Samvardhana Motherson Finance Limited (SMFL) IPO Review

SMFL IPO Analysis Report

Issue Highlights

Issue Period: 2/5/12-4/5/12

Issue Type: 100 % Book Building

Face value: Rs. 10

Issue Size: Rs. 1665 crore

Price Band: Rs 113-118

Registrar: Link Intime

Lot Size: 50 Shares

Maximum Retail Subscription: Rs. 1,94,7000

Listing: BSE, NSE

Industry: Automotive Components Manufacturing

Industry Profile

Global automotive industry is worth 2.34 trillion dollar (2010 figure as per Frost & Sullivan report) and mainly comprises manufacturers, OEM (Original Equipment Manufacturer), dealers, distributors and other ancillary providers.

Automotive industry is divided into two segments-

     (1)   Light Vehicles (LV) : comprises passenger cars, MPV(multi-purpose vehicles) and SUV(sports utility vehicles),sport cars and LCV (light commercial vehicles) like small trucks and vans

     (2)   Heavy Vehicles (HV): Trucks, buses and prime movers fall in  this category

The global production of LV is supposed to grow at a CAGR of 7.6 % to 92.5 million units by the 2013.

Government of India has implemented the Automotive Mission Plan 2006-2016 to boost the Indian automotive industry. This plan intends to double the contribution of Indian auto industry to the national GDP.

Automotive Component Manufacturing

Automotive component manufacturing is divided into two parts-

     

     (1)   OE (Original Equipment) Components: these components are developed by OEMs and used in the production of the vehicles and in case of replacement during service period.

     (2)   After Market Components: these components are directly sold to auto part dealers and non-company service centers

Indian automotive component market is dominated by OEM demand of around 72 %, followed by after-market (17%) and export (11%) demand.

OEM demand mainly comprises of cars & UV (Utility Vehicle) demand followed by commercial vehicle demand.

Company Profile

SMFL was incorporated in late 2004 and caters ‘design and manufacturing-solutions’ needs of the automotive industry through its subsidiaries and ‘joint ventures with partners’.

SMFLs business covers areas like Rear View Vision Systems (presently top business generator for the company), wiring harnesses (erstwhile top business generator segment), polymer processing, air-conditioning systems etc.

The company supplies to OEM customers and has got 120 strategically located manufacturing units out of which 48 locations spread across 25 foreign countries.

Major investee companies of SMFL

     

     (1)   Motherson Sumi Systems Limited (MSSL):  MSSL is listed company on the Indian bourses and dividend received from this company forms a major source of income for SMFL. SMFL holds 36.1 % of MSSLs equity.

      

     (2)   SMR(Samvardhan Motherson Reflectec Group Holdings Ltd.) : Before acquisition its name was Visiocorp involved in rear view vision systems

  

     (3)   Peguform: Peguform group was acquired in late 2011 and it is an international supplier of interior and exterior automotive products. SMFL holds around 80% stake in it through a joint venture with SMFL.

Objects of the Issue

 Issue comprises the fresh issue of shares along with the offer for sale.

 Fresh issuance proceeds shall go for-

       ·         Pre-payment and repayment of debts availed by the company and its subsidiaries : Rs.338.5 crore

       ·         Funding strategic investments in the joint venture SMPL and the subsidiary Motherson  holding private      limited : Rs. 627.5 crore

       ·         Investment in rear view vision systems : Rs. 156 crore

       ·         General corporate purposes : shall be finalized after the discovery of the issue price

Issue structure

Public issue: Rs. 1665 crore

Offer for sale by a promoter: Rs. 321 crore

Fresh issue of the equity: Rs. 1344 crore

Strengths

·         The company’s clientele include  World’s top-ten OEM manufactures

·         The company’s major customers are Volkswagen, BMW, Maruti Suzuki, Daimler, Renault, Nissan, Volvo and Tata Motors.

·         The company enjoys market leadership position In Rear View Vision System

·         Strategically located manufacturing facilities spread across 25 countries

Risks

·         Company bears the risk of  belonging to  automotive sector which is cyclical in nature

·         Company  performs all of its operations through subsidiaries, joint ventures and other consolidated entities  and its profitability depends on the performances of these entities

·         Concentrated customer base with Volkswagen group contributing for 24.2 % of consolidating income. Top-5 clients accounted for 59.3 % of 9-month income in FY12

·         Over-dependence on  Euro & USA geography

Financial Analysis #

# All calculation at the upper price band of Rs. 118

# Post-issue equity was considered for the calculations

Parameter	FY 12-Annualized Stand Alone	FY 12 Consolidated
P/E	212.7	NA  (Due to Net Loss)
P/B	6.3	4.8
ROE	3%	NA  (Due to Net Loss)
PEG	3.5	NA  (Due to Net Loss)
Net Profit margin	51%	NA  (Due to Net Loss)
Profit CAGR	61 %	NA  (Due to Net Loss)
Debt/equity ratio	.14	4.9

 Inference

SMFL is a holding company of very complex structure. On consolidated basis company suffered losses due to the acquisition of Peguform group in CY 2011. Peguform group was badly hit by the financial crisis of 2008.

For holding companies like this profits are always on paper and loss is real. Even as per stand-alone results, SMFL is trading at a Price-to-Earnings Multiple of 212 (at the upper price band) and this implies very steep valuations.

The major chunk of SMFLs income come from dividend from MSSL, for the 9-month ending December 2011 this figure was Rs. 387 million and there is no sense in subscribing to this issue for availing MSSL dividend.  On consolidated basis company has incurred the loss mainly due to higher interest outgo.

No doubt, it’s better to stay away from this comedy of complexities.

Disclaimer: Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.