from the DRHP stage. There was a lot to like - AAA credit rating, robust underlying assets with 35 year contract terms and payments guaranteed by Powergrid as the Central Transmission Utility. (2/18)
Operators also have perpetual right of way for the particular route of the transmission line. Which means when the contract expires, the government can't replace you as the operator. It either renews, or, if the operator is replaced, get another transmission line laid. (3/18)