Mahindra & Mahindra (M & M) has recently given an additional 3% stake in its subsidiary Mahindra-British telecom (MBT) to British Telecom (BT). This has resulted in BT's stake going up from 40% to 43% and M & M's coming down to 57%. In return BT has committed business worth Rs 2.35 bn per annum for a period of three years to MBT.
The issue here is the price at which this stake has been given. The total consideration is Rs 135 m for the 5.05 m shares offered to BT. This works out to Rs 26.7 per share. As the expected IPO price will be substantially higher than this offer price, is this justified.
The company has justified this on the stance that MBT will gain from higher business from BT. Business by BT to MBT accounts for over 70% of MBT revenues currently. It is likely to continue due to their 40% holding. The reasoning, in our view, is not very convincing.
However M & M claims that BT does not have to commit business to MBT. This looks absurd due to the fact that MBT which specialises in telecommunication software currently is likely to get business from BT anyway due to their 40% stake. Also the business commitment by BT at this stage will result in a surge in revenues in the current year only, but will remain flat over FY2002 and FY2003. Anyway, the demand for telecom software is growing rapidly and it is unlikely that the Company will be short of business in case BT were to withdraw.
It is very obvious that the stakes in this deal are in favour of British Telecom and not for M & M. We have attempted to calculate the IPO offer price based on MBT's performance. For FY2000, the company reported a net profit of Rs 630 m for FY2000. This works out to an EPS of Rs 6.6 for FY2000 (on face value of Rs 2 per share after MBT's stock split).
Considering that MBT's net grew by 60% in the 1QFY01, we can safely expect atleast a 30% growth for the full year. Based on this the EPS works out to Rs 8.5 for FY01. Hughes Software, a direct competitor is currently trading at 100 x FY01 earnings. On a conservative basis we can assume a price to earnings multiple of 55 x for MBT's IPO. The IPO price based on these valuations works out Rs 468. While BT gets the shares at Rs 26.7, is such a steep discount justified ?
We hope M & M by such incidents is not getting back into their old unfriendly ways towards public shareholders.
On the current price of Rs 200, M & M is trading at 8.4 x FY00 earnings
Mahindra & Mahindra has announced its financial results for the second quarter of the financial year 2016-17 (2QFY17). During the quarter, revenues grew by 15.6% YoY and adjusted net profits grew by 18.5%.
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