Wheels India Rights - Free money for minorities?

Hi friends,

Seeking your feedback on what looks like a too good to be true opportunity in Wheels India.

Basics of the idea:

1). SEBI allows promoters to bring their shareholding within the regulatory limit of 75%, one was allotting rightsonlyto minority shareholders. Thus, in these issues, the promoters forego their rights entitlement and only the residual shareholders participate in such a way that post issue promoter shareholding is brought down to less than 75%. In the case of Wheels India, promoter (TVS group + Titan International) is at 91.44%. The promoters have thus chosen to use the rights to minority holders as the route to bring down their shareholding also presumably raising much needed funds for the company (to pay down existing debt) in the bargain.

2: Terms of the Issue

CMP 825 (A)

Current o/s Equity : 9869444 shares (B)

Fresh Issue : 2162835 shares ©

Diluted Equity = B+C = 12032279 shares (D)

Issue Price 400 (E)
Record Date for entitlement : February 14th 2014

Theoretical Ex-rights price is 749.

3). Returns and the risk

Assuming you are able to sell your 20 shares at the theoretical ex-rights price of Rs 749, you would book a loss upfront of Rs 1528 (825-749)*20 on your investment of Rs 16500.Subsequently, if you are able to sell these 51 shares at the same ex right price viz 749, you would make a profit of Rs 17799/- explained as [(749-400)*51]. Net of your loss of Rs 1528 booked earlier, you would still be left with a profit of Rs 16271/- leading to a theoretical return of roughly 98% on your investment of Rs 16500/-!!!

Risk is mainly from the not so good fundamentals of the company with mid-teens ROCEs, high debt on the books, lack of pricing power being primarily an OEM supplier and the general pangs of overall auto industry slowdown.

We have put out a detailed note on the post as well here:

http://http://manufacturedluck.blogspot.in/2014/02/wheels-india-rights-issue-free-lunch.html

Do you think there is a chance to manufacture luck here?

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On PE basis the stock is very expensive. A trailing pe of 32 .even if we take into account the slump in auto ind, it is still quoting at high valuation. In last 10 years the profits have hardly grown. The fundamentals as you mentioned are weak. If we forget about rights issue and if we have to value the stock basis diluted equity Will we be willing to pay 400 rs for the stock. What will be its fair price. May be the stock is quoting high due to punters in anticipation of rights issue or may be the price will crash after rights issue

Hi Manish,

We are slightly wary of valuing this company on a PE basis. This is largely because it is a manufacturing business undergoing a cyclical downturn. While depreciation is on the entire asset base, capacity utilisations currently are at ~ 70% and thus earnings are depressed. Due to this reason a lot of cyclical manufacturing businesses tend to look expensive when looked at it in PE terms during downturns. Also presence of debt (475 cr in the case of Wheels India) sometimes tends to distort the PE picture. We tend to prefer EV/EBIDTA which is at ~ 8.5x at CMP. Business of course is not great but looked at on EV basis it is not super expensive while surely not cheap. Have attempted to answer this question in greater detail on the post. Am repasting the link here since it did not go through properly the first time

http://manufacturedluck.blogspot.in/2014/02/wheels-india-rights-issue-free-lunch.html

Entirely agree with you that the key risk is price correction after issue ex date but sense that there is some safety margin in built due to the special situation.

Can we say wrt to this deal that Shareholders getting almost 10% stake in Wheels India for 40cr and hence company valued at 400cr mkt cap and hence at half of current PE?

we should also calculate breakeven point: Price at which you we would make no loss - no profit

At price of 900, this turns out to be magic number of 555 :slight_smile:

That means if price falls below 555, then only you will be in loss

After the restructure in the group company has come up with detailed presentation.

Few interesting points.

  1. Most of the capex done in the last 3 years is not contributing to bottom line. some segments are in loss as the capacity utilization is low
  2. Company started focusing on free cash flows from last 1 years. All the capex is happening with internal accruals only.
  3. The company has diversified in to new segments like renewable segment, aluminum wheels etc which are in the ramp stage.
  4. Debt is coming down from last 2 years. In total debt of 731 Cr, long tern debt is 230+Cr. Rest of it is for working capital debt.

Disc: Invested (transactions in last 30 days)

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Good results from WIL:

https://nsearchives.nseindia.com/corporate/WHEELS_20052024144420_WILReg30PressrelaseMay2024.pdf

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Wheels India reported good set of numbers. As management communicated in previous concalls margin improved to 8% in Q4FY24. 1% being contributed by discount by customers which normally gets accumulated in Q4.

Some points from concall

  • Expecting flat growth in FY25. Possible to grow if market situation improves
  • Planned capex of in excess of 200Cr across Wind components machining, cast aluminum wheels, earth moving & tractors, hydraulic cylinders and CV. All capex to be from internal accruals. If there is any moderation of capex, then 35-40Cr of debt to be retired.
  • Business opportunity in Railways - Looks not really focused here. They don’t directly wok with railways. They supply to customers like Alstom
  • Cast alloy wheels supply to domestic customer to start from Jun-24. Ramp up might happen in Q2 or Q3 of FY25. Since the ramp up has not happened, I believe this segment is not contributing to bottom line yet.
  • Machining / Fabrication of Wind castings - Supplies to both domestic and exports. Ramp will be inline with ramp of customers.
  • Monetizing of any assets / or rights issue to reduce the burden of interest - There is no non - core assets as of now to monetize. Will look for rights issue only for greenfield capex (as and when it happens).

Outlook for FY25:

Press release:

Q4FY24 - Investor PPT:

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WHEELS INDIA AGM - FY2024:

  • Company expecting muted growth in FY25
  • Tractor segment is not doing well
  • Started supplying alloy wheels to one of the domestic OEM. This segment shall reach double digit margins once the ramp up happens to 40K wheels per month
  • Expecting exports to be muted as some of the new customers programs are going to be started towards end of FY25
  • Wind segment to grow as per the growth of customers
  • Raw material inflation/deflation is a pass through every quarterly
  • FY24 - profitability got impacted due to one time provision. One of European distributor got into trouble.
  • Although sales growth is muted, there shall be growth in bottom line
  • Capex will be 200Cr per year for the next 2 years
  • Expected IRR is 15% for new projects
  • wrt to margins - CV and tractor is single digit and rest all are double digit
  • 40% of the overall business is having double digit margins
  • Sundaram Hydraulics is merged and good growth is expected in this segment. RIght now its high single digit and reach double digit with increase in sales
  • With the current capacity, sales can hit 6K crore (given all the segments doing well - as the industry is cyclical)
  • Directionally company moving towards 18% ROCE in next few years

Merger is Sundaram Hydraulics Lts is earnings accreative. In FY24, SHL clocked revenue of 158.9 Cr vs 127.1 cr (previous year) and PBT of 4.1 cr vs loss of -3.03 Cr. Management is confident of showing growth in hydraulics division

Not much participation from investor community. Only one asked few questions and the other one (myself) was listener :slight_smile:

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