Wheels India: Good exit opportunity for investors

Unless Indian, new foreign promoters clash for control of the co, for investors, the run in share prices provides a good exit opportunity

The share price of TVS group controlled, Wheels India hit the upper circuit of 20% on Friday and was up another 5% on Monday to Rs 934 levels following news of an open offer by its new foreign promoters. Rumours of a take-over by the foreign promoter as well as a further hike in offer price has also aided the stock.

However, market experts rule out any possibility of take-over by the foreign partner and also add that there is less 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 22-25% and net profit by 39-90% (to Rs 2,077 crore and Rs 34.4 crore, respectively for FY12), at current levels the enterprise value / ebidta is a little over 7 times on trailing 12 months financials (latest PE works out to 26 times).

Titan Europe plc, which holds 35.91% 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 statuary 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% 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 that the company is unlikely to delist.

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

On the other hand, according to SEBI mandate, all companies (except PSUs) will have to comply with the minimum 25% public shareholding by June 2013. In this scenario, experts observe that promoters (including foreign) will look at reducing their shareholding to meet the SEBI’s guideline. In fact, a day after the open offer news, Wheels India had also sought shareholders’ approval for raising Rs 100 crore though a public issue. Srivats Ram, managing director, Wheels India, told to Business Standard that the fund-raising is to meet fresh capital requirements and will also help meet the 25% 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 as per "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. "I think, the upside in the share price is already captured post the spike due to the open offer news. I would say investors should rather look to exit the stock at around Rs 900 levels," says Tulsian.