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.




Would Warren Buffett have invested in Concor?

There was an interesting article in Mint today on Concor (see link).

The article states that increase in haulage charges has taken business away from Concor towards private roadway operators.Hence the company is facing headwinds.

Lets look at this company from Warren Buffett’s eyes:

1.Does this company have a significant moat?

The answer is Yes.This company is more or less a monopoly.Private operators who tried to enter this business got their heads handed to them on account of govt. regulations.

2.Are the macro trends in favor?

India will grow its international business as it grows.So will its domestic haulage.Not only the volume of business will grow, but also the value due to persistent inflation

The clincher is diesel prices.While short term, diesel prices may not be increased due to political compulsions, long term the laws of economics will prevail.As per the Parikh report (section 4.9), railways consume 1/4th the diesel per net tonne kilometre as trucks.This is a huge huge advantage

3.Does the company need additional equity capital to grow?

The track record of this company is outstanding.It is sitting on 2600 Crores Rupees net cash.The dilution of equity is neither needed nor wanted

4.Is the management competent and ethical?

As the management is government owned,this question is a tricky one.

5.Is the company’s prices regulated?

The finances of this company depends on the haulage charges of the Railways.It is possible that political compulsions may wreak havoc with Concor’s finances but the possibility is remote

6.Are the valuations attractive?

At 11 times estimated fiscal 2013, they are fair.

Conclusion:Warren Buffett would probably buy this stock  and keep it forever !!