Description

GFL - Attractive Risk-Reward opportunity:

GFL is a special sit investment candidate with an extremely attractive risk-reward. As a quick brief, the corporate structure of GFL before the demerger of its chemical business was as follows:

The company demerged its chemical business into a separately listed entity called ‘Gujarat Fluorochemicals Limited’ and the current demerged structure is as follows:

This write up is about GFL1. It is now primarily a holding company with investments in two listed entities of the group and doesn’t have any operating entity as such. GFL limited before the demerger of its chemical business was a 1.4 Billion USD market cap business. Now the market cap of the entity is hardly around 100 Million USD. 

Hence, there has been a lot of forced selling from investors who have market cap constraints or were invested only for the chemical business. I believe this has created an extremely attractive asymmetric investment proposition. 

For a company whose current market cap of the firm is approximately 100 Million USD, the company holds the following assets:

- Inox Leisure - Listed entity (51.32% stake) -  266 Million USD

- Inox Wind - Listed entity (56.98% stake) -  65 Million USD

- Inter Corporate Deposits with the 2 listed group firms - 62 Million USD

- Investment in Wind Farm which they want to monetize - 60 Million USD

Hence, the total value of this entity should be somewhere around 450 Million USD. It is trading at a holding company discount of over 75%. The firms expects ICD’s and Wind farms to get converted into cash over the next few quarters. GFL limited doesn’t have any standalone debt on its balance sheet and cash equivalents are higher than the current market cap of the firm. 

It is not uncommon to see large Holdco discounts in India, especially in a bear market, as is the case now in Indian small caps. My interest in GFL stems from the following facts:

A.) Unlike most Holdco’s in which there is no catalyst or intent from the promoter to reduce the discount, GFL’s team has been communicating their intent to collapse the Holdco structure going forward and the demerger of the chemicals business was just the first step in this process. The group wants to simplify the structure further and provide investors their economic interest in the two listed entities directly. They are looking for a tax efficient way to achieve this objective. One of the methods that they have been contemplating is splitting the firm into two holdco and then merging them with their respective listed entities. While the structure of this unlocking isn’t clear, the intent is surely there. I believe that there is a 50%+ probability of a corporate restructuring happening within the next 2 years. 

B.) Also, unlike most listed Indian holding companies, GFL only has two listed entities which drive almost all value for the Holdco and the rest is cash and cash equivalents that can be distributed back to shareholders easily. Also, the holding firm owns over 50% of both the listed entities and hence the results of the Wind & Leisure business would get consolidated into its own numbers going forward. Hence, the value wouldn’t be too difficult to uncover for any analyst going forward. 

C.) I have looked at Inox Leisure and Inox Wind themselves as standalone potential investments before. They are both very well run businesses and run efficiently by young management teams. Inox Leisure is an extremely well run business and is a strong No: 2 in the growing cinema exhibition business in India. It has the strongest balance sheet in the industry and continues to scale up aggressively. It’s mature sites have consistently been doing 20%+ ROCE’s and the opportunity for growth is enormous. There are only 3 healthy players who are rolling up and expanding the multiplex industry in what is a traditional single screen market. Inox Leisure can continue compounding shareholder value for a long time and is a brilliant play on the Indian discretionary consumer growth. The second listed entity, Inox Wind is at an interesting turnaround situation. After all the mess in the Indian wind sector from the regulatory changes, the competition is more or less bankrupt and there is a strong consolidation in market shares possible going forward. Inox Wind has a good balance sheet and will survive the crisis. When they come out, there could be significant opportunities as the market is huge and growing. The supply shortages of wind turbines will provide profitable growth opportunities. The recent launch of 3.3 MW turbine, execution of its large order book and the healing of its balance sheet are key triggers. Inox Wind at its peak was a 1 Billion USD+ market cap firm. 

GFL’s parent group has a long history of shareholder value creation and treating minorities fairly. They have always had a huge aversion to debt and most of their businesses are debt free and asset rich. The young scions of the group have incubated new businesses in different segments with large opportunities and have scaled up well. All the group’s firms are either No:1 or No: 2 in their respective industries and have focused always on operating efficiency and profitability. 

Hence, I see multiple ways to win in this investment. Of-course the best case is that the corporate restructuring leads to no holding discount. Or else, just that the holding company discount narrows over time as the value emerges with the yearly results. Or else, the two underlying two businesses continue to compound in value and are much bigger 3 years down the line. Hence even without a change in discount, I get my 20%+ returns. Or the cash is being used for dividends, allowing us to wait for the restructuring. 

The real risk in this investment is if the promoters allocate capital badly going forward and destroy value or if the wind energy business takes much longer to turnaround, sucking up even more resources of the holding company. Even accounting for these issues, I think the Risk-Reward in this investment is extremely favourable for investors and hence we have been accumulating its shares. While the daily trading volumes are low, there are blocks available from forced sellers and we have been able to accumulate 1.5% of the firm. Since all the four listed entities of the group have detailed disclosures, earnings transcripts and annual reports, diligent investors can analyze the underlying businesses and ascertain if they themselves standalone are attractive investments. 

Catalyst

Corporate Restructuring, Full Year disclosures, Abating of forced selling