GMM PFAUDLER OFS And What Management Has to Say About It
24 Sept, 2020
GMM PFAUDLER's share price goes into lower circuit for three consecutive days followed by announcement of Offer for Sales with a floor price of ₹3,500 at 33% discount to prevailing market price of ₹5,203.
What caused distress amongst investors :
According to the timeline:
Between September 15 and September 20 at a stock price of INR 5,900 to INR 5,200 , approximately 74,000 shares of GMM PFAUDLER were borrowed from NSE’s SLB segment.
What is a SLB?
SLB stands for Security Lending and Borrowing wherein a lender lends its security to an investor (borrower) in exchange for a collateral for a specific period of time.
The collateral provided to the lender is usually more in market value than the security lent itself to compensate the lender for any loss if in case, the borrower is unable to return back the security.
Borrowers borrow securities, usually stocks, to perform short selling. Short selling becomes important in a bearish market wherein an investor feels confident that the market and the associated stock will go down in price.
After borrowing, an investor sells the stocks at a higher price, only to buy them back later at a lower price when the stock price falls following a bearish movement.
The stocks of GMM PFAUDLER were never borrowed in the SLB segment till this activity. The borrowed shares were short-sold between INR 5,900 and INR 5,200 and the traded volume in this duration was recorded to be nearly 49,500 shares.
2. Announcement of Offer for Sales (OFS) at INR 3,500 by DBAG
On September 21, after the market hours, GMM PFAUDLER announced OFS issue at a floor price of INR 3,500.
It was a steep discount (33.3%) from the prevailing market price of INR 5,203 which raised questions such as why the shareholder is doing so when the business prospects are good for GMM PFAUDLER and they can demand higher profits.
3. The shares of GMM PFAUDLER went into lower circuit for 3 consecutive days since the announcement.
Why is this correlated to SLB?
As mentioned earlier, securities are typically borrowed with the intention of short selling. The borrowers of GMM PFAUDLER short-sold their shares between INR 5,900 and INR 5,200.
These short-sellers could have purchased the shares again at INR 3,500 through the OFS offer which could have easily provided them with the profit of INR 1,700 to INR 2,400 per share excluding the lending fees to borrow shares.
This is further solidified with the exponential increase of trading volume to 6 lakhs between September 17-21 and the fact that the shares of GMM PFAUDLER were never borrowed before.
Managements' take:
Today, MD of GMM PFAUDLER in an interview with Zee Business clarified various instances related to their recent activities. He said that DBAG which is a private equity firm that also happens to be a major investor in the company for the last 6 years decided to monetize it’s 25% stake as usually private equity firms sell their stake in about 4-5 yrs. He further added that even at a 33% discount offer i.e at ₹ 3,500 the valuations are very rich as it is still 72 times it’s price to earnings recorded in FY20.
He also told that the Promoters, DBAG and Patel family are locked in for a period of 3 yrs from now, so no dilution will take place now.
As for the possible case of SLB fraud, the company clarified that no such instances were possible from their side due to their confidence in ethics and integrity and they are willing to cooperate for an investigation.
Patel family, shareholders of GMM PFAUDLER also provided 2% of their stake in OFS which earned proceeds of $14 Million. These earnings will be directed to the company’s benefits and thus, will be invested in acquiring 26% stake in their International business.
Lastly, following the above movements, the share holding pattern in the company will be as follows:
Patel family will hold about 22%, DBAG will come down to about 30% and public shareholding will increase to more than 50%.
Our Outlook:
GMM PFAUDLER has been performing well and we expect it to do so provided no possible cases of fraud are reported. The historical data of the company provides us with insights like large amounts of free cash flows (In simpler terms, more profits), strong entry barriers (Negligible competition for Glass lined Equipment's for healthcare industry) and reputed & reliable investors.
The retail investors can apply for OFS issues at INR 3,500 or purchase the trading shares at an ongoing price of nearly INR 4,000. Since the future of the company seems very positive to us, the prices might take off again earning profitable returns for investors.
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