Novel Ideas

IDFC Ltd & IDFC Bank merger

Opportunity

The merger of IDFC Limited, a bank holding company, with its subsidiary IDFC Bank with uncertainties around approvals from multiple regulators. Valuation and sale of their Mutual Funds business, use of sale proceeds, and swap ratios.

Intrinsic Value

Our valuation analysis of IDFC Ltd. Including the Holdco. and mutual fund business, the valuation of IDFC First Bank, and the merger ratios made it clear that IDFC Ltd. was trading at a discount of ~38% to its intrinsic value.

Structuring

A Long-Short and a Covered call deal based on our valuation of the bank, holding company, and the MF business.

Risk Management

Covered and long short positions mitigated the high uncertainty in approvals. The short position was gradually brought down over the course of the year, based on the quarterly improvement in the performance of the Bank.

Performance

The valuation of IDFC Ltd. Improved to converge to the intrinsic value with each successive merger approval. Discount to fair value reduced from 38% to 13% providing multi-bagger returns on our derivative long positions.

Tata Motors DVR

Opportunity

Tata Motors Ltd. Has two classes of shares listed on the stock exchanges, Tata Motors Ltd. And Tata Motors DVR with differential voting rights, but with the same shares in the profits of Tata Motors Ltd.

Intrinsic Value

Tata Motors DVR shares were being traded at a discount of 66% on the price of Tata Motors Limited. Globally the discount on non-voting shares ranges from 5%-10%. A higher discount is acceptable for companies with poor corporate governance. This was not the case with Tata Group.

Structuring

A long-Short strategy was ideal for Tata Motors when TAMO was performing poorly in its India PV business. We transitioned to a Covered call strategy when TAMO stock was close to bottoming out at double-digit prices.

Risk Management

Our analysis of the Tata Motors fundamentals and its SOTP valuation along with an on-the-ground review of its upcoming PV portfolio convinced us of the improving forward earnings on the stock. The position was converted into a Long Only TAMO DVR position.

Performance

From the date of our transaction initiation Tata Motors DVR has appreciated 7.44 times as against an appreciation of 4.57 times in Tata Motors. The discount on TAMO DVR has narrowed from 66% to 45%.

NMDC Demerger

Opportunity

NMDC, the largest iron ore mining company in India had invested all their surplus money in building a steel plant. This meant significantly lower dividends than what one would expect from a leading PSE.

Intrinsic Value

The NMDC Steel Plant accounted for 40% of the enterprise value of NMDC. However, the actual value incorporated in leading analyst valuation was less than 50% of the replacement value of the steel plant.

Structuring

A long-only investment designed to take advantage of share price improvement, high dividend yield on improving iron ore production and tax arbitrage created through the demerger.

Risk Management

Active monitoring was conducted on the stock to capitalize on the tax arbitrage arising from the demerger.

Performance

The demerger has unlocked part of the value of the steel plant resulting in outsized returns. A divestment process for the NMDC steel plant is underway which should bring the overall valuation closer to its intrinsic value.

Tata Steel Partly Paid-up Shares

Opportunity

Tata Steel PP shares were issued in 2018 at a price of Rs 615 with 75% of the money yet to be called. Subsequently, the shares of Tata Steel crashed to below the 75% mark rendering these partly paid shares unviable

Intrinsic Value

The instrument became akin to an indeterminate time call option which would be exercised only if the market price would come back to the issuance price of Rs 615. This embedded option value was not adequately captured in the price.

Structuring

After a deep study of the industry and the company we decided on a long position with 4 alternatives ways to invest,
1. Long-only
2. Futures
3. Tata BSL (Entity merging with Tata Steel - available a discount based on the swap ratio) 

4. Partly Paid shares.
We chose a combination of 3 & 4.

Risk Management

Constant Monitoring and evaluation of the sustainability of the turn in the steel cycle. Monitoring and review of the prices of finished steel, duty structures, coking coal, demand-supply situation, European operations, expansion projects, merger integration, and merger timelines.

Performance

We were able to capture the full upside on the base company along with the option value and merger discount. This gave us a significantly higher return on funds than the market for nearly the same level of risk.

Novel Ideas

IDFC Ltd & IDFC Bank merger

Opportunity

Intrinsic Value

Structuring

Risk Management

Performance

Tata Motors DVR

Opportunity

Intrinsic Value

Structuring

Risk Management

Performance

NMDC Demerger

Opportunity

Intrinsic Value

Structuring

Risk Management

Performance

Tata Steel Partly Paid-up Shares

Opportunity

Intrinsic Value

Structuring

Risk Management

Performance

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