Apr 30, 2012, 07.13 PM | Source: Moneycontrol.com
Aditya Birla Money has come out with its report on Samvardhana Motherson Finance Ltd (SMFL) IPO issue. The research firm has recommended to avoid the issue, in its April 30th 2012 report.
, Aditya Birla Money |
SMFL, is the holding of Samvardhana Motherson Group (SMG), incorporated in Dec 04. Mr. V.C. Sehgal found the group in 1975. SMFL is a reputed and distinguished end-to-end solutions provider to automotive (OEMs) clients across the global. It provides wide range of design and manufacturing solutions. The company has diversified portfolio of products for Passenger Vehicles (PVs) and Commercial Vehicles (CVs), such as rear view vision systems, wiring harnesses, polymer processing, lighting products, HVAC systems, elastomer processing, metal tooling, cabins for off road vehicles, registration systems and design engineering for both auto and non-auto clients. It derives ~76% of the business from global market and rest from Indian operations. SMFL serves all the top 10 automotive OEMs in the world. To serve those large clients, SMFL has diversified its presence across 25 countries, with 120 manufacturing facilities (48 facilities outside India). It derives 96% of the revenues from automotive business and rest 4% from non-automotive business.
At the lower price band of Rs113, SMFL is valued at pre-IPO issue market cap of Rs53.5bn, which translates into a trailing P/B valuation of ~3.7x. The company is currently loss-making and is saddled with a high debt of Rs39.2bn (debt-equity ratio of 2.7x) due to large acquisitions made in Europe. The company seems to have bitten off more than it can chew. The company has a substantial exposure towards Europe and high single client concentration. Given the austerity measures imposed in the European periphery and the constraints of a common currency, the outlook for Europe is weak which could make turnaround of its major acquisitions in Europe difficult. Two big overseas acquisitions in the past 3 years have adversely affected consolidated profitability and the return on capital of the group. They are expected to contribute roughly half of SMFL’s revenues going forward. In the past, the Group had carried out various internal measures to bring SMR on track, but the much larger Peguform acquisition in H2FY12 would keep the profitability under check for the group in the medium term.
The net proceeds of the IPO would be used towards prepayment and repayment of debts and investments in subsidiary companies. The company is unlikely to see immediate benefits from such investments. Given (1) the adverse macro-economic environment SMFL is faced with -- about 50% of revenues expected from Europe -- (2) the high debt on its balance sheet (3) its current financial losses and (4) SMFL being a holding company, the IPO of SMFL, at the lower band of Rs113, is priced at a steep pre-IPO P/B valuation of ~3.7x. In the prevailing adverse equity market conditions, the market is unlikely to give such a high valuation to SMFL. Moreover, ~ 20% of the issue is an offer of sale by the existing promoters - a move not likely to be seen as positive by the market. We, thus, recommend an Avoid rating to SMFL IPO.
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