Anchor investors buy 13.3% of Indian auto parts maker's IPO

Indian auto components manufacturer Samvardhana Motherson Finance (SMFL) has secured Rs2.22 billion or about 13.3% of the funds targeted through its initial public offering from anchor investors, including the Government of Singapore, an announcement on the National Stock Exchange of India website shows. The amount is slightly below the maximum 15% that was set aside for anchor investors, although that may be partly because the company hasn’t fixed the number of shares to be sold.

Instead, SMFL has said that it aims to raise a total of Rs16.65 billion ($313 million) at a price between Rs113 and Rs118 per share. The offering opens for subscription for non-anchor investors today and will close on Friday. It is only the second Indian IPO of size since July last year, following Multi Commodity Exchange of India’s $134 million offering in February, and the largest since government-owned Coal India raised $3.46 billion in October 2010.

Investment vehicles of four separate anchor investors agreed to pay Rs115 per share, or slightly below the mid-point of the indicated range, which could indicate that there will be some price sensitivity among other investors too. However, if the bookbuilding in the coming three days results in a higher price than Rs115, then the anchor investors will have to pay the higher price as well.

According to a source, the price range values SMFL at 7.7 times to 8.2 times its projected earnings for the fiscal year to March 2014. The company posted a loss of Rs1.28 billion in the nine months to December 2011, mainly as a result of the acquisition of the loss-making Peguform Group in November last year and a foreign exchange loss related to loans denominated in a foreign currency. And the fact that the bookrunners are marketing the deal on a fiscal 2014 basis suggests that the Peguform acquisition will have a negative impact on earnings in the current fiscal year as well.

In the listing prospectus, SMFL noted that the integration of Peguform, which makes interior and exterior plastic products for the automotive and related industries, has resulted in a doubling of SMFL’s consolidated fixed assets to Rs45.15 billion as of the end of last year from Rs21.35 billion as of March 31, 2011, while its current liabilities and provisions have ballooned to Rs33.06 billion from Rs13.38 billion.

The Peguform acquisition is part of a growth strategy that involves both an expansion and a diversification of its business and the company acknowledged that this has placed, and will continue to place, significant demands on the management. “Our failure to manage our growth effectively could have a material adverse effect on our business, prospects, results of operations, cash flows and financial condition,” the company said.

The question for investors will be whether the company’s strong brand and market position outweigh these risks and whether the management will be able to successfully integrate the Peguform business.

The management does have a good track record in this respect, however, as shown by the purchase of Visiocorp’s rear view vision systems business in 2009. SMFL bought the business out of administration and was able to turn it around to generate a profit in its first year of operation following the acquisition.

“We believe that the strength and quality of our management team and its understanding of the global automotive component business enable us to identify and take advantage of strategic market opportunities,” the company said. “In addition [it] has demonstrated its ability to effectively respond to changing local market conditions, and we believe we have the ability to adapt efficiently while continuing to expand in our current markets as well as into new geographic and market segments.”

SMFL is particularly strong when it comes to exterior rear view mirrors and in 2010 ranked as the second largest manufacturer globally in this segment, with a market share of 25%, according to a report by Frost & Sullivan. The company also makes a number of other components used primarily in the automotive industry and argues that one of its strong points is its horizontal and vertical integration that is helping it to cut costs and achieve economies of scale. It supplies all of the top-10 carmakers in the world, but following the acquisition of Peguform, its five largest customers will account for more than 70% of consolidated revenues. Volkswagen alone would have accounted for more than 50% in the nine-months to December, which could pose a problem for SMFL in light of the economic struggles in Europe.

In the nine months to December 2011, more than 76% of SMFL’s revenues came from customers outside of India. It currently has 120 manufacturing facilities, including 48 outside India, and is in the process of setting up new production facilities in India, Brazil, Mexico, Spain and Thailand — countries where carmakers are expanding their production and where car ownership is expected to continue to grow rapidly.

Most of the company’s businesses are operated through subsidiaries or joint ventures. The rear view mirror business is carried out by Samvardhana Motherson Reflectec Group Holdings (SMR), in which SMFL owns an effective 63.1%. The group also owns 36.1% of Motherson Sumi Systems Limited (MSSL), which makes wiring harnesses and is already listed on the Indian exchanges.

The announcement showed that the four anchor investors bought a combined 1.93 million shares. The Singapore government, including the Monetary Authority of Singapore, took the largest chunk with 35.1% of the anchor tranche, while the rest was split between First State Investments, which is an asset management arm of the Commonwealth Bank of Australia; Ivy Pacific and Birla Sun Life.

Excluding a 5% portion that is reserved for existing MSSL shareholders, the company is planning to sell 50% of the IPO to qualified institutional buyers (QIBs), of which up to 30% was set aside for anchor investors. Another 35% is targeted at retail investors, while 15% will go to non-institutions such as high-net-worth and corporate investors.

Most of the deal (80.7%) will be made up of new shares and the total issue will account for about 25% of the enlarged share capital.

Observers have expressed some concern as to whether the Indian market will be able to absorb a deal of this size in the current market environment. The IPO of Multi Commodity Exchange (MCX) was well received, but that deal was supported by the fact that the company is essentially a monopoly with regard to the trading of commodity futures in India. It was also less than half the size of SMFL's IPO, making the latter look pretty ambitious. Meanwhile, India’s benchmark Sensex index is up 12% so far this year, but investors are still highly selective in terms of what names they buy and continue to show a preference for companies that are already listed and that have a proven track record.

J.P. Morgan and Standard Chartered are joint bookrunners.