Day: March 27, 2012

Value unlocking at Sundaram Clayton

Post author By Raoji
Post date March 27, 2012
5 Comments on Value unlocking at Sundaram Clayton

Sundaram Clayton Limited (SCL) is part of the $5 billion TVS group, one of the largest auto components manufacturing and distribution group in India.

SCL is a leading supplier of aluminium die castings to automotive and non-automotive sector. (Rs.808 Crore sales in FY2011)

It has a fully owned subsidiary called Anusha Investments Ltd (AIL)

Now SCL owns 4.2 Crore shares (8.84%) of TVS Motors.AIL owns 23.06 Crore Shares (48.56%) shares of TVS Motors.

So effective ownership of SCL in TVS Motors is 27.26 Crore Shares (57.4%).

As of today 27 March, 2012 at a CMP of Rs.38.75, this works out to a valuation of Rs.1056.3 Crores

Sundaram Clayton Ltd (SCL) has a current market cap valuation of Rs.580.24 Crores.

So effectively if you were to buy SCL today , you’ll get the SCL business for free as well as Rs. 476 Crores of TVS Motors for free.

Typically, the markets discount holding companies as the value unlocking doesn’t happen.

But in this case, the management seems intent to remove this anomaly.

They have proposed a scheme of arrangement wherein all the non-automotive related businesses of SCL will be transferred to a company called Sundaram Investments Ltd (SIL)

If the scheme gets the necessary approvals, a person holding two shares of existing SCL will get one share of the demerged SCL and one share of SIL.

The only catch is that the promoters don’t intend to list SIL.They intend to provide an “exit option” to public shareholders at a fair value based on a report by a valuer/merchant banker.

The TVS group is known for its integrity.Its unlikely they will screw the minority shareholders.

So , all in all, the scheme should unlock tremendous value.

Tags ValuePick

Promoters

Promoters as jockeys

The late Aditya Birla started his career with Indian Rayon.After he took it over, the workers went on strike,a fire broke out and losses spiraled.

The great GD Birla whose favorite grandson was Aditya Birla incessantly grumbled:”You have mounted Aditya on a decrepit steed”

The late Aditya Birla was of course able to turn Indian Rayon into a success. (source:Gita Piramal’s Business Maharajas)

GD Birla’s comments however hold lot of wisdom.Promoters can be compared to horse jockeys.Sometimes the horse (business) is so fast and swift that they gallop all the way to success.Sometimes even the best jockey can’t do much with an old nag.

This resounds with WB’s famous saw ““When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

But there are some jockeys (promoters) who are capable of changing horses(businesses) mid-stream and achieving greater success.This is a true hallmark of an outstanding businessman.

For instance,WB started with the textile business and then later moved on to insurance which propelled Berkshire Hathaway to great success.

In the Indian context, Dhirubhai Ambani started with trading,moved to textiles, then to petrochemicals and then finally oil &gas.

Are there any current businessmen who are outstanding jockeys capable of changing horses midstream?

Such an extraordinary businessman is Deepak Parekh.He started with HDFC, launched a bank,life insurance, general insurance and other wealth creating companies.If one had bought HDFC shares when Deepak Parekh started his career, one would have had a very comfortable retirement indeed.

On the other hand, there are jockeys who will run their horse into the ground.But that’s a story for another day !!