Tube Investments, manufacturer of iconic Hercules bicycles and supplier to auto makers, received a shot in the arm after it sold 14% stake in Cholamandalam MS General Insurance.
This may trigger valuation re-rating of the residual stake in the insurance venture as well as bring down its debt burden. The combined positive impact of these two factors lifted its stock 11.62% on Monday , the highest one-day percentage change since September 2014, to end at `446.6.
There are two factors that might help analysts to lift their target price on the stock. One, the company will receive nearly `882 crore post selling 14% stake in the insurance company.This will be used to retire the debt of the company and consequently, bring down the interest expense by nearly half.
At the end of FY15, the company has a total debt of `1,420 crore, and is expected to receive net proceeds of `750-800 crore from stake sale after deduction in capital gains.
De Arul Kaarthick, analyst with Karvy stock broking says that the interest cost of Tube Investments will come down to `79 crore for the next fiscal versus `122 crore this year.
The company’s profit margin for the next year may improve by 120150 basis points.
Secondly , after selling 14% stake, Tube Investments will still own 60% in the insurance firm. Given that the current deal is valued at 8.46x the book value, much lower than currently factored by the analyst, the revised valuation for general insurance could set higher valuation benchmark of the remaining stake and could potentially trigger valuation rerating of the insurance company .
Source: Economic Times
Date: 29th December 2015