Inox Leisure a market performer: Karvy

5048 Investors following INOX Leisure. Share this News with them.

0

Like this story, share it with millions of investors on M3

Inox Leisure a market performer: Karvy

Karvy Stock Broking has recommended market performer rating on Inox Leisure with a target of Rs 79, in its March 5, 2010 research report.

Post your opinion here

 

0

Tweet

Share on Tumblr

RELATED NEWS Support for INOX Leisure at Rs 65-70: Mohindar Inox Leisure can slip to Rs 64-65: Anu Jain ALSO READ See previous views by Karvy Stock Broking See what other Experts & Brokerages are saying about INOX Leisure See messages about INOX Leisure INOX Leisure BSE | NSE 01/06/12 Are Mutual Funds betting on INOX Leisure?

Karvy Stock Broking has recommended market performer rating on Inox Leisure with a target of Rs 79, in its March 5, 2010 research report.

Karvy Stock Broking research report:

Reliance Media Works (RMW), the entertainment arm of the ADAG group continues to strongly oppose the Inox-Fame deal and has made serious allegations regarding the under pricing of the deal and the existence of a financial arrangement between Inox and Fame, since a year ago. Inox currently holds ~ 50.5% in Fame and has announced an open offer for acquiring additional 20% in Fame for Rs 51 per share. RMW has already made a counter open offer for acquiring ~ 62.1% of Fame at a price of Rs 83.4 per share, 64% higher than the price offered by Inox. Technically, it should be not be a major risk to Inox as it holds 50.5% in Fame. However if ADAG (which currently holds ~14% stake in Fame through its companies RMW, Reliance Capital and Reliance Capital partners) acquires another 12% and increases its stake in Fame to 26%, then the company will have to take ADAG's consent before taking any crucial decisions. Understandably, Inox will not want such a situation at a time when it may be thinking of a possible merger of Fame with Inox.

As per industry sources, Inox can revise its open offer prices upwards in order to match RMW's price of Rs 83.4 per share. Also, in order to negate the possibility of RMW acquiring 26% stake in Fame, Inox will have to increase its open offer quantum from 20% to at least 25% of Fame's equity. This would mean that Inox will have to spend more than double of its current open offer amount. Inox could end up spending at least Rs 726 mn for additional 25% stake in Fame as compared to Rs 355 mn for a 20% stake. We believe that this option may not be very fruitful for Inox as -

• It will be easier for ADAG to increase its stake in Fame from 14% to 26% than for Inox to increase its stake from 50.5% to 75%.
• Also, even if Inox increases the price and quantum of its open offer, as discussed above, RMW may engage in a price war and increase its open offer price further.

However, Inox will not want to opt out of the deal as it will involve a loss of reputation, business synergies and market share for the company. We believe that Inox is in a catch - 22 situation, where it would not opt out of the deal but would have to spend much more in order to keep away the counter bidder from acquiring a major stake in Fame.

The FCCB angle....

Fame has currently $13 mn of outstanding FCCBs which are due next year. Out of the total $ 13 mn, $9 Mn are Series-A and convertible at Rs 90 per share and $4 mn are Series-B and convertible at Rs 107 per share. As per the agreement, if held till redemption, they have to be redeemed at a 37% and 40% premium over the invested amount respectively. However, in case the FCCB holders exercise their option and convert their holdings into equity, it will be an interesting situation as Inox's stake in Fame will come down to 43% from 51%. We have made a case for FCCB holders in case they hold the bonds till maturity or convert them into equity of Fame. We estimate that in case the Series-A and Series-B FCCB holders convert their holdings into equity, they will breakeven at when the market price of Fame's stock reaches Rs 128.4 and Rs 155.9 respectively. So currently when the stock price of Fame stands at ~ Rs 89, we don't expect the bond holders to exercise their option, thus mitigating a potential risk to Inox.

Moving forward, it will be interesting to see whether Inox goes ahead with a higher open offer price. We retain our market performer rating on the stock (with a target price of Rs 79), given that the company holds the controlling stake of 51% in Fame India.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment