Vodafone Investment

Piramal made an investment by buying 11% of Vodafone's Indian arm in two tranches for Rs. 5,800 crores. Post the deal, Vodafone's stake in its Indian arm was reduced to 64% (below the 75% SEBI guideline)

The first tranche of 5.5% equity was bought in August 2011, followed by another 5.5% equity in Feb 2012.

The first question is what is a healthcare company doing in Telecom field? 

On Feb 6, 2012, the CEO, Ajay Piramal, had the following to say. 

link

Ajay Piramal -- "Coming to Saturday’s announcement, we have now invested a further 3,006 crores to buy an additional 5.5% stake in Vodafone India Limited. With this purchase, our total investment in Vodafone is now 11%. As we have said in the past, the idea here is to utilize surplus money for short term to invest in globally reputed companies in high growth sectors in India with intent to generate higher returns that can be earned rather than investing in fixed deposits and fixed maturity plans. Just to make it clear, this is not a strategic investment, we have no plans of entering the 

telecom sector and we hope to exit this investment  in the next 12-18  months either through an IPO or a stake sale."  (Emphasis added)

Let us switch over to Vodafone to see what they have to say about the deal on their annual report. (link)-- page 59

In respect of our interest in Vodafone India Limited (‘VIL’), Piramal Healthcare (‘Piramal’) acquired approximately 11% shareholding in VIL from Essar during the 2012 financial year. The agreements contemplate various exit mechanisms for Piramal including participating in an initial public offering by VIL or, if such initial public offering has not completed by 18 August 2013 or 8 February 2014 respectively or Piramal chooses not to participate in such initial public offering, Piramal selling its shareholding to the Vodafone Group in two tranches of 5.485% for an aggregate price of between approximately INR 70 billion (£0.8 billion) and INR 83 billion (£1.0 billion).

What does this mean for the investor?

There are three scenarios. (We will talk pre-tax here)

First scenario -- Vodafone does not do an IPO but pays Piramal INR 7,000 crores. Assume that the deal takes place on Feb 2014. Discounting the entire amount at 15% (for present value),  the gain on today's terms will be Rs, 1,020 crores. Using an very aggressive tax of 30%, the entire stake will be worth 6,616 crores in today's terms or INR 378 a share. 

Second scenario -- Vodafone does not do an IPO but pays Piramal INR 8,300 crores. Assume that the deal takes place on Feb 2014. Discounting the entire amount at 15% (for present value),  the gain on today's terms will be Rs, 2,125 crores. Using an very aggressive tax of 30%, the entire stake will be worth 7,500 crores in today's terms or INR 429 a share. 

Third Scenario -- Vodafone goes ahead with an IPO in Feb 2014. (Could be earlier) The company will need to be valued north of 85,000 crores (pre-tax for Piramal) for further upside for Piramal Enterprises. Conservative investors that we are, we will neglect this embedded option in the table.

Given that Vodafone holds only 64% of its arm in India, it is possible that Vodafone can buy back the entire stake from Piramal without violating SEBI's 75% ownership law.

On a very conservative basis, we are going to value this stake at Rs. 6,616 crores for Piramal. (We are already nine months into the 18-24 month window)

For investors who like to calculate EPS, the INR 6,616 crores will be available for further investment. If just left in a bank @9%, it will earn INR 600 crores a year. Remember that the stock is at a discount to its book value, so the effect on the earnings yield will be higher.

The investment is around 47% of the enterprise value.