Why is there a piggy bank with $600m in it, on sale for roughly $200m?
Disclosure: I am not a registered investment professional. As such, what follows is not intended to be investment advice.
I have not come across any write-up on this company. This is my attempt to do so.
I own common stock in Kiri Industries Ltd.
Company Summary
Company Name: Kiri Industries Limited
Stock Exchange: NSE, BSE
Ticker: KIRIINDUS
Current Market Cap: ₹ 1600 Crores ($200m)
Shares Outstanding: 5.18 Cr (51.8m)
Kiri Industries was founded in 1998, through the setting up a small manufacturing unit for dyes near Ahmedabad in Gujarat, India. The unit mostly exporting to Taiwan and the US. Today, they are one of the largest manufacturers and exporters of a wide range of dyes, dye intermediates and basic chemicals anywhere in the world.
This was a result of two distinct approaches:
A two stage backward integration process that started in 2004, where they set up an intermediate chemicals facility, and then a basic chemicals facility (Both near Vadodara, Gujarat)
One historical acquisition of a German dye company Dystar, in 2010, which would forever change the fortunes of Kiri (but not in the way one would expect)
While the business of dyes is fascinating in itself, and worthy of its own blog post, where the industry is today, and what it means for Kiri - as naive as it sounds - is largely irrelevant from an investment standpoint given current share prices.
The contents of the post, for the sake of brevity, will focus primarily on the acquisition.
Buckle up, this is a strange one.
Financial Snapshot
Before I get to the crux of the matter, it’s worth looking at a snapshot of the recent financial performance and balance sheet of the company. I will keep my analysis brief for this part. All figures are in ₹ crores (for my friends not in India, 1 crore = 10 million).
Revenue and profits have steadily grown over time, almost tripling between 2012 and 2022, except since Covid. More recently, the company has suffered from a myriad of demand, supply and operational issues (source: 2023 AGM)
Reduction is global demand for dyes by 35%, dye intermediates by 34% and Basic Chemicals by 29%
Reduction in the price of intermediates by at least 9%
Increase in the price of Raw Materials for Intermediates by at least 12%
Higher Electrcity and Power costs by at least 11%
Increase in Gas costs by 40% and Coal prices by 22%
Due to these factors, the company has not been able to realise fixed costs, reflecting in the negative earnings. The company also has ongoing recurring legal expenses that weigh down the earnings.
If we look at the balance sheet, things are better. The company has substantially reduced borrowings, from a peak of ₹ 787 Cr (over $100m) in 2015, to just 117 Cr (about $15m) today. While the trend is a steady downward slope, the company has recently taken out a loan of between ₹ 80 - 100 Cr (roughly $10m) at 18% to finance an ongoing lawsuit. The interest costs will take continue to take a substantial toll on the bottom line of the company for the next year.
In ideal conditions, while Kiri can comfortably achieve operating margins in the low double digits, and generate about 300-350Cr ($35-$45m) in PAT on a consolidated basis, it is not the strongest business, and operates in a brutally competitive, commodity industry.
Not the makings of a good investment.
Until you factor in Dystar.
Dystar Acquisition
In 2010, Kiri partnered up with Zheijiang Longsheng Group - a shanghai stock exchange listed company - to buy German based Dystar, which was struggling financially in the aftermath of the financial crises.
The structure was as follows:
37.57% stake held by Kiri Industries Limited
62.43% stake held by Longsheng, through its wholly owned subsidiary Senda International
The plan was to restructure and turn around the then debt ridden company, by closing down its plants in developed countries, and shifting manufacturing to lower cost regions in India. Part of the agreement was that Kiri would backward integrate into dye intermediates, and become one of the key suppliers to Dystar.
By 2013, there was already evidence that this turnaround was successful - Dystar was already profitable, and today, with over a billion dollars in revenue (low double digital PAT margins) is the cash cow of Longsheng, and much larger in market capitalization than the entirety of Kiri Industries
But it wasn’t all sunshine and rainbows. Despite Dystar’s meteoric rise, there were many disagreements around IP and governance, leading to Kiri finally suing Dystar for minority oppression (among other things) in the High Court of Singapore.
Summary of Court Case
The following is my rough summary of the court case. I have omitted several details that I deemed less relevant for the sake of keeping this concise. This court case has been hailed as a landmark judgement in Singapore due to its complexity, and atypically long timeline.
The final judgement (which I spent hours skimming through), is hundreds of pages long, and available online - official summary here.
June 2015 - Kiri files a case in the High Court of Singapore against Longsheng and Dystar, in an effort to enforce it’s rights as a minority shareholder arising from matters relating to governance and intellectual property rights.
January 2018 - After 3 long years, recording of all evidence is finally completed.
July 2018 - Main Judgement by the Singapore International Commercial Court (SICC) - Senda to Buy Out Kiri’s Stake in Dystar
August 2018 - Appeal by Senda in the Court of Appeal (AKA Supreme Court of Singapore), plus a Stay Application filed in SICC
August 2018 - Stay granted on purchase of shares, but not on the valuation process
September 2018 - Valuation process started by the SICC
January 2019 - SICC Judgement says no minority discount (DLOM) to be applied.
May 2019 - Court of Appeal rejects Senda’s appeal against the July 2018 order
October 2019 - Senda appeals the January 2019 valuation discount judgement in the Court of Appeal
February 2020 - Court of Appeal rejects Senda’s valuation discount appeal
December 2020 - Interim order issued by the SICC ascribing a valuation of $1630m to Dystar
January 2021 - Appeals filed by both Kiri and Senda in the Court of Appeal against the SICC valuation
June 2021 - Valuation Set by SICC for Kiri’s Stake - US$481.60 M (₹4000 Cr), assuming a 19% minority discount.
December 2021 - SICC delivers judgment on minority oppression lawsuit and orders Senda to pay Kiri S$8m (₹50Cr) by January 2023.
March 2023 - SICC issues order for final valuation - $603.8m (₹4800 Cr) or a 25% increase from the earlier valuation - minority discount is removed.
Phew.
Since March of 2023, the only issues that still remain be be settled are (1) how and (2) when the funds will come.
Where things are today
The final judgement has been crystallized and can no longer be appealed - Senda has to buy out Kiri’s stake in Dystar and pay Kiri $603.8m plus another S$8m for the lawsuit costs.
Senda has not complied with the December 2021 order of paying Kiri S$8m (₹ 50Cr) by January 2023, which raises the question - if they cannot even pay ₹50 Cr, why will they pay ₹4800 Cr?
To secure Kiri’s receivables, they filed a writ of seizure and sale of Senda shares held in DyStar to the extent of the recovery of legal costs along with interest. The sheriff’s office of the Singapore Court took possession of the said Senda shares.
The Company has filed an alternate relief application with SICC against Senda and DyStar to make them jointly and severally liable to make payment of awarded valuation. The court has fixed 24 to 26 January 2024 for hearing Kiri’s application for the enforcement of judgment.
A 9 year case, now in it’s final legs. All the information I posted is public - then why does the stock chart look like this?
Some Things that Should Raise Eyebrows
The following is the shareholder pattern of Kiri Industries. The promoters hold a significant portion of the company but over time, they have reduced their holdings. This is primarily because the promoters had a portion of their holdings pledged - outside of the pledged shares, no other sale is made by the promoters that I am aware of.
But if there is potentially a chance of tripling your money, why are the promoters not buying more shares? They have been prompted on this numerous times over the years, and the answer is always that they are willing to, but don’t have the necessary funds.
In January 2023, the stock suddenly crashed, curiously coinciding with the short report on a list of companies in the Adani Group by Hindenburg Research. While there is no direct correlation between Kiri Industries and the Adani Group, a lot of funds that own substantial stakes in Kiri also own large stakes in Adani stocks. I will let the readers decide whether or not they choose to go down into this rabbit hole.
What sort of authority do the Singapore courts have in the case Senda does not comply? Remember, Senda is owned by Longsheng, a Chinese company, with assets in a few dozen countries. It does seem however, that Senda’s equity in Dystar can be seized by the courts, or the entire company can be auctioned off.
Dystar also has a “healthy” balance sheet - how healthy is hard to know, but it’s been insinuated that it’s not healthy enough to pay Kiri in one go. If the payment is to be made today, Senda / Dystar do not have all the funds. The courts may have to intervene here.
Final thoughts
Basic / Intermediate chemicals companies trade at a 15-20x earnings multiple in India. On a standalone basis, Kiri can do about ₹100-150 cr in revenue. Assuming ₹100 crore revenue, 10% margin (which is low for this industry) and a 15x multiple, this gives us a valuation of ₹150 crores or roughly ₹30 / share. Since the company has about a ₹100 Cr in debt, and since the point of this investment is hardly in valuing the business correctly, let’s assume the value of the standalone business is zero.
After taxes and transaction costs, Kiri should net, very conservatively, around ₹4000 Crores from Dystar, or about ₹770 per share.
The stock currently trades around ₹300.
The question then is - Do you assign a higher than 50% chance that the highest court in Singapore will be able to uphold its decision?
Thank you for reading.
This is a very interesting writeup, thanks Abhinav.
There's an updated order dated 20th May 2024 by the SICC which says that there needs to be a bloc sale of Dystar facilitated by Deloitte, and Kiri would receive $603.8mn (~INR 5000cr) proceeds from the sale in priority (so irrespective of final sale valuation, Kiri would get their money back). The long stop date is Dec 2025, although this can be extended.
So even if i assume a 75% chance of this sale being a success, that translates to an expected receivables of ~3750cr for Kiri, say ~2800cr post tax. Discount this by ~25% (15% WACC, 1.5 years till Dec 2025) for time value of money, you get ~2100cr value as of today. Current market cap (5th June 2024) is ~1500cr, so there is a 40% discount in today's market value.
Then there would be some additional value of the core business (currently trading at 0.5x P/B, not sure how markets are valuing it).
Key risk is if there would be interested buyers for Dystar? What if the sale gets extended indefinitely?How do Dystar's financials look like? Couldnt find much on the internet.
Anything that i am missing here?