Samvardhana Motherson to be debt free company post IPO

Ex-chairman and executive director of Samvardhana Motherson Finance (SMFL) Vivek Chaand Sehgal tells CNBC-TV18 that they will become a debt free company once the proceeds of the IPO flow in.

SMFL currently has close to Rs 4,000 crore of debt, but Sehgal points out that only Rs 980 crore is the direct debt of the company. “The rest of the debt is in the underlying companies and because we are a core investment company all the predicted debt comes on us. We have no recourse to our balance sheet and almost 90% of the debt is the working capital that is required for these companies to do their operations,” he explained. Analysts, however, also have another concern and that it with regards to SMFL’s profitability. For the nine month period of FY12, SMFL posted a loss, but Sehgal isn’t too worried about this. “The loss that is appearing at this particular moment includes Rs 67 crore which is a one time right off of the acquisition cost of Peguform and almost about Rs 70 crore of mark to market loss,” he said. Below is an edited transcript of his interview with Sonia Shenoy and Mitali Mukherjee. Also watch the accompanying video. Q: Analysts have raised a concern about the debt of the company, which is currently more than Rs 3,900 crore. How much of the proceeds will be used to scale down debt and what is the game plan from here on? A: One must look at this predicted number in a different manner because only Rs 980 crore is the direct debt that SMFL has on its own balance sheet. The rest of the debt is in the underlying companies and because we are a core investment company all the predicted debt comes on us. We have no recourse to our balance sheet and almost 90% of the debt is the working capital that is required for these companies to do their operations. If you look at just the Rs 980 crore, the total amount would be paid off by the proceeds of the IPO and hence we would be a debt free company. Q: There seem to be concerns on the profitability as well. For the nine month FY12 period, your company has posted a loss. Can you give us a sense of the kind of trajectory you expect to see both in terms of revenue growth and more importantly profitability for your company going in to the next couple of years? A: Absolutely. Motherson is not a quarter on quarter company and the loss that is appearing at this particular moment includes Rs 67 crore which is a one time right off of the acquisition cost of Peguform and almost about Rs 70 crore of mark to market loss. Now you will give me credit that most of my loans are outside India and it’s only a translation loss that’s happening over here. Infact, the money is never going to be moving through India. So these companies are all outside, they borrowed outside but yet in the Indian balance sheet we have to show mark to market loss. So we are actually pretty comfortable. We have always given our projections but I am not at liberty to talk about it bound by the law. Q: On revenues, do you expect contributors to become more widely spread out because at this point it seems to be quite a bit of concentration in terms of a few names. The Volkswagen group is contributing more than 25% right now to your growth, is it not? A: It is actually 48%, but then Volkswagen Group by itself is a very exciting combination. You got Volkswagen, you have got Audi, Porsche, Skoda and Ciat, so amongst all these it does contribute a bit more. Just to give you an idea as to the size of the acquisition, our share of it is 49% which works to about Rs 980 crore. It’s very exciting to be there because there are so many opportunities that we can do, especially with these big companies and there is lot of synergy that the group can provide to them. Q: You were telling us about Peguform and the plan over there. SMFL has about 40% stake in that company. When do you think Peguform could go ahead and report an EBITDA positive? What kind of a time line do you think it would take? A: SMFL owns 49% and indirectly through Motherson Sumi Systems Limited (MSSL) almost about 80% comes into SMFL. But Samvardhana Motherson Peguform (SMP) it is actually EBITDA positive, it was EBITDA positive as per results that have been given. You will have little bit of ups and downs in quarter to quarter, but we are very positive that it’s a phenomenal acquisition for the group.