SML Isuzu (SMLI), formerly Swaraj Mazda, is a Chandigarh-based CV maker with specialization in LCVs (small and mid-sized buses like those used in schools and hospitals, as also police personnel carriers, water tankers and special vehicles.). It was set up as Swaraj Mazda in 1985 as a three-way JV between Punjab Tractors (which was later acquired by M&M and merged into itself) with 29% stake, Mazda Motors (15.6%), Sumitomo (10.4%) and public the rest 45%. It became a sick company in 1994 (mainly due to rupee devaluation) and was referred to BIFR. It then re-invented itself and wiped out all its accumulated losses by 1998, 4 years ahead of schedule.
In 2005, Mazda sold its entire stake of 15.6% to Sumitomo, making it a significant stakeholder in the JV (about 26%). Around the same time, PTL also offloaded about half of its stake of 29% to Sumitomo taking its total stake to about 40% making it a major stakeholder in the company. In 2009, Sumitomo bought out the remaining stake of M&M (about 15%) and thus now is a dominant partner in the JV owning about 55% stake. Sometime last year, Isuzu picked up about 4% stake in the company. Reliance Capital, CDC Financial Services and Actis (the last two being PE majors) also hold about 9%, 7% and 6% respectively in SMLI. Thus the open float in the market is not very high, about 18% of the total equity, with Japanese firms Sumitomo and Isuzu together holding about 60% and financial investors about another 22%.
Isuzu is the world's largest manufacturer of medium to heavy duty trucks and SMLI is a perfect fit for its Indian dreams. Isuzu would certainly want to strengthen its Indian presence through SMLI with which it has a technical collaboration. Isuzu could play this out in 2 ways - either acquiring a controlling stake in SMLI from Sumitomo or buy the stake from other minority shareholders such as Actis who may be keen to cash out. For Sumitomo, auto sector is not a core area, and Actis has held the stake long enough to feel the need to cash out. There is a distinct possibility that sooner rather than later, Isuzu may want a bigger say in running the company and may find a favorable environment to do so now.
With the advent of new players in the commercial vehicle space, SML's margins have come under pressure. It has been working on a range of higher tonnage trucks to get a larger footprint in the heavy commercial vehicle space, currently dominated by Tata Motors and Ashok Leyland. So it might be eager for Isuzu to take control and bring in its technology and products to the Indian market.
SMLI is currently trading about 400 with a P/E of about 12.4. Apart from a reasonable valuation, the other good part is that it has a low equity of 14.5 crore compared to its closest competitor Eicher Motors (27 cr.), and very close to another peer Force Motors, not even considering the biggies Ashok Leyland and Tata Motors which have a huge equity base. Comparing it to peers, it is way cheaper than Eicher Motors (ttm P/E 41) which has been a true blue multibagger over the last few years (it was around 60 way back in 2003 and is now around 2000, so you can make your own math), and may probably deserve a higher valuation than its peers (though 41 looks way too excessive). Force Motors, another strong company some time back is beset with its own problems after its break-up with MAN Truck and Bus AG, the German truck major.
All in all, this looks to be a good time to lock into SMLI. The major risks are of course the growing competition as more and more foreign majors enter the growing Indian market (Mahindra Navistar, Volvo Eicher, Daimler Commercial Vehicles and the latest to join this space is the CV maker from China, Beiqi Foton Motor Co. Ltd, which is setting up a manufacturing unit in Chakan, near Pune) and the shaky economic growth in the near future, though this may only be a temporary blip with the govt. trying to address this issue, albeit in a measured way.
The story seems to be playing out with 2 major financial investors - Actis and CDC selling off their stake completely and a new set of financial investors - Reliance Life Insurance, Axis MF and Antique Stock Broking coming in @410/share (all seem to be long term investors).
ReplyDeleteThe other major development appears to be the stake of 11% sold by Sumitomo. While I am not aware who bought it (will have to wait for news of this to appear in public domain), a safe assumption could be that the buyer is Isuzu.
SML Isuzu which was quoting around 400 in March ’12 when I started covering it is now at 600, a return of 50% in slightly more than 2 years, a CAGR of about 17%. And in the interim, it had gone down to 300 levels also where there was a great accumulation opportunity. From that point, the returns would have been truly great. With a strong parent like Isuzu, the world's largest manufacturer of medium to heavy duty trucks, this is what I had expected. And this at a time when the LCV and MCV sector is yet to pick-up.
ReplyDeleteWith the government’s thrust on roads and infra in general, good days should start rolling in for SML Isuzu. Also, the risk of competition which I had highlighted then also appears to be receding with most of the new entrants either deferring their plans or calling it quits altogether (the dissolution of JV between Force Motors and MAN of Germany being a case in point). However, there is still competition from domestic giants like Tata Motors, Ashok Leyland and Mahindra who are looking at this space closely. But the market looks big enough to accommodate all these players.
And the strong parentage also is reassuring. Sumitomo holds about 44% and Isuzu 15%, making nearly 60% between them. And nearly 20% is held by a host of DIIs – domestic insurers who are generally long-term players and respected MFs such as Birla SL and Axis whose equity selection has been commendable over the years.
SML Isuzu has started firing on all cylinders !! From 600 in July, it has jumped up to around 800 now, a return of nearly 33% in 1 month !! This though should be looked at from a longer term perspective. It has more than doubled in 2-1/2 years !!
ReplyDeleteA few years back, before the entry of Volvo, Eicher Motors was also in a similar situation. Volvo came in and changed the face of the company ! And how !!
From around 60 in 2003, it has come close to 10,000 today !! Not many stocks can boast of that kind of performance.
If things pan out as I expect, this could well be on its way to be the next Eicher Motors. A strong MNC management and long term investors (DIIs) are 2 things which inspire a lot of confidence in this scrip. Hold on and enjoy the ride !!