Good exit opportunity for investors of Wheels India

The share price of TVS group-controlled, Wheels India, hit the upper circuit of 20 per cent on Friday and was up another five per cent scaling its all-time high on Monday to close at Rs 934 following news of an open offer by its new foreign promoters. Rumours of a takeover by the foreign promoter as well as a further hike in offer price have also aided the stock. However, market experts rule out any possibility of takeover by the foreign partner and also add that there is low probability of the open offer price being revised upwards.

Hence, they advise that existing shareholders could use this rally to exit the stock, given that positives are priced in and valuations not cheap. While the company has reported good performance in the last two years – annual increase in net sales by 22 to 36 per cent and net profit by 39 to a whopping 90 per cent (to Rs 2,077 crore and Rs 34.4 crore, respectively for FY12), at current levels the enterprise value / Ebitda is a little over seven times trailing 12-month financials (latest PE works out to 26 times).

Titan Europe plc, which holds 35.91 per cent stake in Wheels India, has informed the exchanges that by virtue of an international transaction involving the acquisition of Titan Europe plc by Titan International Inc, it is required to make an open offer to the public, under the India Takeover Code.

"This is all statutory compliance. Due to the change in shareholding pattern of the foreign promoters the open offer has triggered. But given the current share price and the open offer price who is going to tender the shares," says SP Tulsian of sptulsian.com.

Titan International has made an open offer at Rs 725.38 per share, which is about 22 per cent lower than the current price of Rs 934. This suggests that investors are unlikely to tender their shares in the open offer. Due to the same reasons, experts believe the company is unlikely to delist.

Currently, the foreign promoter holds 35.91 per cent stake in Wheels India and if the open offer for another 14.38 per cent stake materialises the foreign promoter will become the largest shareholder with a stake of 50.29 per cent as against 49.7 per cent stake of the Indian promoter (TVS Group). If it happens, it will go against the comfort of the Indian promoters, and also lead to an increase in total promoter holding (domestic plus foreign) to almost 100 per cent from 85.6 per cent currently. But, that seems unlikely for now.

On the other hand, according to the Securities and Exchange Board of India’s (Sebi) mandate, all companies (except public sector undertakings) will have to comply with the minimum 25 per cent public shareholding by June 2013. In this scenario, experts observe that promoters (including foreign) will look at reducing their shareholding to meet the Sebi guidelines. In fact, a day after the open offer news, Wheels India had sought shareholders’ approval for raising Rs 100 crore though a public issue. Srivats Ram, managing director, Wheels India, told Business Standard the fund-raising is to meet fresh capital requirements and will also help meet the 25 per cent public shareholding as mandated by Sebi for listed companies. In the event of a public offer, the share price could come under pressure.

The Indian promoters also clarified that the requirement to make an open offer is according to "statutory requirements", and the management control will not change. In this backdrop, and unless the Indian and new foreign promoters clash for control of Wheels India, for investors, the run in share prices provides a good exit opportunity for investors.