Diamond valued at coal price: Zodiac shareholders taken for a ride, offered 75% discount to book

Zodiac JRD MKJ was listed back in the 1990s, when its share price was more than Rs 90

Shares of Zodiac JRD MKJ, a Mumbai-based gold and diamond jewellery company, have doubled to Rs 66 in the past eight trading sessions. Reason? An open offer for a 26 percent stake in the company at Rs 33 a share.

For minority shareholders wanting to exit the company, double the price through market sale should be an alluring proposition, but no – they feel shortchanged.

That’s because the market price, which is twice the open offer price, is only half of what the company is worth, as reflected in its books. Both the acquisition and the open offer price grossly undervalue the company, which has diamonds in its inventory and has a book value of Rs 133 per share.

Zodiac JRD MKJ’s open offer was triggered after Mudit Jain, promoter of chemicals company DCW Ltd., and Bluerock acquired a 27.32 percent stake from the promoter Jhaveri family for Rs 33 per share. Entities acquiring 25 percent stake or more in a listed company must make an open offer to buy an additional 26 percent of the shares from the public.

If the open offer goes through entirely, Jain and Bluerock will hold 53.32 percent in the company.

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Is the open offer price unfair?

Moneycontrol spoke to the open offer’s merchant banker Saffron Capital Advisors, which said the price was calculated as per the regulator’s norms.

“If Zodiac JRD MKJ was an infrequently traded scrip, the floor price of the open offer would have to be determined on valuation basis. But since it is a frequently traded scrip, the floor was calculated using the volume weighted average market price of the share in the 60 days preceding the announcement,” said Saurabh Gaikwad, assistant manager at Saffron Capital.

The floor price came out to be Rs 32.91 and the acquirers said they were willing to pay Rs 33, he added.

“Frequently traded shares” mean the traded turnover during the 12 months preceding the announcement is at least 10 percent of the total number of shares.

Minority shareholders’ interest

According to Zodiac JRD MKJ’s annual report, it had inventory worth Rs 43.52 crore and investments in highly liquid mutual funds worth Rs 5.6 crore at the end of March. These, along with trade receivables, take the company’s net worth to about Rs 69 crore.

The Rs 43.52 crore inventory includes Rs 38.69 crore of cut and polished diamonds, which were valued lower than the net realisable value (NRV), said the company.

“Verification and valuation of inventory is a technical matter. The stock was physically verified by an independent valuer and valued at market price. However, the management has computed cost as per the weighted average cost method, which was lower than the market price and hence it is valued at lower of cost or NRV,” Zodiac said in its annual report.

An investor took to social media site X to point out that it would be detrimental to minority shareholders of the company to sell the business as a going concern at the price (Rs 33), which is much lower than the book value of the company.

“Had the company liquidated the assets, at least Rs 68-69 crore would have been received, which could have been distributed to shareholders,” the investor added.

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Zodiac JRD MKJ was listed back in the 1990s, when its share price was more than Rs 90. After the stock fell to Rs 5 in 2001, it turned into a penny stock and has not been able to regain its heyday glory since. Over the past 10 years, the company’s profit has compounded at 2 percent while sales have fallen at a CAGR of 1 percent.

Shareholders from the 1990s could be looking for an opportune time to exit. In fact, Ministry of Corporate Affairs through its Investor Education Fund also holds 1.69 percent stake in the stock. Ace investor Sangeetha S holds a 3.67 percent stake.

Sonam Chandwani, managing partner at KS Legal & Associates, said undervalued assets such as diamond inventory and mutual fund holdings could be substantially underestimating the company's true net worth.

“Assets, even if illiquid or encumbered, contribute to a company's overall value. By not accounting for these assets in the acquisition price, the acquirers could be aiming for a bargain, which would disadvantage minority shareholders,” she said.

Legal recourse

Moneycontrol reached out to Jain, who refused to comment on the open offer price. A mail has been sent to both the acquirers – Jain and Bluerock – and the story will be updated when they respond.

If minority shareholders feel an acquisition undervalues the company, they can file a complaint with the Securities and Exchange Board of India for a potential revision of the offer price.

“Additionally, they can invoke Sections 241-242 of the Companies Act of 2013 to file a case with the National Company Law Tribunal for oppression and mismanagement. These legal avenues offer protection against unfair acquisition terms,” Chandwani said.

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While that decision is best left to the shareholders, it is certain that the acquirers will not get more than a few shares if the offer price is left unchanged. The tentative schedule for the open offer is from November 6 to November 20.