Samvardhana IPO: Complex holdings, tax havens raise serious doubts

by VS Fernando

Delhi-registered Samvardhana Motherson Finance Ltd’s (SMFL) initial public offer (IPO) of Rs 1,665 cr with the price band of Rs 113 to Rs 118 for Rs 10 paid-up share, comprises a fresh issue of Rs 1,344 crore form the company and an `Offer for Sale’ of Rs 321 crore from one of the promoter group companies.

[caption id=“attachment_295910” align=“alignleft” width=“380” caption=“Currently, the consolidated debt of the company is as high as Rs 3918 crore as against its net worth of Rs 1433 crore. Post public issue, the company has planned to reduce the debts by Rs 966 crore. AFP”]  [/caption]

Made through the 100 percent book building route, 50 percent of the net offer is reserved for qualified institutional buyers (QIBs) while 15 percent and 35 percent are allocated for non-institutional investors and retail investors, respectively. The shares are proposed to be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

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Issue Object

The fresh issue proceeds of Rs 1,344 cr are proposed to be deployed as follows:

• Funding pre-payment and repayment of debt facilities availed by SMFL and its subsidiaries Rs 338.50 cr

• Funding strategic investments in a Joint Venture (Samvardhana Motherson Polymers Ltd) and in a subsidiary (Samvardhana Motherson Holdings (M) Private Ltd) Rs 627.50

• Funding investments in rear-view vision systems business Rs 156.00 cr and the balance is earmarked for General corporate purposes.

Issue Grade

ICRA has assigned 4 out of 5 to the issue indicating ‘above-average fundamentals’. The rating is influenced more by the group’s standing, production capabilities and the diversified product portfolio. However, it does not reflect the company’s current working which is in loss.

Pedigree

Incorporated in December 2004 to undertake designing and manufacturing solutions for the automotive industry through subsidiaries and joint ventures with partners, SMFL is the holding company of the Samvardhana Motherson Group (SMG). The SMG group has diversified businesses which include rear view vision systems, wiring harnesses, polymer processing, automotive lighting products, heating, ventilation and air-conditioning systems, elastomer processing metal tooling, cabins for off road vehicles, refrigeration systems, design engineering, etc.

SMFL has invested in most of the new joint ventures/acquisitions of the SMG group either directly or through its subsidiaries/associate companies. The company has equity investments in over 30 companies. Nearly 84 percent of the book value of SMFL’s total investments at the end of fiscal 2011 was in Motherson Sumi Systems Ltd (MSSL) - the only listed company of the group which posted a consolidated turnover of more than Rs 8,175 crore in fiscal 2011.

The other major investee companies were the Europe-based Samvardhana Motherson Reflectec (SMR) and Peguform. SMR, formerly known as Visiocorp, manufactures rear view mirror systems for automobiles. This business was acquired by 49:51 JV of SMFL and MSSL in 2009. Peguform is a manufacturer of plastic injection moulded components with a turnover of Euro 1.4 billion in calendar 2010. SMFL in 49:51 JV with MSSL completed acquisition of 80% stake in Peguform in November 2011.

The group’s principal focus is the automotive industry. Through a combination of organic growth and acquisitions, the group is now a multinational with manufacturing and design capabilities as well as customers spread across multiple geographies. In 2011 approximately 22.5% of the consolidated income was from customers located in India while 76.6 percent was from overseas customers.

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Promoter

The SMG group was founded in 1975 by VC Sehgal, an Australian citizen of Indian origin, who is the executive chairman of SMFL. Though the group caters predominantly to just one industry, viz. Automobiles, the promoters have preferred to have a complex web of subsidiaries and joint ventures. The existing listed company of the group, MSSL, too has many subsidiaries. Notwithstanding the size and financial track record of the group, the promoters lack investor confidence which is reflected in the comparatively poor discounting of the listed company of the group. Moreover, the promoters’ complex web of holdings raises serious doubt about their intentions.

Whereas the promoters are based in Australia, they have preferred ’tax havens’ to route their investments into India. The offer for sale is made by the Singapore-registered Radha Rani Holdings which is an erstwhile overseas corporate body as defined under Foreign Exchange Management (Deposit) Regulations, 2000. The promoter of Radha Rani Holdings is a Mauritius-registered company, JSRR Holdings, which is owned by JBJ Development Inc registered in British Virgin Islands. This company is owned by JBJK Growth Trust whose trustee is Pollux Trustee Services Limited of Switzerland! The sole beneficiary of JBJK Growth Trust is VC Sehgal, the main promoter of SMG.

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Financial Track

SMFL has witnessed strong growth in public, thanks to its recent acquisitions of rear view mirrors and polymer component businesses. On a consolidated basis, from Rs 515 crore revenue in FY08, the company clocked Rs 5061 crore in FY10 and Rs 5717 crore in FY11. In the nine month period up to December 31, 2011, the turnover further increased to Rs 6025 crore.

However, the company’s profitability is far from convincing. Its operating margin has been in single digits during the last three years. After posting a net profit of Rs 169 crore in FY11 (with a net margin of less than 3%), the company incurred a net loss of Rs 127 crore in the nine-month period up to December 2012 on an increased turnover. During the preceding four years, the company’s EPS has never exceeded Rs 2.90 on Rs 10 paid-up.

Prospects

Currently, the consolidated debt of the company is as high as Rs 3918 crore as against its net worth of Rs 1433 crore. Post public issue, the company has planned to reduce the debts by Rs 966 crore. Though the reduced debts may lighten the interest burden, the company may take some more time to see a credible bottom line as the recently acquired stressed assets are likely to drag on the company’s profitability in the near future.

Valuation

SMFL, which reported a consolidated EPS of Rs 2.90 in fiscal 2011 and posted a loss of Rs 2.50 in fiscal 2012, has fixed a price band of Rs 113 to Rs 118 for the IPO. Recently the company allotted nearly Rs 2 crore worth of shares to some anchor investors at a price of Rs 115. Though this price may perhaps be justified in the long run considering the future consolidated earning potential of the company, the valuation looks very steep for the near term. It is worth noting here that only in September 2011, the company made a preferential offer at Rs 52.10 a piece.

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Promoter’s Cost

The average cost of acquisition by the core promoters works out to between Rs 6.28 and Rs 10.05. In fact, if Radha Rani’s disinvestment of Rs 321 crore is adjusted against the promoters cost, their average cost of holding would be negligible.

Managers’ Track

SMFL’s IPO is managed by MNC merchant bankers Standard Chartered and JP Morgan who are not very active in the primary market. Standard Chartered has so far managed only one IPO namely Tata Steel in January 2011 which is currently quoted at a discount of 24 percent.

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In the case of JP Morgan, of the 12 issues handled by the merchant banker, eight are currently quoting below their offer prices. IPOs like Brigade, Rel Power and JSW Energy are languishing at less than half of their offer prices.

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Strengths

•Global customer base and strong relationships with major automotive OEMs

•Market leadership position in exterior rear view vision systems

•Long term partnerships and collaborations with global technology leaders facilitating access to cutting-edge technology

•Wide range of capabilities, enabling end-to-end solutions to customers

•Synergies through horizontal and vertical integration

•Growing inorganically through overseas ventures

•Expansion into emerging markets

Concerns

•Complex web of holdings and tax haven routes tank investor confidence

•Being predominantly a holding venture, standalone cash flows largely depend on the performance and distribution of the investee-companies

•Comparatively poor investor-sentiment towards existing listed company of the group

•current adverse profitability and absence of dividend distribution

*V S Fernando is a veteran IPO Analyst who has been tracking domestic Public Offerings since 1986.