Amid protests from the minority shareholders and a telling rout in stock prices, the Ashok Leyland board has decided to acquire a lower stake in its subsidiary, Hinduja Leyland Finance (HLFL), slashing the investment to less than a third of the Rs 1,200 crore initially proposed.
To simplify the holding structure to raise funds and prevent any future dilution in HLFL’s due to its growth plans, the board of Ashok Leyland had approved the acquisition of 19 per cent stake at Rs 119 in HLFL from existing shareholders, such as private equity firm Everstone Capital and Hinduja Group entities.
The decision resulted in significant fall in the stock price of the company the day after the March18 announcement, with the shares crashing more than 26 per cent to hit oneyear lows. On Friday, the stock fell a further 9 per cent to Rs 44. During the conference call held on March 19, investors raised several questions on the timing of acquisition given the need to conserve cash, valuations of the deal, and the rationale to buy partial stake of the promoters.
According to independent market analyst Ambareesh Baliga, it is commendable that the management took note of the investor sentiment, especially in light of the situation created by uncertainties surrounding Covid-19 and decided only to honour the commitments to the PE Investor. “Ashok Leyland should regain a part of the lost market cap,” he added.
Ashok Leyland would now hold 69 per cent in Hinduja Leyland Finance, which is valued at about Rs 5,600 crore, against Ashok Leyland’s current market cap of Rs 13,000 crore.
“The strategy was to have ownership of the full company as that would have helped in fund raising. However, the company is sensitive to the feedback from investors. Given the market situation, that can take place in steps going forward,” said a senior official of the company.
Its assets under management (AUM) rose at a strong 38.4 per cent CAGR in FY16-19. It plays an important role in the consolidated financials at Ashok Leyland with about Rs 222 crore in profit after tax for nine months ending FY20. It posted a topline of Rs 2,561 crore for the financial year ending March 31, 2019.
HLFL is in active discussions with potential private equity investors for fresh capital infusion to shore up its balance sheet. During a conference call with analysts last week, the management said that the basic objective of the move is to ensure that Ashok Leyland maintains a healthy holding position in the company i.e. greater than 51 per cent so that there is enough room for dilution in case of any fundraising.
Analysts believe that the valuations have become attractive after the steep correction in stock prices. “After the recent correction, valuations are very attractive at 12.2 times FY22 estimated EPS and 6.5 times EV/EBITDA and do not fully reflect the company’s focus on adding new revenue and profit pools,” said Jinesh Gandhi, analyst, Motilal Oswal Financial Services.
