Samvardhana Motherson IPO Review by KM Global (Avoid)

Review By K.M. Global Financial Services Ltd on May 2, 2012

Issue Period: May 2nd - 4th, 2012
Price Band (Rs): 113-118
Issue Size (Rs Cr): 1,665
Mcap (Rs Cr): 6,639-6,933
Grading (1 to 5): Grade 4
Promoter: Vivek Chand Sehgal
Listing: NSE, BSE
Grey Market: Rs 1.5 - 2.0

BRLM: Standard Chartered, J.P. Morgan

Anchor Invetsors (1.93cr shares at Rs 115): First State Investments, Ivy Pacific Opportunities Fund, Birla Sun Life MF, GIC

Samvardhan Motherson Finance Ltd (SMFL) was incorporated on December 9, 2004 and provides design and manufacturing solutions, mainly to the automotive industry, through subsidiaries and joint ventures with partners.

SMFL is expanding the expertise and skills acquired in automotive business into other sectors where they anticipate significant future growth. Through a combination of organic growth and acquisitions, SMFL is now a multinational business with manufacturing and design capabilities as well as customers spread across multiple geographies. Within the automotive industry, SMFL is one of the largest manufacturers of exterior rear view vision systems in the world.

Concerns

Valuation doesn't factor holding company discount - The offer price doesn't factor in an adequate discount to the fair value of its subsidiaries
Low Profit Margins - The company hasn't been able to deliver profits consistently. The RoE has been below 10% for the last few years.
Client Concentration - Volkswagen group accounts for nearly 50% of the overall revenues. This can pose a major risk to its business if Volkswagen's products sales start to fall.

Industry Overview: Auto Sector Should Grow Steadily

The Auto Sector should continue its steady growth post the 2009 correction. Global auto sales are expected to grow around 8% while the Indian market should pick up
as the RBI cuts interest rates.
Rear view mirror market is dominated by 6 major global players which are Magna Mirrors, SMR, Ficosa, Murakami, Ichikoh and Gentex.

SMFL's Operations:

Marquee Client List: SMFL supplies to most major OEMs such as the Volkswagen Group, BMW, Daimler, Renault Nissan, Ford India, Volvo, Maruti Suzuki, Tata Motors, Honda Siel, Toyota Kirloskar and Fiat India. They are able to leverage these relationships and offer multiple products and technologies.
Global Reach: SMFL and its subsidiaries have 120 manufacturing facilities, including 48 manufacturing facilities outside India, with a presence in 25 countries across the world. They are in the process of establishing new manufacturing facilities in India, Brazil, Mexico, Spain and Thailand.
Wide Range of Products: The company produces multiple products including rear view vision systems, wiring harnesses and polymer processing including assemblies and bumpers. It is a market leader in exterior rear view vision systems with a market share of over 25%.
Experience Management: The promoter of the company and his team have been in the auto components business for over 25 years and have grown significantly in size and scale.
Future Strategy: To focus on markets with high growth potential such as modules for off-highway vehicles, air conditioning systems, and engineering & design capabilities.

Conclusion / Investment Strategy

We recommend that investors avoid subscribing to the IPO of Samvardhan Motherson Finance Ltd due to rich valuations compared to peers, low profitability of its subsidiaries and high revenue concentration amongst a few clients. We believe that investors should pick other auto ancillary stocks with a better risk reward profile.

Reviewer recommends Avoid to the issue.