In due course of time when the SIEL management will try to impress upon its shareholders why it needs to buy back the shares of its automobile joint venture with Honda of Japan, it will be hard-pressed to put forth its case logically. Only recently, a cash-strapped SIEL sold three fourths or 30 per cent of its 40 per cent stake in Honda SIEL Cars Ltd (HSC) to Honda of Japan, the majority stakeholder in the company with a holding of 60 per cent.The company should benefit tremendously from the sale of a chunk of its stake in HSC to Honda, with an infusion of over Rs 54 crore in cash. In addition to this sale, the company has sold off its stake in Shriram Honda as well, yielding another Rs 64 crore. But despite some initial improvement in the stock price, the shareholders do not seem to have gained much [with the exception of a hike in dividend to Rs 4 per share (payout of Rs 10 crore)], and an issue of bonus shares that serves no real purpose except despite the fact that the company will benefit to theextent of over Rs 20 per share with expectations of more to come.
The management has been making noises about buying back the 30 per cent equity stake that was sold off to Honda before October 1998 through internal accruals. How it proposes to raise the amount through internal accruals is another matter altogether, as the company has been plagued by falling profitability over the past two years. And if the company is able to generate internal accruals would it not be better off if it reduced its high debt:equity ratio? Or for that matter if it utilised the surplus amount available on account of the asset sales and investments to reduce debt and consequently shore up its return on capital, thus benefiting its shareholders in a sustainable manner.
The basic business that the company has been involved in all these years is itself being restructured and will call for additional investments. And businesses such as sugar, fertilisers and airconditioners have not being too well and require large doses ofworking capital. Only recently, the company spun off its compressor unit to a separate joint venture with Techumseh of the US.
That shareholders have not benefited from SIEL is well known. But with this stake selloff and that of Shriram Honda, besides other asset sales that the company has been contemplating, there is an outside chance that shareholders might benefit. There are also questions about the financial management of the company. For one, it has numerous subsidiaries in which large sums of money have been invested and almost no returns have been generated.
In fact, a few subsidiaries have been losing a lot of money in recent years, and the trend, going by recent developments within the group, is towards merging these loss-making companies with SIEL, a move that can only further erode shareholders' confidence. If the management is going to further burden the company by buying back the 30 per cent stake in the car project, it defies logic, for this investment will take time to give returns. And itwill simply mean that the company has generated surplus cash by selling off unrelated investments and assets and reinvesting in further unrelated areas.
In fact, not only would shareholders not lose if the company decides against buying back its stake in the car venture, it would also be doing itself a service by selling off the remaining 10 per cent stake in the car project as it has no synergy with its existing businesses.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
