SUTLEJ IND - HIDDEN VALUE

Equity: Rs 10.6 crore FY06 EPS: Rs 37 Textile Units: Rajasthan Textile Mills, Chenab Textile Mills Fabric Unit: Damanganga Fabrics Last Dividend : Rs 3.75 per share Promoter and PCB Holding: 75 per cent FY06 Book Value: Rs 240 per share Value of Stock Portfolio: Rs 370 crore or Rs 370 per share
Price Trigger: Group consolidation under-way as the scions of Late Mr. G D Birla, get ready to pass the baton to the third generation Birlas.
Excellent Financials
The KK Birla run Sutlej Industries has reported an excellent performance for the FY06 with EPS rising to Rs 37 as against Rs 16 in FY05. The FY06 numbers however include a one time exceptional income of Rs 12 crore, which arose as a result of the inter-se disposal of shares in Century Textiles to Mr. BK Birla.

Consequently, 310000 shares were sold over to a group company of Mr. BK Birla as a part of unlocking cross holdings in group companies of the Birla families.
Sutlej already owns a huge portfolio of Investments, which include Chambal Fertilisers, Zuari Industries, Pilani Investments, Upper Ganges and Oudh Sugar. This portfolio at today's prices is worth Rs 375 crore.
An Equity base of Rs 10.6 crore and a CMP of Rs 381, works out to a market capitalisation of a mere Rs 370 crore. This seems to be a gross undervaluation for the Rs 650 crore textile business of Sutlej Industries, as the Value of Investments held on hand alone is worth Rs 370 crore. So the textile business is effectively available free of cost.

De-merger in the final stages
Realising the under-valuation, the Sutlej Board has decided to hive off the textiles business into Sutlej Textile Industries Limited (STIL) and retain invesments in Sutlej Industries.
Each shareholder of Sutlej Industries will be given one share of STIL foc, for each share held by them in Sutlej Industries. Consequently, both companies will be listed separately.
I would expect the Sutlej Industries scrip to trade close to the NAV of Rs 375-380 per share, just like a close ended fund like MSGF trades or the more illustrious Tata Investments trade.
The STIL scrip on a conservative basis should trade at Rs 250 or so. Thus there will be tremendous unlocking of value.

Here's a backgrounder to the de-merger scheme:
THE Rs 650-crore Sutlej Industries Ltd, a member of the K.K. Birla Group of companies, has decided to transfer all its textile activities into a wholly owned subsidiary, which has been named Sutlej Textiles and Industries Ltd.

The board has decided that one share of Sutlej Textiles and Industries would be given to the shareholders for every one share of Sutlej Industries.

The appointed date for the scheme to come into effect has been fixed for July 1, 2005. The valuation was done by N.M. Raiji & Co and the fairness opinion was provided by Ernst & Young.

At present, Sutlej Industries has three factories located in Rajasthan, Jammu and Gujarat. For the year ended March 31, 2005, the company registered a turnover of Rs 650 crore (Rs 525 crore).

The company's net profit for FY06 has come out to Rs 37 crore (Rs 16 crore). Meanwhile, Sutlej Industries has commenced the manufacture of readymade garments and home furnishings business at its Damanganga Unit.

The company has appointed Ernst & Young to advice on its organisational and corporate restructuring. Sutlej Industries is mostly into spinning and weaving of cotton, synthetic and blended yarn. It has doubled its production capacity from 85 lakh metre per year to 170 lakh metres.

The expansion programme cost around Rs 65 crore and has brought the third textile unit under the operations of Sutlej. The three units are: the Rajasthan Textile Mills, Chenab Cotton Mills and Damanganga Fabrics.

Sutlej Industries is managed by Mr Chandra Sekhar Nopany, grandson of Mr K.K. Birla and son of Ms Nandini Nopany. Mr Nopany is the Vice-Chairman of the company.

Three other Birla factions led by Mr Aditya Birla, Mr B.K Birla and Mr S.K. Birla are already in the readymade garments business in a big way. Their companies are Grasim, Century and Birla VXL, respectively.