Just on the cusp of the long festival weekend, the board of a US$2.5bn (billion) company met at a time of the day when the directors may have an excuse for not having brushed their teeth.
And before the coffee served could be gulped down, the meeting concluded. What they decided was to sell some investments amounting in value to less than 2% of the book value of the company’s total assets!
It was not any hush-hush deal with a third party that could have set off an alarm in the market, but a sale of an investment in an associate entity to two other group companies!
The company anyway should hold the Q2 results meeting anytime. The tearing (in Madras basha-‘head going’) hurry of a crack-of-the-dawn meeting just for a single agenda item is a good reason to look further into the case!
To get to the crux of this story, the dramatis personae of this need to be listed.
Ramco Cements Ltd (the seller), Rajapalayam Mills Ltd, Ramco Management P Ltd (the buyers) and Ramco Industries Ltd (the investment being hawked).
On 29 October 2024, the board of Ramco Cements decided to sell 1.4 crore (14mn) equity shares the company holds in Ramco Industries.
The trigger to write on this issue is the absence of any reason in the company’s communication to the public.
This is a long-held investment in an associate entity that is consolidated as part of Ramco Cements’ balance sheet!
In fact, just some months earlier, Ramco Cements had bought 7.2 lakh (7,20,000) shares of Ramco Industries for a sum of Rs15.5 crore!
Being a related-party transaction, only the independent directors can vote and decide.
Ramco Cement’s board composition is fairly unique for a family-owned company with just a solitary promoter member.
Out of the seven serving on the board currently, three marked in green are the ones inducted on 1 April 2024, in place of those marked in yellow.
Six, including the chair, are outsiders and the sole promoter director is the managing director.
Surprisingly, there is little reference to this announcement in any of the popular newspapers that readily latch on to such events.
There has been no whisper of any such move in the latest directors’ report for FY23-24, nor in any other investor communication that is publicly accessible.
At the annual general meeting (AGM) held in August, which lasted 36 minutes, there was no hint of any restructuring of the group investments.
The company is a well-known player in the industry that has been spurring the market in recent days due to multiple acquisitions and consolidation by the two behemoths, Ultratech and Ambuja.
Its operational parameters look robust, though there has been some dip in the past two years, in tandem with the market trends.
Its debt of Rs5,000 crore is none too alarming as it has been investing heavily in assets which have increased from Rs7,500 crore in FY19-20 to Rs12,700 crore in FY23-24.
The accompanying table shows the investments held in the three listed entities of the group.
These are held for very many years and constitute the typical cross holdings that most Indian family companies sport on their balance sheets.
The fact that these investments existed for a very long period implies that the same have a reason. Any move to change that should be explained suitably.
Rajapalayam Mills, one of the two buyers, held its own board meeting on 29th August, even earlier than the Ramco meeting, to approve the purchase. The approval was for investing Rs85 crore.
This company was the first to be started by the group’s founder in the 1930s to manufacture cotton yarn. The company continues to thrive in the said business till date.
How cash-rich is Rajapalayam Mills to invest Rs85 crore at the press of a switch, that would, at best, yield a low single-digit return?
The outstanding debt of this company as of 31 March 2024 is a tad above Rs1,000 crore. A significant part of this is current, implying payable within 12 months.
It clocked a loss of Rs34 crore from its operations in FY23-24. It managed to show a profit of Rs23.44 crore, after adjusting an extraordinary income on the sale of investments.
This part is interesting and looks like another piece of the unfolding story.
The investment sold in this case was 6.13 lakh (613,000) shares of Madras Cements Ltd.
It is seen that a major portion of this sale was to a family member, Sharadha Deepa. The rest of the transaction is not immediately traceable to the destination.
The reason stated by the company for this disposal was the need to find cash to fund the margin money for a loan to be taken for the expansion of the fabric division.
Against the above-mentioned background, the decision to invest Rs85 crore to purchase the shares of Ramco Industries is, indeed, inexplicable.
The company is apparently borrowing this money from Barclays Investments and Loans by pledging 14.5 lakh (1.45mn) shares of Ramco Cement.
As already stated, the investment in Ramco Industries shares would at best fetch a sub 2% return through dividends, while the borrowing from a non-banking financial company (NBFC) like Barclays will not come cheap!
How would the minority investors benefit from this investment which would strain the balance sheet of Rajapalayam Mills and most likely its net earnings when a huge interest cost hits its net income with no matching credit?
The other buyer is Ramco Management P Ltd, about which no information can be located in the public domain.
In this case, the outlay would be around Rs270 crore, which is no small deal, unless the said company is rolling in currency notes!
Little can be found out about the financial condition of this entity to park so much cash in an investment that doesn’t add any strategic value since it is shifting an existing investment within the group without adding to the total promoters’ holding.
Should this company also require loans to defray the purchase, it would be a major cost with no corresponding income to offset it.
While as a private company, this doesn’t concern the general public, the fear is whether the loss in this deal will be recouped from other profitable entities that have public shareholders can give rise to further disquiet on the governance side.
To be fair, this is purely speculative but is triggered by the plethora of related party transactions that all listed entities in the Ramco group have.
The table alongside gives a glimpse of the cross-holding between the different listed entities in the group.
Even as of date, the pledge of Ramco Cement shares is quite significant.
The scene now changes from the rationale to valuation/ price.
These inter se group sales are invariably between related parties. Such transactions have necessarily to be at arm’s length.
Ramco Cement’s announcement mentions that the sale of the 1.4 crore (14mn) shares in Ramco Industries shall be at the current market prices.
The earlier purchase of the same shares that Ramco Cements did sometime during FY23-24 seems to have happened at around Rs220 per share.
Ramco Industries shares had traded between a low of Rs124 in April 2023 to a high of Rs274 in February 2024.
The price of Rs220 is well above the mid-point of these two coordinates. While such an internal transaction could have been done at any time when the price was low, the group did not take that route.
Still, the prickly question that crops up is whether the market quotation is
per se a good benchmark for such group transactions.
To answer this question arithmetically, the chart on the right would be relevant.
This is a partial extract of the investment schedule of Ramco Industries whose shares are being sold by Ramco Cements.
The current price of Ramco Industries’ share is around Rs282, adding up to a market-cap or equity valuation of about Rs2,400 crore.
Thus, any sale around this, or at a slightly higher price to obviate any pesky question, shall satisfy the arm’s length price.
But does it?
As can be seen, the market value of the investments of Ramco Industries (only in the three listed entities) as of 31 March 2024 is Rs4,293 crore. Considering the appreciation in the market prices since, the present number is much higher.
Thus, the intrinsic value of the company based only on the three investments listed is almost twice or more its current market value!
Ramco Industries is a mid-size enterprise with a turnover of over Rs1,100 crore and is a leading player in the manufacture of asbestos roofing sheets, building products, textiles and wind power.
These companies set up decades back would have huge land banks which is seldom visible on the books.
All in all, even the liquidation value of the company would be many multiples of what the market price reflects.
If the strategic value of its holdings in a company like Ramco Cement and Ramco Systems is reckoned, it would be another X to the multiple.
How does the decision to sell the shares at the current market quote reconcile with the data above?
Ramco has a board with six outside directors and a lone promoter director, acting as the managing director.
The chairperson is also an independent director. This board composition is unique among all family-owned companies.
The expertise of the six directors is rich and diverse. Their personal credentials and experience are impressive.
Unless the minutes of the discussion at the board are made public, it is difficult to speculate how the price was decided given the facts staring at one’s face.
The fact of the earlier purchase of the 7.2 lakh (7,20,000) shares at the then prevalent market price may have been relied upon by the management as a precedent and the rest of the board may have found it convincing.
Most readers may have read the stories of Vikram and Betaal.
The king, Vikramaditya, got himself into a fix whereby he had to deal with a spirit that would narrate a complicated story and pose a riddle at the end, which the king should answer correctly.
A wrong answer carried the risk of his head breaking into a thousand pieces!
Betaal was frustrated with the king correctly answering its question every time.
When the Ramco matter reached its ears, Betaal knew it had finally a tale that would stump the king, as it was not just a vanilla riddle, but wrapped in a conundrum as well!
It narrated to the king the subject in a more gripping way than the story written here.
And finally, the riddle was coined as below (an inaccurate translation from the original Pali!)
“The promoters should have the full freedom to keep their shareholdings where they like; expecting them to sell them at a value higher than the minimum demanded under the law is neither tax nor cash flow efficient; in any event correctly valuing a share is not feasible in the large expanse of Bharata Varsha due to the fact that no valuer is truly independent; finally, shortchanging the minority shareholders should be avoided at least in such direct cases-
And, added a rider most vicious- “The answer should not be pinned on some dodgy Supreme Court decision”!
“Oh! King! Tell me the way out of this, despite the above constraints!
“Mind you! The answer should not be like what the consultants provide, that carries three options and none of which the adviser is sure of.”
The king became very pensive, actually crestfallen! The spirit knew it had finally nailed him!
After the lapse of time of one muhrta, the king was found striding on his way, implying that he had answered the riddle correctly.
Unfortunately, how he solved the problem was missed to be recorded!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
