After receiving a lukewarm response from investors, Samvardhana Motherson Finance (SMFL) has withdrawn its initial public offering (IPO) at the end of the third day of its offer.
After receiving a lukewarm response from investors, Samvardhana Motherson Finance (SMFL) has withdrawn its initial public offering (IPO) at the end of the third day of its offer. The offer, which aimed at raising Rs 1,665 crore, managed to get subscribed by only 0.23x between its offer dates from May 2 to 4, 2012.
While most experts and analysts on the streets would blame the government for its rigid stance on various tax laws, including the infamous GAAR, due to which the FIIs have shunned the offer, we at DSIJ strongly believe that the foremost and chief reason for the poor response is the bad pricing method adopted by the company and its lead managers.
Right from the initial days when the company began its road show to promote the IPO, its inappropriate decision to not disclose the price band during the press conference and analysts meet was a complete put-off. This was a serious concern as it suddenly sent out a wrong signal to the investor community, who suspected that the company and its lead managers were up to something fishy and thus wanted to avoid any sort of discussions on their pricing method.
In fact for a company like SMFL, whose business structure is very complex to understand, the one thing that investors were keenly awaiting was the announcement of the price band, which would have helped understand the valuations. Finally, when the IPO band was announced, the disappointment was even greater. At a price of between Rs 113-118 a share, the PE multiple of SMFL’s shares stood at 39.62-41.73x its FY11 post issue EPS of Rs 2.83-2.85. This seemed massively overpriced when compared to its very own listed subsidiary Motherson Sumi Systems (MSSL) which is currently trading at a PE of 17.6x. Also, given the fact that the company had reported losses between the period April to December 2011, investors were very skeptical about paying such a steep price for this company.
What’s astonishing is that SMFL, despite being backed by the enormity of its business prowess, operational ability and strong brand value, failed to woo the investors. It is hard to imagine how a company with 19 years experience in the auto ancillary sector and commanding a resounding global market share in most of its business segments could not capitalize on the opportunity presented to it.
At a time when there is a dark cloud looming over the fate of the secondary equity markets, SMFL with its ‘mega offer’ had the one chance to revive investor confidence, but alas due to some poor decisions and unwarranted actions on part of the promoters and the lead managers, the issue has not been able to do so. We at DSIJ, while writing our initial analysis on the IPO, had recommended to our readers to completely avoid the issue as we expected the prices to correct sharply post the listing.