Samvardhana IPO for high risk appetite investors: SMC

SMFL has enjoyed long-standing relationships with most of its customers including many of the major global automotive OEMs. This long standing relationship is attributable due to its consistent quality performance over time and the emphasis, which is placed in catering to customers' needs, coupled with its access to technology. The company is one of the largest manufacturers of exterior rear view vision systems in the world; in 2010, it had a 22.0% share of the global exterior rear view vision systems market based on sales volumes. It had enjoyed a market share of approximately 34.0% in European countries, 25.0% in North America, 17.0% in Asia-Pacific regions and 57.0% of the market for exterior rear view vision systems in India in the year 2010. SMFL has entered into joint ventures and partnerships with several multinational companies, and believes that its partners are industry and technology leaders in their respective markets.

Industry Outlook: The automotive industry is one of the most important contributors to the global economy with global revenues estimated around €1.78 trillion in 2010. In India also, the automotive sector holds one of the core industries. The de-licensing of the sector in 1991 and the subsequent opening up of the sector to foreign direct investment levels of up to 100% and the permission of such investment under the automatic route were significant for the Indian automotive industry. There has been an increase in the production of commercial vehicles from 520,000 units in 2006-2007 to 752,597 units and of cars from 1,544,850 units to 2,986,797 units in 2010-2011. Rising per capita income and changing demographic distribution are conducive for growth.

Valuation: Considering the P/E valuation on the upper end of the price band of Rs 118, the stock is priced at pre issue P/E of -32.56x on its annualised FY11 EPS of Rs -3.62. Post issue, the stock is priced at a P/E of -40.38 on its annualised EPS of Rs -2.99. Looking at the P/B ratio at Rs 118, the stock is priced at P/B ratio of 3.90x on the pre issue book value of Rs 30.26 and on the post issue book value of Rs 52.73, the P/B comes out to 2.24x. On the lower end of the price band of Rs.113 the stock is priced at pre issue P/E of -31.18x on its annualised FY11 EPS of Rs -3.62. Post issue, the stock is priced at a P/E of Rs -38.67 on its EPS of Rs  -2.92. Looking at the P/B ratio at Rs 113, the stock is priced at P/B ratio of3.73 x on the pre issue book value of Rs 30.26 and on the post issue book value of Rs 52.73, the P/B comes out to 2.14x.

Outlook: The fundamental of the company looks average as it holds strong global market position in rear view mirrors and dominant domestic position in wiring. Moreover its established relationship with major global as well as domestic OEMs indicates bright future of the company. Rising per capita income and changing demographic distribution are conducive for growth. On the flip side the company two big overseas acquisitions on Europe and the US is likely to lower the demand for its products due to weak outlook of the economy. With the rise in energy price, higher interest rates and higher inflation, the automotive sector is likely to see moderate growth in India. An investor who has high risk appetite can opt for this issue.

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