Borosil Glass Works has announced to the Bombay Stock Exchange that it has sold its property in Andheri to Neepa Real Estate Pvt Ltd for Rs 830 crore. The company has shut production at the plant located on this land. Till its new unit to make borosilicate glass at Bharuch, Gujarat, gets gets ready, the company is sourcing its products from alternate sources.
The company had made public its intention to sell the land and there is no surprise on that front. In the first week of August, news reports did break out pegging the sale price at Rs 875 crore. Since more details are not available on the transaction, it is not clear if the sum will be received upfront or in stages.
The sum is large for a company of Borosil’s size and is over 2.6 times the company’s market capitalisation of Rs 309 crore. The company has debt of about Rs 44 crore on its books, which nearly doubled from the previous year’s level as it took loans to fund the voluntary retirement scheme for its workers. With little liabilities on its books, the company will become flush with funds. Borosil’s net sales rose by 31% to Rs 88 crore in 2009-10 but it incurred a loss of Rs 26 crore, mainly due to VRS payments of Rs 19 crore. The company has a net worth of Rs 45 crore. In comparison, the sum it has received is indeed substantial.
Cash windfalls of this kind prompt investors to look at the cash per share on a company’s books and then revalue the share price. In this case, for example, its per share cash after paying off debt, will be Rs 1982 per share on a pre-tax basis. Its share price in contrast is just Rs 790.
While the gap is indeed wide, shareholders should gauge what the company intends to do with the cash. Its 2009-10 annual report makes no mention of it nor does a web search throw up any recent news stories about the company’s plans to utilise the cash. For example, Piramal Healthcare got a huge sum by selling its healthcare division to Abbott Inc, but the company is proposing to deploy the cash for unspecified diversification plans.
The cash per share argument holds good only if it trickles down to shareholders. If Borosil decides to diversify into a new business or expand its existing business, using the money it received, it may only pay out part of the proceeds by way of dividend or a share buyback to shareholders. How much it retains and how much it pays out will determine the extent to which shareholders will benefit as diversification plans could take a long time to materialise. The share price was up by 5% at Rs 799 even though the announcement came after market hours on the BSE.