Demanding valuations make the initial public offering of Samvardhana Motherson Finance (SMF) an unattractive bet for investors.

SMF is a core investment company that produces components such as rear view mirrors, cockpit assemblies, bumpers, door trims, wiring harness, lighting and air-conditioning systems for the auto industry through subsidiaries and joint ventures. The most prominent among them is the listed Motherson Sumi Systems (MSSL), in which SMF holds a 36.12 per cent stake.

Taking SMF as an equivalent to a holding company, the offer price band of Rs 113-118 seems to be at a stiff premium to the per-share value of the company's investments. Valuing the investment in MSSL at market price and the rest of the investments at cost, we arrive at a net asset value (NAV) for a share of about Rs 69, after the issue. Considering that listed holding companies generally trade at a discount to its NAV, the offer price is unappealing.

In comparison, Bajaj Holdings and Investment or Tata Investment Corp available in the secondary market may be superior bets for investors looking for exposure to holding companies. Moreover, investors with an appetite for risk and a perspective of two to three years can consider buying the MSSL shares itself. MSSL consolidates the financials of two major European acquisitions that the group has made — Visiocorp (renamed Samvardhana Motherson Reflectec -SMR) in 2009 and Peguform in 2011. Although associated costs with the turnaround/acquisition of these two companies have affected profitability, these businesses hold good potential for growth over the long term.

The company is raising about Rs 1,344 crore for prepaying/repaying debt incurred by the group and for funding investments in some ventures/subsidiaries in the group. SMF's consolidated debt to equity ratio, at 2.3 currently, is expected to come down to about 1.08 after the issue.

While SMF's standalone revenues are predominantly income from investments, MSSL together with SMR and Peguform are the major group companies. MSSL operates predominantly in the Indian markets in its wiring harness business. SMR has about 20-25 per cent share in the global exterior rear view mirrors market, making it one of the largest global manufacturers in this segment. Peguform is an international supplier of interior and exterior plastic products for the automotive industry. The major customers include Volkswagen, BMW, Daimler, Renault Nissan, Volvo Cars, Maruti, Tata Motors, Honda and Toyota. At the consolidated level, for the nine months ended December 31, SMF's total income stands at Rs 6,024 crore while restated net loss is at Rs 153 crore. While these recent acquisitions have strained the finances, the company's conscious strategy of growth through acquisitions followed all along lends confidence. Synergies such as joint sourcing of material, sharing of manufacturing facilities and access to clientele will help the group move up the value chain and increase its content supplied per-car.

Besides, like most tier-1 auto component manufacturers, SMF is diversifying from businesses that follow the cyclical nature of the automotive industry. It is concentrating on areas such as making modules for off-highway vehicles, cold storages and refrigeration transport systems and cutting tools through its direct subsidiaries/joint ventures. These, though, currently bring in only about 5 per cent of the consolidated revenues.

The offer is open from May 2 to May 4. Standard Chartered and JP Morgan are the lead managers. The issue includes an offer for sale by Radha Rani Holdings for Rs 321 crore (total issue is Rs 1,665 crore).

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