SMFL IPO: Complex Auto Conglomerate, Retail can Avoid

  • Date: May 3, 2012
  • Offering:  IPO is of Price Range Rs 113-118, available from May 2-4
  • Description: SMFL is a mid sized Auto ancilliary firm with a complex Private Equity style business model
  • Opinion: Retail investors need to avoid the IPO

SMFL – Description and Profile

  • Samvardhana Motherson Finance is into Auto components design/ manufacture. It is the holding company of the Samvardhana Motherson Group, started in 1975 by Chairman & ED V.C. Sehgal. Group turnover is 13,500 crores, and SMFL revenue 8,300 cr. (FY11).
  • The group is growing organic/ inorganically into an integrated autocomp supplier.
  • In Dec’11, SMFL had 18 Subsidiaries, 19 JVs and 86 other Consolidated Entities. Top holdings, along with SMFL stake and the Revenue contribution are:
    • Motherson Sumi Systems (Listed) – MSSL – 36.12 % stake, 51.2% revenues
    • Samvardhana Motherson Reflectec (SMR) – 63% stake, 33.7% revenues
    • Samvardhana Motherson Peguform (49% stake) contributed 10%.
  • The products suite includes wiring harness, polymer processing, rear-view vision systems, dropdown cabins, metalworking and elastomers. Mfg locations number 120 including 48 abroad.
  • Customers include the Volkswagen Group, BMW, Daimler, Renault Nissan, Ford India, Volvo Car, Maruti Suzuki, Tata Motors, Honda Siel, Toyoto-Kirloskar, etc. They are spread over 25 countries, and in FY12, 76.6% of income was from abroad.
  • About 4% of revenues are from non-auto industry like mfg of cabins for off-highway vehicles, refrigeration systems, and IT and engineering/ design services.

To understand this IPO offer, let us first review the listed group company, MSSL for its business and share performance. See Fig 1.

Motherson Sumi Systems – Financial Snapshot

A 5-year view of the share price of Motherson Sumi Systems in Fig1 shows us:

Motherson Sumi Systems Stock Price, JainMatrix Investments

Fig 1 – Motherson Sumi Systems Stock Price

  • Share price has risen 19% per annum over 5 years. Current market cap is 6700 cr.
Motherson Sumi, JainMatrix Investments

Fig 2 – Motherson Sumi, JainMatrix Investments

  • Revenues appreciated – Fig2 – by 41% CAGR, due to both acquisitions and organic growth. P/E has been in the 12-24 times range. EPS has grown, except for FY12.
  • The FY12 loss was on account of currency fluctuations and acquisition expenses.
  • In short, MSSL has been a good investment over the last 5 years.

SMFL – Financial Snapshot

Samvardhana Motherson Finance, JainMatrix Investments

Fig 3 – Samvardhana Motherson Finance, JainMatrix Investments

  • We can see, while revenues have grown rapidly, profitability has been lumpy.

IPO Offering Outline and Valuations:

  • The offer is of 14.7 crore shares in price range Rs 113-118, from May 2-4
  • The 25% dilution will get Rs 1665 cr. at upper end, for a 6930-cr market cap.
  • With the firm showing losses in FY12, the PE valuation is meaningless. The Price to Book ratio is 3.7, which is 40% lower than that of MSSL, and in the range of Bharat Forge (3.8) and Exide (3.3).
  • ICRA graded the IPO 4/5, indicating above-average fundamentals

Why Is SMFL going for an IPO?

  • The money raised will be used for the following:
    • Pre & repayment of debt availed by SMFL and subsidiaries – Rs 338 cr
    • Investments in SM Polymers (JV) & SM Holding (Subsidiary) – Rs 627 cr
    • Investments in Rear View Vision systems business – Rs 156 cr
    • General corporate purpose – Rs 222 cr
    • Reduction in holdings, by Promoter firm Radha Rani Holdings – Rs 321 cr.
  • The recent acquisition of Peguform has pushed up debt. D/E is at 2.7 times from 0.7 times in previous years. The IPO proceeds will be used to reduce this.
  • SMFL will meet the new listing norms as promoters will have < 75% stake.

Industry Overview

  • India is developing as an important Auto demand & supply center. For small and fuel efficient cars, India leads with R&D and mfg excellence from firms like Maruti, Hyundai and Tata Motors – JLR.
  • Firms like Bharat Forge, Exide, Amtek and the SMG are the Ancillaries support firms in this space. As per CRISIL Research there are over 46 Indian firms of turnover > 500 cr.
  • CRISIL Research projects domestic autocomp mfg. at 14-16% CAGR from 2011-16.
  • Quick calculations give the SMG a rough Market share of 7.4% with SMFL at 4.5% of the Indian autocomp market.

Key Strengths of SMFL and IPO offer

  • Motherson group is an established firm in the autocomp space. The first generation entrepreneur promoter has strong industry experience.
  • MSSL is a listed entity since many years, and has provided good return to investors.
  • The Autocomp sector is cyclical in nature, but is now coming out of a trough, and the outlook over the next few years looks positive
  • Multiple technologies, partnerships and mfg facilities provide a big growth opportunity.
  • SMFL has already raised Rs 222 cr. through issue of shares to four anchor investors – the Govt. of Singapore, Royal Bank of Scotland, US-based IVY Pacific Opportunities Fund and Birla Sun Life.

Key Weaknesses/ Issues/ Challenges of SMFL and IPO offer

  • SMFL is a holding company with a very complex clutch of JVs and subsidiaries. While we can sense the opportunity in the sector, a Valuation of the group and projection of growth is very difficult.
  • Future prospects of the group are embedded within multiple firms, and will be unlocked only on internal exploitation of synergies, successful integration of acquisitions and coordinated marketing.
  • Current revenue concentration is Europe centric (50%) with a poor economic outlook there.
  • The current plunge in profits is another sign of this risky M&A model
  • Will this firm transition from a Family business to a professionally managed one? As SMFL grows from mid cap to large, this may be required to manage a complex global business.

Opinion, Outlook and Recommendation

  • The IPO was subscribed only 9% till EOD 3rd May. This is not a good sign, and the firm may struggle to attain the numbers on the final day. Also there may be no pop on listing.
  • The business model of SMFL is like that of Private Equity, with multiple acquisitions and integrations. Profitability is currently 1-2 years away.
  • Retail investors should not enter into such businesses as this is a high risk model, with very unsteady financials and long gestation investments.
  • Retail investors interested in the group can either enter MSSL, or watch the SMFL listed stock for 4-6 quarters and enter once the business stabilises.

JainMatrix Knowledge Base:

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Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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