THE CURIOUS CASE OF LACTOSE INDIA Ltd.

Many of our investors are vulnerable to market moods and taking decisions  based on crowd mentality mainly due of lack of conviction in stocks they are interested .Many of us  are only  investors in stock markets and not in companies or businesses and our investment decisions are subject to the opinion of the anchors of popular business channels.If we want to get more conviction we should spend more time to study the business,management ,future plans..etc..etc  of companies rather than spending  full time in front of the trading terminal.I am not sure how many of us are at least periodically looking into the published results of companies in which we are invested and reviewing our investment decisions based on company’s working or its future prospects.Percentage of  informed  investors are very small and most of us are interested to know the answer for only one question in every morning – Which stock will go up ‘TODAY’ ? .On a net basis ,result of such an action ( I don’t think it can be called as ‘Investment’) will be always  negative or negligible.On the other side ,there is no meaning in expecting same kind of return from each and every stock and should not hesitate to book loss if we feels  there is something wrong happening in a company and should not take loss booking is a failure of an investor .In the case of majority of retail investors the major reason for failure in stock market investing is their unwillingness to book loss .What I try to convey is only one point – if you are taking investment in stocks seriously you should spend more time to learn about the company and not to watch the minute by minute price movement of the stock of that company.

Let us come to the point mentioned in the headline of this posting.Lactose India is a small,unknown and unnoticed company listed in BSE( CODE -524202).This company operating in the niche market of manufacturing food and pharmaceutical grade lactose.Company’s turnover jumped from Rs.27 Cr in FY 2011 to over Rs.40 Cr in FY 12 .Even if many of you are not interested in the footnote of published results, I am reproducing below  the footnote attached with the September quarter result of this company  .( Click on the figure to read )

                                                    Let us take the point No.3 alone which indicating company received an amount of over Rs.10 Cr from a company named Kerry Ingredients Pvt Ltd .Lactose claiming that ,an amount of Rs.7.7 Cr out of this contribution is  meant for expansion of production capacity and balance Rs.3.3 Cr as an advance for goods to be supplied to Kerry. It is really an interesting deal especially at a time many companies are trying hard to find some customers for their products .We should note another important point that the amount Rs.10 cr was  sufficient to bought out this entire  company itself (Its market cap was below Rs.10 cr at the time of this deal ,which is now Rs.12 Cr).Just because of curiosity I checked the identity of Kerry Ingredients Pvt Ltd and realized that this company is owned by Kerry Group of Ireland ( Details HERE) which is a leading company supplying food and pharma ingredients to world market.Kerry is a listed company in Dublin  Stock exchange and its common stock is trading at a price of €38.10 (approximately Rs.2740) . To my surprise, In one of their filing to Irish stock exchange Kerry informed that  they have already acquired Lactose India Ltd !! .For  your reference ,I am reproducing the mentioned  portion of their investor presentation below :

An Irish publication named  ‘Irish Examiner ‘ also published this news item in their business section.( Link HERE) . More clues about this acquisition is available in the latest annual report of Kerry which is available in their website. Why Lactose India so far not disclosed this deal to BSE is the moot question. There may be many reasons and one possibility is like this .The Indian promoters are currently holding close to 29 % stake only in this company.If they have some plans to hike their stake before offering stake to Kerry ,disclosing the deal before hiking stake will force them to shell out more to hike stake.As per SEBI rules (link HERE ) pricing of preferential allotment depends on a market price linked pricing formula.This may be a reason for not  disclosing  the deal so far ,and theoretically speaking I don’t think such a disclosure is mandatory  till the company openly  accepting they have entered in such a deal and allotting shares to Kerry .Even if some one complaining to authorities for not disclosing price sensitive information , I am not sure what will happen if company plainly deny such a deal and argue that the news items published in a foreign country is not known to them and it is false) Anyway  I  strongly feel , as Kerry mentioned in their filing to Irish Stock Exchange, at least Lactose already reached in an agreement to sell majority stake to Kerry and it will be disclosed in due course.In an interesting development which we can read along with this story ,day before yesterday there was an EGM for Lactose India to approve the allotment of 1134000 warrants to promoters @ Rs.12.5 which will be converted into one equity shares each.On conversion of these warrants Indian promoters stake will be improved to 39.In last year annual report company mentioned it plan to hike its production capacity 4 fold from current 3000 Mt per year to 12000 MT per year.This massive capacity expansion may be backed by some assurance from Kerry Group.In September quarter (December quarter result not published so far) Company reported a net profit of Rs.42 lakhs v/s Rs.11 lakhs in June quarter.Currently stock is trading around Rs.17 which may sharply re-rate even from current level  if something happen as we expected.Anyway ,something is really cooking in it ,when it will be served to the public is a question.Since this information is based on data available in public domain and some assumptions ,I am not recommending it but only sharing some information  available with me .Take a decision after own due diligence .Lactose India is listed only in BSE and trading around Rs.17

Link to Kerry Group's website  HERE

Link to latest Annual Report of Lactose India HERE

Disc : Holding few shares.