'Avoid' Samvardhana Motherson Finance IPO

The year 2012 has so far been mixed for the primary equity markets. Of the four IPOs that have come out so far – Multi Commodity Exchange (MCX) of India and MT Educare (MT) have managed to create good wealth for investors while Olympic Cards (OCL) and National Building Construction Corporation (NBCC) have not been able to do so. 

With the expectation that the secondary equity markets would remain volatile in the near term owing to an unwarranted downgrade from ratings agency Standard & Poor’s (S&P) and a weaker-than-expected March 2012 quarter earnings, investors would look towards the primary markets to spring in some champagne opportunities and help create wealth.

Likely so, Samvardhana Motherson Finance (SMFL) plans to raise Rs 1,665 crore through a fresh offering of Rs 1,344 crore and offer for sale of stake by a promoter entity amounting to Rs 321 crore. The initial public offering (IPO) which opens on May 2, 2012 and closes two days later on May 4, 2012 is priced between Rs 113 to Rs 118 per share.

Of the Rs 1,344 crore, SMFL intends to use Rs 338.5 crore to repay the group’s debt obligations, Rs 627.5 crore towards prepayment of loans availed for funding its strategic investments and finally Rs 156 crore towards funding investments in rear-view vision systems business. Investors would be wondering if SMFL with its mega offer, touted to be the largest of CY2012 so far, could emulate the performance of MCX and MT or tank down like NBCC and OCL. Well, before we answer that, let’s understand its business and then gauge the fact if this business is worth investing in.

SMFL, the holding company of Samvardhana Motherson Group (SMG), has diversified its business interests mainly into the automobile ancillary industry through its 18 subsidiaries, 19 joint ventures (JVs) and 89 other consolidated entities. While it would be very impractical and complex to explain each of its subsidiaries, JVs and entities, readers must note that the company on a consolidated level operates majorly through five subsidiaries and JVs that rein in more than 95 per cent of its revenues. Kindly refer to the below pie-chart for further details.



Known to be an end-to-end solutions provider to the automotive industry, SMFL’s main business segments include manufacturing, designing and supplying of rear-view vision systems, wiring harnesses systems and polymer processing systems amongst many others. While the wiring harness business, as most of us would be aware, is carried mainly through its listed entity Motherson Sumi Systems (MSSL), the rear-view vision systems is held through Samvardhana Motherson Reflectec (SMR) and the polymer processing system business through Samvardhana Motherson Polymers (SMPL). 

Until FY09 the wiring harness business was the largest revenue grosser for SMFL, but after its acquisition of Visiocorp (Samvardhana Motherson Reflectec) the rear view vision systems became its largest business segment. Now with the recent acquisition of Peguform, the business mix is expected to be skewed in favour of the polymer processing business. 

Powered by its 120 manufacturing facilities and presence in 25 countries across the globe, SMFL supplies its products to the top ten largest automobile original equipment manufacturers (OEMs). It is said to be one of the largest manufactures of exterior rear-view vision systems commanding a global market share of 22 per cent. Without arguing much over SMFL’s business prowess, operational ability and strong brand value, we at DSIJ recommend investors to give this offer a miss. There are some compelling reasons for our bearish tone on this offer. 

Our chief and foremost concern is that SMFL on a standalone level is more of a core investment company (CIC) than an automotive equipment manufacturer. The company earns its standalone revenues mainly as income from its investments through dividends paid to it by its JVs, subsidiaries and consolidated entities. We believe that in future the inability of any of its entities to pay dividend due to unforeseen reasons would severely hamper SMFL’s growth prospects.

Moving on to the consolidated level, SMFL, as on December 31, 2011 has huge debt on its balance-sheet amounting to Rs 3,918 crore which translates in a pre-issue debt/equity ratio of 2.73x. While the company plans to pay off Rs 966 crore through the proceeds of the IPO, the D/E ratio would continue to stand high at above the 2x level, which looks threatening. On the financial front, the growth for the company has come majorly through the inorganic route as its topline grew at a CAGR of 123 per cent to Rs 5,716.5 crore between 2008 and 2011. This was majorly due to the additional sales from the acquisition of SMR in 2009. 

At the same time its bottomline clocked a CAGR of 77 per cent to Rs 167.65 crore. However, despite the past growth trend, the margins of the company remain an area of concern. The margins of SMFL have dipped considerably from 14.7 per cent in 2009 to 8.5 per cent in 2011 at the operating level and from 7.3 per cent to 3 per cent at the net profit level. 

In fact, for the nine months ended December 2011, the company has incurred a net loss of Rs 128.75 crore on a consolidated level due to one-off items like Rs 61.7 crore towards transaction costs on the acquisition of Peguform and forex loss of Rs 70.8 crore. There have also been some start-up costs incurred for SMFL’s new facilities in Brazil and Hungary, for which company has not quantified any amount. If we adjust for the above incurred exceptional items the company seems to have reported a consolidated net profit of Rs 31.33 crore in the period April-December 2011.

On the valuation front, at a PE of 39.62-41.73x its FY11 post-issue EPS of Rs 2.83-2.85, the shares of SMFL seem massively overpriced. Its very own subsidiary MSSL is trading at a PE of 17.6x, which makes SMFL’s offer look very expensive.

In conclusion, despite the numerous growth opportunities promised by SMFL through its IPO, we advise investors to stay away from the offer as we expect the shares to list at a considerable discount to the offer price.