How D-Mart owner Damani made 1,800% gains from a cigarette stock

In February 2001, Radhakishan Damani, now better known as the owner of supermarket chain D-Mart, stunned the market by making a hostile bid for VST Industries, controlled by British American Tobacco (BAT). 

At that point Damani had already acquired a cult status on Dalal Street -- both as a trader and value investor. 

But even Damani’s closest associates were surprised by this act of aggression, completely at odds with his soft-spoken and reclusive nature.

Through his investment arm Bright Star Investments, Damani had by then accumulated a shade below 15 percent in the company over the previous 12 months at an average price of Rs 88 per share. He was now willing to pay Rs 112 per share for an additional 20 percent in the company, a 26-percent premium to the market price on the day he announced the bid. 

A messy bidding war ensued, as ITC entered the fray with a counter offer to thwart Damani, counted among India's savviest stock market investors, from taking control of VST. 

It is still not clear if ITC – then also controlled by BAT -- had done so at the prodding of its foreign principal, or if the move was motivated by self-interest.

ITC chairman YC Deveshwar’s public stance was that BAT should not be allowed to hike its stake in VST.

“Why should we allow BAT to increase stake in VST? We are trying to do many things to control consumption of tobacco and atthe same time you want to encourage it," Deveshwar had said at the company’s AGM in August 2001.

And it soon became evident that there were far too many obstacles—regulatory, competitive and cultural--for Damani to be able to walk away with his much-coveted prize. 

ITC initially made an open offer at Rs 115 per share and later increased that to Rs 126 per share. Damani eventually raised the price and size of his bid--Rs 151 per share for 30 percent of the company--but failed to win over the banks, insurance companies and financial institutions that together held 22 percent in the company. Through the open offer, Bright Star managed to increase its stake to around 20 percent, but Damani’s dream of owning a controlling stake in VST remained just that, a dream. 

Nearly sixteen years on, RK Damani has every reason to feel satisfied despite the injury to his pride. VST shares are now trading around Rs 2700, valuing Bright Star's investment in the company (25.95 percent as on December 31, 2016) at roughly Rs 1100 crore. That is an almost 20 times-return from the time Damani first started accumulating the shares way back in 2000. 

According to a back-of-the-envelope calculation, the acquisition cost of VST shares for Bright Star is less than zero, considering the hefty dividend pay-outs over the last nine years. Between July 2002 and April 2016, Bright Star has pocketed around Rs 175 crore through annual dividends ranging between Rs 4.50 and Rs 70 per share. Bright Star’s first 15 percent in VST cost it around Rs 20 crore (average price of Rs 88), and the next 5 percent (assuming the open offer price of Rs 151 and some open market purchases) would have cost around Rs 11 crore. 

Between March 2003 and March 2005, Bright Star added a further 4 percent when the stock price ranged between Rs 90-350. Even assuming an average price of Rs 275, that stake would have cost not more than Rs 20 crore. Thelast tranche of roughly 2 percent was purchased between March 2007 and March 2009, when the price was declining and ranged between Rs 350 and Rs 210 (the high during the period being Rs 450). That would have cost not more than Rs 10-12 crore, even assuming an average price in excess of Rs 300. In summary, Damani’s Bright Star is unlikely to have forked out more than Rs 63 crore for the 25.95 percent stake that it is currently holding. And dividends alone have netted over Rs 175 crore over the years.

Looking back at the failed bid for VST, even today Damani’s close friends are not sure what prompted him to make that audacious open offer. On the face of it, VST appeared a good investment. Cash flows were good and the entry barriers in the business were high. But was it compelling enough to lock horns with a power multinational like BAT? 

“Maybe he wanted to draw attention to the fact the stock was undervalued,” says one broker who has known him for the last couple of decades. 

“By provoking a bidding war, he was hoping that the stock’s market value would get a boost. It is unlikely that he would have underestimated BAT’s clout to hit back. There was no way that BAT would have watched silently and allowed him to put them out of business,” he says. 

Perhaps Damani was betting that BAT would not be able to counter attack quickly enough, given the policy restrictions on foreign tobacco companies increasing their investments in India. Yet, nothing went right for Damani from the time he made the open offer in February. ITC, through its investment arm Russell Credit, made a counter offer for VST, and this was approved by SEBI.

In contrast, the approval for Bright Star’s open offer was delayed, and one of the reasons cited was a regulatory probe into Damani’s alleged involvement in the stock market crash a few months back.

Despite Bright Star offeringa better price than ITC, financial institutions refused to side with Damani, a decision that could have to do with political reasons rather than an investment view. 

Finally, when Bright Star's open offer commenced, VST advanced its book closure date by a day just before the last date of the open offer. Bright Star and its investment banker ASK Raymond James cried foul, alleging that it was a deliberate move to foil investors looking to buy VST shares from the open market and tender them in the open offer. 

Ultimately, Damani has been proved right in his bet on VST Industries, though his original game plan may have been a bit grander.