The Hindu Business Line : Punjab Tractors and Swaraj Engines

Consequent to its acquisition of a 43 per cent stake in Punjab Tractors, Mahindra and Mahindra (M&M) is making an open offer to the shareholders of the former. The offer is to acquire 1,21,51,140 shares, representing 20 per cent of the equity at Rs 360, which is at a premium of 12 per cent to Friday's closing price of Rs 322.

The current market price (as indeed the open offer price) is unrelated to PTL's fundamentals. The stock was trading in the Rs 240-250 band in early February when news first came of Actis's intention to sell its 29 per cent stake in PTL.

Soon the Burmans of Dabur, who held around 14 per cent in PTL, joined Actis and they put their joint holdings of 43 per cent up for sale as one block and invited bids from potential buyers.

The PTL stock began its upward move, rapidly rising to a high of Rs 334 by mid-February. The rise was clearly related to the bidding match between potential buyers and had no relation to any fundamental development in PTL's business.

In fact, if fundamentals were the basis, the stock should have moved the other way, heading down, as PTL is losing market share (down to No. 4 from two) and its profitability is also on the decline.

PTL's current market price discounts the 2006-07 EPS of Rs 12.83 by 25 times while the open offer price of Rs 360 per share is at a discounting of 28 times. In comparison, M&M (the closest comparison available) trades at a price-earnings multiple of 18 times based on the latest earnings.

Therefore, it may be wise for PTL shareholders to exit the stock now and examine a possible re-entry at a later date if M&M is able to get the company back on the rails.

Best exit route

Given the public shareholding in PTL, including institutions, of 3,36,36,675 shares (representing 55.36 per cent of the total equity), the minimum acceptance ratio in the open offer will be approximately 36 shares for every 100 tendered by a shareholder. Shareholders have two options before them; one of which they can choose based on their own risk profile.

The first is to tender their holdings in the open offer, of which only 36 per cent is likely to be accepted. They can then sell the remaining shares in the market but they would have to wait for the completion of the open offer to do that.

However, shareholders would be exposed to the risk of a decline in the stock price once the open offer is over, as it could align itself to levels that are compatible with PTL's fundamentals. That could well mean a price below Rs 300 per share.

The second option would be to ignore the open offer and sell all the shares in the market at the current price of Rs 322. That may mean a lower realisation but could well be a safe option in case the stock dips in the post-open-offer period.

Assuming that a shareholder chooses the first option, he would have to liquidate his balance shares in the post-offer period at a price of at least Rs 300 per share, if he were to make the same gains as in the second option. If he manages to sell it at a higher price, he will be gaining more.

SWARAJ ENGINES

Swaraj Engines shareholders can reject the open offer from Mahindra and Mahindra (M&M) and Mahindra Holdings and Finance for their shares at Rs 151 per share and sell their holdings in the market at the current price of Rs 165 per share.

Chances are that the market price would soon align itself with the offer price but shareholders would still be better off selling in the market as the open offer is only for 20 per cent of outstanding equity and only a part of the shares that they tender would be accepted.

Swaraj Engines' fortunes are closely linked to that of Punjab Tractors and light commercial vehicle manufacturer, Swaraj Mazda, to which it supplies engines.

Given the dropping market share of Punjab Tractors and the falling sales of Swaraj Mazda, the current prospects for Swaraj Engines do not appear very bright. Shareholders may exit the stock now at the current market price.