Wheel India Ltd (WIL) of the TVS group and Topy Industries Ltd of Japan have expanded their technical collaboration in the passenger car steel wheel business into an equity relationship.

Established in 1962, Wheels India Limited is company promoted by TVS Group. It is a leading manufacturer of steel wheels for cars, trucks, tractors, and construction and mining equipment; forged aluminium wheels for trucks; air suspension systems for buses and trucks, and components for energy equipment. The company reported a turnover of Rs. 2,176 Crores in FY 2017 and Profits After Tax of Rs 59.31 Crores. The Company has manufacturing plants at Padi (Tamil Nadu), Pune, Rampur (Uttar Pradesh), Bawal (Haryana), Sriperambudur (Tamil Nadu) and Pantnagar, with a combined overall annual capacity of 16 million wheels and a diversified customer base with over 30 customers globally. Wheels India Limited is currently having a market cap of Rs 2,316 Crores. Wheels India Limited currently has 43% market share in passenger car steel wheels’ category.

Japan headquartered Topy Industries Limited, is a leading manufacturer of steel wheels for cars, trucks, construction and mining equipment, amongst other products. Topy has facilities to manufacture steel wheels for passenger cars in Japan, US, China and Mexico.

Transaction

Wheels-India-Topy-Industries-Joint-Venture-1

Note: WIL Car Wheels Limited WOS of WIL, is incorporated for undertaking the manufacture of passenger car steel wheels. The company was incorporated in 2017 and is based in Chennai, India with a paid-up share capital of Rs 3.70 crore. WCWL is yet to commence its business operations

Valuation

The transaction for sale consists of two parts:

  1. The Slump Sale of WIL’s Passenger Car Steel Wheels (PCSW) business undertaken at Padi (Tamil Nadu) and Bawal (Haryana) is transferred at Rs 60 Crores in cash to WCWL.
  2. The subsequent investment by Topy Industries Limited (Topy), Japan into WCWL pursuant to which Topy shall acquire a 26% stake in WCWL for roughly Rs. 80-90 crores based on market news.

Note:

  • Topy Industries will invest funds in the WCWL through preferential allotment and not through acquisition from WIL.
  • The transaction is done on arm’s length basis as the said transaction falls within related party transactions. However, later on sale of 26% stake to Topy Industries is at much higher value.
  • The Shareholding pattern of Wheels India Limited will remain same post this agreement of sale.
  • Date of agreement of sale is 16 June 2017 and expected date of completion of sale/disposal will be within 9 months from the date of execution of agreements i.e. 16 March 2018.
  • Since it is newly incorporated company except for capital infusion at the time of incorporation there is no funds, so the fund received from the Topy industries will be used to pay to WIL.

Tax Implications under Slump Sale under section 50B

As per Section 47(iv) transfer of any capital asset by a Holding company to its 100% Indian Subsidiary company is exempt from capital gains. However as per section 47A(1), if the holding company or its nominees as the case may be, ceases to hold 100% holding in its Indian Subsidiary at any time before the expiry of a period of 8 years from the date of slump sale, the amount exempt would be deemed to be income chargeable under the head “Capital Gains” of the previous year in which transfer took place.

In the present case, Topy Industries Limited is acquiring 26% stake in WCWL, 100% subsidiary of WIL after the slump sale, hence the net amount of profit out of transfer with respect to slump sale shall be taxable under the head ‘Capital Gains’ in the hands of WIL under section 50B and exemption under section 47(iv) for transfer to 100% WOS will not be available to WIL.

Taxability

As all the assets, will be transferred at their book values, the net worth will be equivalent to the sale consideration, there will be no capital gains tax liability arising in this case. The company is not going through court approved demerger because it never wanted to sell the business and exit completely.

Management and Control

The new company (that would be formed following the partnership) would have five-member board comprising three from Wheels India, one from Topy Industries and one an Independent Director. Since it is public limited it has to appoint at least 1/3 board as independent directors so therefore one more independent director will have to be appointed.

Rationale for strategic partnership

  • Topy will be issued fresh shares at a price which is yet to be determined to facilitate it equity investment in WCWL.
  • The equity capital of WCWL is Rs 5 Crore. Post this arrangement, WIL will continue to hold Rs 3.7 Crore (74% of Rs 5 Crores) and the balance Rs 1.3 Crores (26%) will be held by Topy Industries Limited.
  • The Topy will invest Rs 80-90 crore with WIL’s factories in Padi (Chennai) and Bawal (Haryana) transferred to WIL Car Wheels Ltd. The combined capacity of the two factories is about 6.5 million wheels a year.

Synergy benefits

For WIL

  • By transferring the passenger car wheel business into a separate subsidiary, there will be free flow of technology from Topy, with which WIL had entered into technical pact in 2011 for passenger car steel wheel business.
  • The joint venture partner WIL Car Wheels Ltd will set up a new unit in Gujarat, where Maruti, Ford and Tata are likely to be its key customers. The new factory is expected to come up at Vanod by next year at an investment of Rs 50 crore.
  • The expected capacity of passenger car steel wheels in this new unit would be around 1.5 million in 2018.
  • The strategic partnership will combine the leadership position already established by Wheels India in the passenger car steel wheel segment in India, with the technology skills and global relationships of Topy.
  • This partnership will put the business on a focused growth path and strengthen the existing relationship with Topy as a technology partner.

For Topy

  • It sees WIL as a strong partner to tap the opportunities both in India and in the newer markets, through which Topy will increase its customer base.

Topy Industries Expansion plans states the following:

Mid-term Consolidated Management Plan (Growth & Change 2018)

In its new mid-term business plan for April 2016-March 2019, the Company is aiming to achieve annual sales of JPY 250 billion (a 15.8% increase from FY 2015) and an operating profit of JPY 14 billion (a 40% increase from FY ended March 2016).

Automotive and Industrial Machinery Components Business

Enhancement of global presence and business expansion for sustainable growth with respect to passenger car steel wheel business and various others.

  • Strengthen strategic alliances with overseas partners for the wheel business
  • US: Expand steel wheel capacity for passenger cars
  • Mexico: Expand steel wheel capacity for passenger cars
  • Mexico: Start production at new industrial fastener plant (scheduled for January 2017)
  • Vietnam: Strengthen industrial fastener capacity

Source: marklines website

Financials

  • The company reported a turnover of Rs. 2,176 crores in FY 2017 and Profits After Tax of Rs 59.31 crores.
  • The turnover of Passenger Car Steel Wheel business is Rs 224.30 crores, which is 10.3% of WIL’s total revenue.
  • It caters to major automotive players in India such as Maruti Suzuki, Hyundai and Ford.
  • Currently, WIL pays Royalty and Know-How fees (Net of Tax) are Rs 2.97 Crores. (FY 16)
  • The passenger car steel wheel business consumes 41% production capacity of WIL, this will be transferred to WCWL (manufacturing capacity of WCWL is unknown).

Conclusion

Wheels India limited incorporated a wholly owned subsidiary WCWL in 2017, for the purpose of having an equity relationship with their technology partner Topy Industries (Japan). As Titan Europe is already a joint promotor, it was necessary to transfer car wheel business to new structure and take partner in the new company.   Through this, they will be able to raise funds for further expansion of passenger wheels’ segment in India. The sale agreement poses as a backward integration for Wheels India Limited in terms of technical know-how related to passenger car steel wheel manufacturing.

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