Indian auto components manufacturer Samvardhana Motherson Finance (SMFL) late Friday called off its initial public offering after poor sentiment towards India made investors stay away from the deal.
Excluding the anchor tranche, the deal was only 0.23 times covered when the bookbuilding closed on Friday, which prompted the company, the selling shareholders and the bookrunners to decide “not to proceed with the issue", SMFL said in a brief statement. The company was seeking to raise Rs16.65 billion ($313 million) and had secured Rs2.22 billion, or about 13.3% of the total deal size, from anchor investors before the order books opened on Wednesday, but sources said a deterioration in market conditions late last week changed the dynamic of the transaction.
India’s benchmark Sensex index lost 2.8% on Thursday and Friday and the rupee continued to depreciate against the dollar after a finance ministry official said the government intends to review its tax treaty with Mauritius. The news added to the concerns about new anti-tax avoidance rules that have been weighing on Indian markets since they were proposed in the budget in late March. The new legislation, known as the general anti-avoidance rule (GAAR), is meant to clamp down on companies and investors that are avoiding Indian tax through the use of tax havens such as Mauritius. The tiny island in the Indian Ocean accounts for almost 40% of all foreign direct investment into India and many foreign institutional investors route their investments through special purpose vehicles based there.
While the SMFL IPO was open for subscription for three days, investors tend to submit their orders on the last day since they have to fund 100% of their share applications up front. Hence, the deal became a major casualty of the uncertainty that arose because of the plans to review the Mauritius tax treaty.
Yesterday afternoon, however, finance minister Pranab Mukherjee announced that the government will delay the implementation of GAAR by one year, to the fiscal year starting in April 2013 to allow all parties more time to review the proposals. Mukherjee also told the Indian parliament that the burden of proving tax evasion will lie with the authorities rather than with overseas investors.
The news prompted a spike in the Indian rupee to about 52.90 against the US dollar from 53.20 beforehand, while the Sensex index bounced from a 1.9% decline earlier in the session to finish 0.5% higher. India was one of only a couple of Asian markets to close in the black yesterday after the failure to elect a new government in Greece prompted fresh concerns about the country’s ability to stay in the eurozone.
But for SMFL, the government’s retreat on GAAR and the market bounce came too late and triggered some comments that the timing of the finance ministry’s statements on the Mauritius tax treaty last week had been exceptionally cruel towards the company. However, other sources argued that the rebound in sentiment towards India may well be temporary as investors still need clarity on the tax issues longer-term and there are still a lot of concerns about India’s budget deficit — particularly after Standard & Poor’s downgraded its outlook on India’s long-term debt rating to negative in April — and the slow-down in economic growth.
In addition to the overall market sentiment there was also some talk before the launch of the SMFL offering that the deal may be too big for the Indian market to absorb. The only other Indian IPO of size since July last year was Multi Commodity Exchange’s $134 million offering in February, and SMFL’s IPO would have been the largest since government-owned Coal India raised $3.46 billion in October 2010.
Some analysts also expressed concern about the company’s substantial exposure to Europe and a high dependence on a single client (Volkswagen).
SMFL didn’t specify the number of shares on offer, but rather defined the deal size at a fixed amount in rupees. The number of shares would have depended on the final price. Most of the deal (80.7%) was made up of new shares and the total issue accounted for about 30% of the enlarged share capital. The shares were offered at a price between Rs113 and Rs118 per share, which translated into 7.7 times to 8.2 times the 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 a controlling interest in the loss-making Peguform Group in November last year and a foreign exchange loss related to loans denominated in a foreign currency. The use of a valuation range referring to fiscal 2014 suggested that the Peguform acquisition will have a negative impact on earnings in the current fiscal year as well. Indeed, analysts at Indian brokerage Ashika said in a note that “the recently acquired stressed assets are likely to be a drag on the company’s profitability in the near future".
Five percent of the offering was reserved for existing shareholders of 36.1%-owned Motherson Sumi Systems, which makes wiring harnesses and is already listed on the Indian exchanges. Excluding that, SMFL was planning to sell 50% of the IPO to qualified institutional buyers (QIBs), of which up to 30% was set aside for anchor investors.
According to an earlier announcement, four investors committed to buy a combined 19.3 million shares through the anchor offering at a price of Rs115 per share — slightly below the mid-point of the indicated range. 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; US-based Ivy Pacific and India’s Birla Sun Life.
The rest of the QIB tranche was 0.6 times covered when the books closed, while the 35% retail tranche, the 15% targeted at non-institutions such as high-net-worth and corporate investors, and the 5% reserved for Motherson Sumi shareholders attracted very few orders and were all just 0.01 times covered.
SMFL is particularly strong when it comes to exterior rear view mirrors and in 2010 ranked as the second-biggest 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, including bumper systems and dashboards, and argued in the prospectus 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 after the acquisition of Peguform, Volkswagen would have accounted for more than 50% of its consolidated revenues in the nine-months to December.