I was reading about M/s Pakka Ltd., wherein I came across an instance of a merger of a company owned by the promoters into M/s Pakka Ltd. As per my analysis, the valuation given to the merged company was very generous. I request your valuable inputs.
As per AR 2022-23, the company informed that it has absorbed by merger another company, called Yash Compostables Limited (YCL). The Scheme had been approved by the Hon’ble National Company Law Tribunal, Allahabad Bench vide order dated April 18, 2022. As such, 28,38,500 Equity Shares of Face Value of Rs. 10/- each of Pakka Limited were allotted on 13.05.2022 to the Shareholders of YCL.
AR 2022-23, Page 119,
In this way, around 7.45% of the company went to YCL shareholders.
From the Merger related documents available on website of Pakka Ltd., at least 99% of the shareholders of YCL were promoters of Pakka Limited.
So, it is clear that ~7.45% of the equity holding in Pakka ltd after the merger went to the existing promoters of Pakka Ltd only.
Now, the NCLT scheme annexure gives the basis of valuation of YCL as follows: –
Pdf named ‘YPL NCLT Convened Meeting- Notice to equity shareholders, pages 123-142.
As such, the methods used to value YCL and ‘Pakka Ltd’ were ‘DCF method’ and “Market Price method”, respectively, as Pakka Ltd was already listed on exchanges.
As the DCF takes into account the future projections, following were the projections used: –
So, the revenue was projected to grow at a CAGR of `~46% from FY 2020 to FY 2023.
Similarly, PAT was projected to grow from loss of -1.3 cr to profit of 16.2 cr.
Further, the valuer says that the management of YCL has forecasted company’s earnings.
The valuer did not feel any need to question such high projections.
As a result, the Equity value of YCL was calculated as ~118 crores as on 01.06.2020, whereas it was still making loss of 1.3 crores as of 31.3.2020.
AR 2022-23, Page 249 of Pakka Ltd shows that YCL has negative Net assets as on 01.04.2020.
Now, if we compare the projected revenues of YCL with actual figures from Pakka Ltd. ARs, we see projections were indeed too high. (Although not directly comparable, but since YCL was mostly making tableware products, I am using ‘Moulded products’ revenue from Segmental reporting in Pakka Ltd.
(in cr) FY 2020-21 FY 2021-22 FY 2022-23
Projected Revenue 344 516 670
Actual Revenue 23 32 53
Total Revenue of Pakka, after merger 184 291 408
Even the total revenue of Pakka Ltd. is way less than the projected revenue of YCL alone.
Also, the Moulded products division was not able to report profits even in FY2022-23, whereas it was projected that YCL would have ~16 crores of PAT in that FY.
Based on the information discussed above, it seems to me that promoters were able to get a bigger pie of Pakka ltd by valuing the YCL at exorbitantly high valuations.
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