The reason why the stock has gone up is that on a consolidated basis the product business was not generating any EBITDA so to that extent the valuations were not coming through on the product business separately.
Polaris was in focus today as the stock took a near 5 percent cut due to profit booking but has been up about 40 percent in the entire week. CNBC-TV18's Reema Tendulkar and Sumaira Abidi spoke to Srinivas Seshadri, equity analyst, CIMB to know what is taking the stock up, whether there is room to buy more or have investors missed the bus. The stock closed at Rs 194 today.
Also Read: No plans to sell stake in either businesses: Polaris
Below are the excerpts from the interview:
Reema: What explains this massive stock price increase seen post the demerger announcement? How have the fundamentals changed to justify this increase?
A: What the company has announced is that they will be demerging the product business into a separate subsidiary which will be listed. The reason why the stock has gone up is that on a consolidated basis the product business was not generating any EBITDA so to that extent the valuations were not coming through on the product business separately.
With the proposal to list it separately investor would start assigning some valuation to the product business based on peer group multiples so that why you have seen the stock price jump over the last three-four days.
Reema: For the products business the shareholders have the option of retaining the shares or exchange it into their NCD with a face value of Rs 42 plus after 90 days, what would your advice be, have shares of products business or exchange it for an NCD and get money back?
A: It would make sense to hold on to these shares. We have done our calculation in terms of the potential enterprise value implied in the NCD offer. So what the shareholders would get is Rs 42/share valuation of the NCD plus a bit of interest on the three month tenure. Against that the company will also transfer a substantial portion of its cash reserves to the products company and so, our basic calculation suggests that the enterprise value implied in the NCD offer, if one were to accept it, would be as low as Rs 17-18/share. Against that if you look at the product business and the peer group valuations, what we have highlighted is the closest peer group company Nucleus Software which operates in a similar space.
If you had to give even a 30 percent discount to Nucleus valuations, you would get a valuation of around Rs 52/share. And again if you look at larger names, they trade at much higher EV to sales multiples. So, if the company can potentially execute well on its reasonably good intellective product then the valuation could be significantly higher from a two-three year period versus the NCD offer which is being made to the shareholders.
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