We would like to bring to your attention a Special situation opportunity on the demerger of two businesses in PTL Enterprises.
We initiated this opportunity for our Alpha + members in Aug’16 around 119 odd levels and recently closed the same around 150.
Besides investing in high quality small/mid cap companies for long term wealth creation, we also like to participate in slightly shorter duration Special situation opportunities arising out of corporate actions like de-merger, de-listing, buy-back, etc
With de-mergers we have had good experience over the years and would therefore like to share the detailed note on PTL Enterprises de-merger opportunity with you.
4 New Reports: 2 new long term investment report and 2 Special Situation opportunities:
- Feb’17 – High probability of 100% acceptance of shares
- Jan’17 – High quality debt free company consistently growing at 18-20%
- Jan’17 – An opportunity to create low cost shares
- Nov’16 – Transforming from commodity to a brand
PTL Enterprises (NSE Code – PTL)
(Alpha + Note as on 7th Aug’16)
PTL enterprises is an associate company of Apollo Tyres Ltd. PTL Enterprises, earlier know as Premier Tyres Limited, was set up in 1959 as a tyre manufacturing company. The company became a “sick unit,” following a series of losses, liquidity pressures, and labour issues during the early 1990s. Apollo Tyres took over the company in 1995.
The company has two divergent businesses. It has a tyre manufacturing facility located at Kerala, which has been leased out to its associate company Apollo Tyres Limited (“Tyre Business”). PTL is also engaged in the business of providing and promoting medicare and healthcare services through Artemis Health Institute, Gurgaon (the “Medicare and Healthcare Services Business”).
Proposed De-merger and the scheme of arrangement
The businesses in which PTL is engaged are varied in nature and in order to facilitate the growth and development of each of the businesses the management has proposed to demerge the Medicare and Healthcare Undertaking from PTL into the Resulting Company AGLSL.
As per the proposed scheme of de-merger, the healthcare business will be demerged from PTL into AGLSL and it will subsequently list on the exchanges as a separate entity.
In consideration of the demerger of healthcare business, the existing shareholders of PTL will get 1 new share of AGLSL for every 1 share held in PTL as on record date.
PTL owns a land parcel of around 31 acres in Kochi and has a tyre manufacturing facility on the same which it has leased out to Apollo Tyres.
The salient terms of the lease agreement are as below:
The current lease agreement is valid up to 31st Mar 2022.
Earlier the lease rent was Rs 40 crores per annum; however the same has now been revised to Rs 50 crores per annum
For FY 16, on standalone basis the tyre business recorded PBT of Rs 37.61 crores. On standalone basis the company is debt free so we don’t expect any interest cost in FY 17. Further, in FY 17 the company will get full year benefit of revision in lease rent to 50 crore and therefore expect the company to record PBT of ~43-44 crores.
On the basis of earnings, we expect tyre business (similar to bond coupon) to trade at ~ 8-12 times PBT and expect the business to trade at market capitalization of ~350-500 crores.
Recently, an independent firm has assessed the value of land parcel of the company at 568 crores.
Further, some time back Govt. of Kerala acquired 1.50 acres of land of the company for stated compensation of Rs 29.36 crores (the govt. is yet to pay the money) which again points to the figure of ~ 600 crores as market value of land.
The healthcare business is getting de-merged. The company set up Artemis Hospital in Gurgaon in 2007, spread across 9 acres. The Artemis Hospital in Gurgaon is a 380 bed hospital and can be expanded to 500-550 beds (LINK). Further, the company also runs 50 bed multi-speciality hospital in Dwarka, New Delhi that commenced operations in September 2012.
The incremental CAPEX on expanding the number of beds to 500 will be ~25-30 crores.
The healthcare business of the company is growing rapidly with sales increasing from Rs 216 crores in FY 13 to Rs 400.44 crores in FY 16.
At the same time with improving scale of operations and overheads remaining large fixed, the profitability has improved drastically from Rs 0.17 crores net profit in FY 13 and 6.5 crores in FY 14 to Rs 21.40 crores in FY 16.
With improvement in utilization rate at the two hospitals we expect the profitability to improve further and on a conservative estimate healthcare business can clock net profit of ~23-25 crores in FY 17.
On the basis of earnings, we expect healthcare business to trade at ~ 15-25 times PAT and expect the business to trade at market capitalization of ~360-600 crores.
In unlisted space and in regions like Gurgaon the deals are happening at per bed valuation of Rs 2-3 crores which values healthcare business of PTL in excess of 700 crores, however as we are looking at a listed company we would like to go by earnings based valuations.
Rationale behind this opportunity
The current market capitalization of the company is 785 crores.
On a conservative estimate, we expect Tyre business to get market capitalization of ~350 crores (8 times FY 17 (E) PBT of 43.5 crores) and healthcare business to trade at market cap of ~ 360 crores (15 times FY 17 (E) PAT of 24 crores) i.e. 710 crores on cumulative basis.
Our realistic estimate is that tyre business can trade at ~ 10 times FY 17 (E) PBT of 43.5 crores i.e. market cap of 430 crores and healthcare business at 20 times FY 17 (E) PAT of 24 crores i.e. 480 crores; so cumulative market cap of ~ 910 crores.
Over optimistic estimate would be 500 crore market cap for Tyre business and 600 crores for healthcare business.
So, as we see it the downside seems limited at around 10% while there’s reasonable opportunity of gain for the shareholders through separate listing of the healthcare business.
In de-merger cases the proceedings can get delayed on account of delay in approval by high court (pending in case of PTL) and by stocks exchanges for the listing of resulting company.
In case of deterioration in performance of healthcare business the valuations will get impacted.
Govt. of Kerala has acquired 1.5 acres of land of PTL and hasn’t paid the compensation as yet. Such acquisition in future with inordinate delay in payment of compensation can impact the tyre business of the company.
Disclosure: I do not have any holding in PTL Enterprises.
Details of Associates: Not Applicable
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