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It all began in February, 2001 when Radhakishan Damani, one of India’s savviest stock market investors, stunned the market by launching a hostile bid for cigarette maker VST Industries, owned by British American Tobacco (BAT). At that time, Damani already owned around 15% in the company via his investment arm 'Bright Star Investments' at an average price of Rs 88 per share. He was now ready to pay a premium of more than 26% in order to acquire additional 20% in the company. So, he launched an open offer at Rs 112 per share. Damani’s this aggressive move even left his closest associates surprised.
Radhakishan Damani wanted to take advantage of the policy restrictions on foreign acquisitions and investments in India. He was hoping that British American Tobacco (BAT), majority stakeholders of VST Industries (around 32% today) would not be able to counter attack quickly enough.
But surely, he was not going to have it easy.
ITC's counter:
On orders of BAT, their other cigarette manufacturing company, ITC (around 29% today) entered the fray.
What followed was an intense bidding, as ITC made an open offer of its own initially at Rs 115 per share but later increased it to Rs 126 per share. In response, Bright Star Investments upped their bid to Rs 151 per share for an increased stake of 30% in the company.
What followed was an intense bidding, as ITC made an open offer of its own initially at Rs 115 per share but later increased it to Rs 126 per share. In response, Bright Star Investments upped their bid to Rs 151 per share for an increased stake of 30% in the company.
Bright Star managed to increase it stake to 20% in the company via the open offer. Worth of their stake became Rs 31 crores (at that time) but they failed to win over banks, insurance companies and financial institutions who together held 22% stake in VST Industries. Thus, due to various political and structural factors, Damani’s dream of owning a controlling stake in VST remained just that, a dream.
Damani's transactions in VST Industries over the years:
As extracted from sources,
- Bright Star’s first 15% in VST cost it around Rs 20 crore (average price of Rs 88).
- The next 5% (assuming the open offer price of Rs 151 and some open market purchases) would calculate to around Rs 11 crore worth of shares.
- Between March 2003 and March 2005, Bright Star added another 4% when the stock moved in the range of Rs 90-350. Even assuming an average price of Rs 250, it would have not cost more than Rs 20 crore.
- Another tranche of roughly 2% was purchased between March 2007 and March 2009 (time of financial crisis), when the price was falling. The high during that period was around Rs 450. Even assuming an average price in excess of Rs 300, that stake would not have taken more than Rs 10-12 crore out of Damani's pocket.
- In fact, Radhakishan Damani is still accumulating this stock. He bought 2,70,000 shares at Rs 4,259.99 apiece in November, 2019 as per bulk deal data on BSE.
Bull's eye!
Fast-forward two decades, and Damani has consistently cornered shares of VST Industries Ltd at most possible stages during the years. He currently owns around 5% in his personal capacity and around 26% via Bright Star Investments summing up to 30% total stake as of December 2020. As per lot of reports he and his company, Bright Start Investments forked out just around Rs 65 - 70 crores for this total stake.
Can you guess what is the worth of RK Damani's stake in the company now?
Dhak-Dhak! Dhak-Dhak! Dhak-Dhak!
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As of December 2020, it is valued at over Rs 1,823 crores! From Rs 63 crores to Rs 1,823 crores, which is 29X or more than 2500% gain in 20 years.
In the same time frame, VST Industries share price has gone up from around Rs 85 - 90 to Rs 3800 - 4000, hitting an all time high of Rs 4774.5 in January, 2020. It is among the top 3 cigarette manufacturers in India and the fastest growing in the sector.
Currently it is fuctuating between Rs 3400 - 3800.
As of December 2020, it is valued at over Rs 1,823 crores! From Rs 63 crores to Rs 1,823 crores, which is 29X or more than 2500% gain in 20 years.
courtesy giphy.com
Currently it is fuctuating between Rs 3400 - 3800.
Google finance: VST Industry share price in the last 20 years
But let me tell you what is so special about this investment.
Power of value investing:
As per many market analysts and coverages, Damani effectively paid ZERO RUPEES.How?
On one hand, RK Damani paid in the region of Rs 65 - 70 crores for 30% stake in VST. On the other hand, as per financial data from 2001 to 2016, he has earned Rs 175 crores as dividend income.
This means just the dividend income from the stock, he has covered his costs incurred to invest in the company. And in fact, not only covered but exceeded as you see from the values above.
This effectively puts cost of acquisition at 0!
Just like ITC, VST Industries is also a cigarette company. In fact, where now ITC is trying to pivot towards the FMCG segment, VST Industries is purely a cigarette manufacturing company. Mean all its earnings comes from the smoking habits of the people.
And there you go, we all know how hard it is to give up any habit one is doing for so long and in this case it is 'addiction'.
So, as people's habit to smoke stays constant, the cash flow of the company stays constant or rather say increases as the population increases. They do not have to make any extensive efforts to promote smoking. In fact, ads are made and messages are shown to promote that smoking is injurious to health and still these companies have enormous cash flows.
This opportunity of free cash flow was identified by Mr. RK Damani and these free cash flows are what get converted to dividend for investors in the long run. So, where prices keep going up and down in the short run (though in the long run even that goes up only if it is a good company) but dividend payments are something that can stay constant no matter what circumstances are - whether it is a bull market or bear market. But those free cash flows need to be identified and patience is needed in order to reap the rewards.
In today's fast paced world, quick money and capital appreciation is what people are running after (Growth Investing). Not saying that it's wrong or something. Even Mr. Damani's stake in VST appreciated and the numbers are above. Surely it is an important part of the market and every wants to and should take benefit of it. But there is one major aspect of investing that we learn from the case study, 'the magic of dividend' (Value Investing) that millennials have not experienced yet.
So one can say that Damani has been proved right in his bet on VST Industries.
See for yourself, ownership breakdown of VST Industries for the last four quarters:
The last picture indicating public ownership specifically includes the names of Bright Star Investments and Radhakishan Shivkishan Damani.
Though he was not able to complete takeover of the company back then but now due to his patience, discipline and belief on the company he is one of the largest stakeholders in the company and largest individual shareholder by a long mile.
Sources:
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