 "Tube Investments deal with Mitsui a boost")
With market conditions for mergers and acquisitions getting tougher and sellers’ asking power for businesses gradually shrinking, the deal between Tube Investments and Mitsui Sumitomo Insurance, Japan, stands out and is a big boost for the Indian company.
The deal will see Tube earn Rs 883 crore for selling a 14-per-cent stake in its general insurance joint venture to partner Mitsui. After the deal, Mitsui’s share in the venture would increase to 40 per cent and Tube would hold the rest. The deal, which saw Tube’s stock soar 12 per cent to touch a 52-week high on Monday, is important on two counts.
First, the company will be able to retire a large part of its stand-alone debt of Rs 1,400 crore. According to Arul Kaarthick of Karvy Stock Broking, if interest cost for Tube reduces Rs 70 crore, its profit margin could improve 1.5 percentage points (now at five per cent on consolidated basis). Reduction in interest when earnings prospects for its core cycle and engineering and metal products businesses are on upward swing, bodes well. Second, the deal signals a valuation boost for Tube, apart from setting a benchmark for the insurance sector.
After the stake sale, analysts peg the market value of Tube’s key holdings (46 per cent in Cholamandalam Investment and Finance Company at Rs 4,800 crore, 60 per cent in Cholamandalam MS at Rs 3,800 crore, and 70 per cent in Shanthi Gears at Rs 600 crore) at Rs 9,200 crore.
Despite the steep run up of Tube’s stock price on Monday, its market capitalisation is still at 10 per cent discount (Rs 837 crore) compared to Axis Capital’s revised valuation for the investments. Even after assuming a residual debt of Rs 500-550 crore, there is upside. With the target price of Rs 523, four out of six analysts polled on Bloomberg recommend you to buy the stock. Axis’s target price is Rs 599.
The deal will see Tube earn Rs 883 crore for selling a 14-per-cent stake in its general insurance joint venture to partner Mitsui. After the deal, Mitsui’s share in the venture would increase to 40 per cent and Tube would hold the rest. The deal, which saw Tube’s stock soar 12 per cent to touch a 52-week high on Monday, is important on two counts.
First, the company will be able to retire a large part of its stand-alone debt of Rs 1,400 crore. According to Arul Kaarthick of Karvy Stock Broking, if interest cost for Tube reduces Rs 70 crore, its profit margin could improve 1.5 percentage points (now at five per cent on consolidated basis). Reduction in interest when earnings prospects for its core cycle and engineering and metal products businesses are on upward swing, bodes well. Second, the deal signals a valuation boost for Tube, apart from setting a benchmark for the insurance sector.
After the stake sale, analysts peg the market value of Tube’s key holdings (46 per cent in Cholamandalam Investment and Finance Company at Rs 4,800 crore, 60 per cent in Cholamandalam MS at Rs 3,800 crore, and 70 per cent in Shanthi Gears at Rs 600 crore) at Rs 9,200 crore.
Despite the steep run up of Tube’s stock price on Monday, its market capitalisation is still at 10 per cent discount (Rs 837 crore) compared to Axis Capital’s revised valuation for the investments. Even after assuming a residual debt of Rs 500-550 crore, there is upside. With the target price of Rs 523, four out of six analysts polled on Bloomberg recommend you to buy the stock. Axis’s target price is Rs 599.