Striking effortlessly when the iron is hot!
Strong fundamentals brighten short term prospects though aging promoters’ unassuming stake, absence of succession plan and venture capital funds’ influential chunk of holding cast shadow on the scrip’s long term outlook.
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SANSERA ENGINEERING OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Nil |
| Offer for Sale | 17,244,328 shares (Rs 1,282 Cr) |
| Face Value | Rs 2 |
| Price Band | Rs 734 – 744 |
| Mkt/Bid Lot | 20 Nos. |
| Implied M-Cap | Rs 3823 Cr |
| Implied Equity Cap | Rs 10.28 Cr |
| Free Float | 63.44% |
| Lead Manager | ICICI Sec, IIFL Sec and Nomura Financial |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 14-Sep-2021 | Closing : 16-Sep-2021 |
| Allotment : 21-Sep-2021 | Refunding : 22-Sep-2021 |
| Demat Credit : 23-Sep-2021 | Trading : 24-Sep-2021 |
The Offer
Bengaluru-registered, three-decade-old Sansera Engineering Ltd (SEL) is going public with an offer for sale (OFS) of 17,244,328 shares (3,772,197 shares from the promoters and 13,472,131 shares from the venture capital funds).The public offer would work out to 33.56% of the company’s paid-up equity capital. The offer is being made through the book-building route with a price band of Rs 734-744 for Rs 2 paid-up share. At the cap price, the value of IPO amounts to Rs 1,282 cr.
Applicants should bid for a minimum lot of 20 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on September 24, 2021. ICICI Securities, IIFL Securities and Nomura Financial Advisory are acting as managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Tuesday, September 14 and closes on Thursday, September 16, 2021.
Being an offer for sale, the company would not receive any amount from the IPO. The object of the offer is obviously to facilitate the OFS and achieve the benefits of listing the shares on the exchange.
Lineage
Of late, the terminology of `promoter’ and `holding company’ have lost their relevance. For instance, SEL claims that, on the date of its Red Herring Prospectus, Client Ebene Ltd and CVCIGP II Employee Ebene Ltd were identified as its holding companies and Subramonia Sekhar Vasan, Fatheraj Singhvi, Unni Rajagopal Kothenath and Devappa Devaraj were promoters of the company. But, the fact is, SEL’s promoters have nothing to do with the holding companies’ ownership.
Mauritius-routed Client Ebene Ltd and CVCIGP II Employee Ebene Ltd were two VCFs originally affiliated to Citi Venture Capital international (CVCI) which were later acquired by The Rohatyn Group (TRG). These so called holding companies invested in the 40-year-old SEL only 8 years ago. The holding companies will lose their present status after the IPO as their holding in SEL will be reduced from 55.24% to 26.22%.
At the time of investment, the VCFs were promised minimum 20% return. At the cap price of Rs 744, they will get a compounded annual return of over 24%. In other words, the VCFs acquired 55.24% of SEL’s equity for a consideration of less than Rs 324 cr in mid 2013 which is valued over Rs 2,110 cr today. By diluting 29.01 out of 55.24%, the VCFs will collect more than Rs 1,002 cr through the OFS which will make the cost of their residual holding Rs 445.48 negative a share!
Though the offer document presents four people as promoters of SEL, the company was actually incorporated in 1981 by Subramonia Sekhar Vasan (68). Until mid 1990 SEL had a capital of just Rs 1 lakh. However, as the founder-promoter was running out of cash his three Chartered Accountant-friends Fatheraj Singhvi (66), Unni Rajagopal (67) and Devappa Devraj (68) of the partnership firm Singhvi Dev & Unni helped SEL’s original promoter by bringing in capital and management. Of the three co-promoters, only Singhvi has joined the company’s board as Joint Managing Director.
Post-OFS, the main promoter will control around 20% and the three co-promoters together will have 16.62% which are too small to ward off any takeover bid.
As regards the company’s business standing, within the country, SEL’s customers include nine out of the top 10 two-wheeler OEMs and the leading passenger vehicle OEM (Maruti) based on production volume. SEL’s overseas customers include six out of top 10 global Light Vehicle OEMs and three of the top 10 global MHCV OEMs.
In the two-wheeler vertical, SEL’s relationships spans over 20 years with Honda Motorcycles, 25 years with Bajaj Auto and over 20 years with Yamaha – the second, third and fifth largest two-wheeler Indian OEMs in terms of domestic production volume.
In the passenger vehicle vertical, besides the very long association with Maruti Suzuki, the leading Indian passenger vehicle OEM in terms of domestic production volume, the company has relationship over 10 years with Stellantis N.V. (formerly Fiat Chrysler Automobiles), a leading European passenger vehicle OEM, and over 10 years with one of the leading North American passenger vehicle OEMs. SEL reportedly made supplies to 71 customers during fiscal 2021 as compared to 64 in fiscal 2019, which helped to decrease its reliance on its top customer, Bajaj Auto.
Key Management
The main promoter of SEL, Subramonia Sekhar Vasan, is the chairman and managing director of the company. He holds a bachelor’s degree in technology from IIT, Madras and a post graduate diploma in management from IIM, Bangalore. He has over 39 years of professional experience.
One of the co-promoters, Fatheraj Singhvi, is the joint managing director of the company. He too has over 39 years of professional experience. He is a chartered accountant and was a partner of M/s. Singhvi, Dev & Unni from 1981 to 2006.
Raunak Gupta is a non-executive, nominee director. He holds a bachelor’s of technology (textile) degree from IIT, Delhi and a post graduate diploma in computer aided management from the IIM, Calcutta. He is currently employed with TRG (The Rohatyn Group) Advisors India P Ltd as a director and represents the VCFs Client Ebene and CVCIGP II Employee Ebene.
B R Preetham, who holds a bachelor’s degree in engineering from Bangalore University, is the Group Chief Executive Officer responsible for supervising the affairs of the company and its subsidiaries. He has been associated with the company since September 28, 1992.
The Chief Financial Officer Vikas Goel, a CA & ICWA, has been associated with the company since July 2019. He has previously been associated with Ingersoll-Rand (India) for two years, Stanley Black & Decker India from November 2013 to June 2017 and Weir India from March 2003 to November 2013.
Stakeholders
Of the share capital of Rs 10.28 cr, the main promoter (S S Vasan) holds 23.96% and the three co-promoters control 6.65% each which make a total of 43.91%. On the contrary, the two VCFs collectively hold 55.24%. Post-offer for sale, the main promoter would hold 19.95% (10.91% locked-in for three years) and the co-promoters will control 5.54% each (3.03% locked-in for three years) which will add up to 36.56% (20% locked-in for three years and 16.56% locked-in for one year). The two VCFs will have 29.01% without any lock-in restriction and public shareholders including employees will hold 34.42%. These will make a free float of 63.44%.
More importantly, after the completion of the offer for sale, the cost of holding for the promoters and the venture capital funds will become negative. In other words, more than 65% of the capital will be cost-free and this can be dumped in the market at any price which will be detrimental to the IPO investors.
Business Track
SEL commenced commercial production of passenger vehicle components in 1986 for Maruti. The company started supplies to the two-wheeler vertical in 1996, to the off-road vehicle vertical in 2009 and to the light commercial vehicle vertical in 2011. It set up a manufacturing facility dedicated to high precision aluminium and titanium machined aerospace components in 2013.
As of July 31, 2021, the company had 16 manufacturing facilities, of which 15 are in India in the states of Karnataka (Bengaluru, Bidadi, Tumkur), Haryana (Manesar), Maharashtra (Chakan), Uttarakhand (Pantnagar) and Gujarat (Mehsana), and one facility is in Trollhättan, Sweden.
SEL is an engineering-led integrated manufacturer of complex and critical precision engineered components across automotive and non-automotive sectors. Within the automotive sector, the company manufactures a range of precision forged and machined components and assemblies, such as connecting rod, rocker arm, crankshaft, gear shifter fork, stem comp and aluminium forged parts that are critical for engine, transmission, suspension, braking, chassis and other systems for the two-wheeler, passenger vehicle and commercial vehicle verticals. In fact, SEL is claimed to be the largest supplier of connecting rods, rocker arms and gear shifter forks to two-wheeler OEMs in India. Also, it is said to be the largest supplier of connecting rods and rocker arms to passenger vehicle OEMs in the country.
Within the non-automotive sector, the company manufactures a range of precision components for the aerospace, off-road, agriculture and other segments, including engineering and capital goods. SEL reportedly supplies most of its products directly to OEMs in finished (forged and machined) condition, resulting in significant value addition.
In fiscal 2021, SEL derived about 88% and 12% of its revenue from sale of products from the automotive and non-automotive segments, respectively. The company is also a global supplier. In fiscal 2021 it derived 65% of revenue from sale of products within the country and 35% of the revenue came from sale of products to Europe, USA and other countries.
Financial Track
During the five fiscals up to March 2019 SEL had a steady growth. From Rs 871Cr in fiscal 2015 the company’s revenue continuously moved up to Rs 1,624 Cr in fiscal 2019. EBIDTA grew from Rs 147 Cr to Rs 292 Cr in this period. Net profit, which was flat at Rs 64 Cr for three consecutive years until 2017, climbed to Rs 98 cr in 2019. Nevertheless, the pandemic which played havoc across all industries caused a slide in fiscal 2020.
As compared to fiscal 2019, domestic two-wheeler production volume declined by 14.1% and passenger vehicle production declined by 15% in fiscal 2020. SEL’s sales decreased 10.3% to Rs 1,457 Cr in fiscal 2020. EBIDTA slid 17.6% to Rs 241 Cr and net profit declined 18.5% to Rs 80 Cr.
In fiscal 2021 two-wheeler production volume declined 12.6% and passenger vehicle production declined 11% as compared to fiscal 2020. Despite these decreases in production volumes, SEL could increase its revenue to Rs 1,549 Cr in fiscal 2021 and registered record EBIDTA and net profit of Rs 295 Cr and Rs 110 Cr respectively.
At the end of March 2021 the company had reserves worth Rs 858 cr against a relatively small equity base of Rs 10 cr. As much as 85% of the reserves comprise of earned surplus. As of July 31, 2021 the company had a total borrowing of Rs 643 Cr which is a cause for concern.
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Sansera Engineering Consolidated Financials (in Cr) |
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| Year Ended |
Mar-21 |
Mar-20 | Mar-19 | Mar-18 | Mar-17 | Mar-16 |
Mar-15 |
| Revenue |
1549 |
1457 | 1624 | 1384 | 1097 | 972 |
871 |
| Operating Profit |
272 |
225 | 276 | 237 | 169 | 152 |
146 |
| OPM% |
17.6 |
15.4 | 17 | 17.1 | 15.4 | 15.6 |
16.7 |
| Other Income |
23 |
16 | 16 | 13 | 6 | 6 |
2 |
| EBIDTA |
295 |
241 | 292 | 250 | 175 | 158 |
147 |
| EBIDTA % |
18.8 |
16.3 | 17.8 | 17.9 | 15.9 | 16.1 |
16.9 |
| Interest |
47 |
58 | 51 | 44 | 33 | 32 |
23 |
| Depreciation |
102 |
94 | 76 | 61 | 47 | 37 |
34 |
| Net Profit |
110 |
80 | 98 | 87 | 64 | 64 |
64 |
| Equity |
10 |
9 | 9 | 1 | 1 | 1 |
1 |
| Reserves |
858 |
748 | 666 | 583 | 497 | 431 |
354 |
| Borrowing |
443 |
527 | 518 | 472 | 351 | 279 |
239 |
| Fixed Assets |
1060 |
1011 | 938 | 748 | 611 | 472 |
374 |
Valuation
The average cost of holding of the promoters works out to about Rs 9 a share. The cost for VCFs (who entered the company towards the end of May 2013) amounts to Rs 119.20 per share. The cap price (Rs 744), thus yields a compounded annual return of around 25% which is quite attractive. Will the IPO investors get similar returns from the stock?
Well, the company’s fundamentals do give a feeling that there is room for some capital appreciation in the near term especially when the secondary market is in a buoyant mood that we are currently witnessing. Nevertheless, the stock’s future course will largely depend on the moves of the aging promoters (whose average cost of holding would be Rs 144 negative) and the two so called holding companies (whose residual cost of holding would be Rs 445 negative).
In the absence of any succession plan from the promoters who would hold an unassuming stake of 37% post-IPO at negative cost, the professional management with little equity stake may find it difficult to face the consequences of any dumping of shares in the market by the two venture capital funds whose cost is extremely negative.
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HOW SANSERA ENGINEERING COMPARES WITH INDUSTRY PEERS |
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Financials |
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| (Amount in Cr) |
Sansera Engg |
Bharat Forge | Schaeffler India | Endurance Tech | Mahindra CIE |
Rico Auto |
| Market Cap |
3822 |
35982 | 23518 | 22470 | 8334 |
666 |
| Borrowing |
443 |
4580 | 0 | 424 | 1648 |
448 |
| Fixed Assets |
1060 |
5314 | 1086 | 2444 | 2971 |
776 |
| Revenue |
1549 |
6336 | 3762 | 6547 | 6050 |
1470 |
| Other Income |
23 |
169 | 60 | 31 | 55 |
19 |
| EBIDTA |
295 |
694 | 596 | 1060 | 556 |
103 |
| Interest |
47 |
108 | 5 | 14 | 55 |
39 |
| Net Profit |
110 |
-127 | 291 | 518 | 106 |
-14 |
| Equity Cap |
10 |
93 | 31 | 141 | 379 |
14 |
| Reserves |
858 |
5322 | 3109 | 3421 | 3001 |
592 |
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Stock Features |
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| Current Price (Rs) |
744 |
773 | 7523 | 1597 | 220 |
49 |
| Face Value (Rs) |
2 |
2 | 10 | 10 | 10 |
1 |
| Book Value |
169 |
116 | 1005 | 253 | 89 |
45 |
| Promoter Stake % |
36.6 |
44.8 | 74.1 | 75.0 | 71.6 |
50.3 |
| Debt/Equity |
0.5 |
0.9 | 0.0 | 0.1 | 0.5 |
0.7 |
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Profitability |
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| OPM % |
17.6 |
8.3 | 14.3 | 15.7 | 8.3 |
5.7 |
| Net Margin % |
7.0 |
-2.0 | 7.6 | 7.9 | 1.7 |
-0.9 |
| Cash EPS |
40.82 |
10.43 | 155.13 | 65.19 | 10.89 |
4.87 |
| Earnings Per Share |
21.03 |
-2.72 | 93.08 | 36.81 | 2.81 |
-1.05 |
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Discounting |
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| Price/Earnings |
35.4 |
-284.1 | 80.8 | 43.4 | 78.3 |
-46.9 |
| Price/Cash EPS |
18.2 |
74.1 | 48.5 | 24.5 | 20.2 |
10.1 |
| Price/Book Value |
4.4 |
6.6 | 7.5 | 6.3 | 2.5 |
1.1 |
| Price/EBIDTA |
13.0 |
51.8 | 39.4 | 21.2 | 15.0 |
6.5 |
| Price/Revenue |
2.5 |
5.7 | 6.3 | 3.4 | 1.4 |
0.5 |
| Price/Fixed Assets |
3.6 |
6.8 | 21.7 | 9.2 | 2.8 |
0.9 |
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Distribution |
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| Dividend % |
0 |
100 | 380 | 60 | 0 |
0 |
| Yield % |
0 |
0.3 | 0.5 | 0.4 | 0 |
0 |
| Pay-out % |
0.0 |
0.0 | 40.8 | 16.3 | 0.0 |
0.0 |