As disclosed in its annual financial statements for FY13, management of Descon Oxychem (DOL) has taken steps that will free up some serious cash flow for the next two years. In a nutshell, the company has obtained a grace period of two years for all its debt, including both the bank as well as subordinated debt. Moreover, the subordinated loan will now accrue interest for two years meaning that no finance costs will need to be paid for it.
All this means that the company will save Rs. 300 million each year for the next two years which comes to around Rs. 3 per share per year. Not bad given the stock is currently trading at Rs. 5.5.
While there would be no significant impact on earnings, improved cash flows could reduce short term borrowings and save finance costs. Possibility of dividends can also not be ruled out.
Now why did the management do this? The company is in excellent financial shape especially as per the June quarter result. Peroxide prices are at an all time high and will stay high for the September quarter implying that the quarter result will be good.
Maybe they just wanted to be safe given the dip in peroxide prices experienced two years ago.
Fair values are fair values and people rarely take them seriously. However, if they have anything worth, the whole debt restructuring exercise has had a fantastic impact on company valuation. The cumulative shifting of Rs. 600 million in free cash flows two years forward has increased the fair value of the company to Rs. 15, giving us an upside of almost 200% given current levels.
Given the intermediate for the stock appears to be good as per business recorder, peroxide prices are still holding, which implies a good result for September quarter.
So Descon Oxychem. Lao Maal!