Hinduja Foundries, Ashok Leyland Shares Fall On Merger Plan

Shares of auto parts maker Hinduja Foundries plunged 20 percent while Ashok Leyland shares fell as much as 3.6 percent after the two companies approved a proposal to merge. Both companies are part of the Hinduja group.

Explaining the need for the merger, Gopal Mahadevan, chief financial officer of Ashok Leyland told BloombergQuint that the merger is critical for Ashok Leyland as Hinduja Foundries is among its main suppliers. He also said that Hinduja Foundaries is expected to start generating profits in the next two to three years.

These are some of the key variables to keep in mind while assessing the deal:

• Hinduja Foundries has accumulated losses of over Rs 1,000 crore but the management of Ashok Leyland is confident they can turn around the company.
• Post the merger, the overall dilution will be around 2.76 percent. Ashok Leyland’s total outstanding shares will rise approximately by 8 crore equity shares.
  
• Promoter holding in Ashok Leyland will rise to 51.3 percent from the current 50.4 percent after the deal.
  
• Since this is a related party transaction, the company will need a majority of minority shareholders to approve the deal.

According to the merger agreement, hundred equity shares of Rs 10 each of Hinduja Foundries will get exchanged for 40 shares of Re 1 each in Ashok Leyland. The deal is being struck at a significant discount to the closing price of Hinduja Foundries on Wednesday, which led to the fall in its stock price in trade on Thursday.

Shares of Hinduja Foundries closed at Rs 44 per share, down 20 percent from previous close. Ashok Leyland stock closed at Rs 81.55 per share, down 3.55% percent.

“The merger proposal will require the approval of minority shareholders and has an appointed date of 1 Oct 2016. Unlike its divestments in other joint ventures, Ashok Leyland is confident of the future business prospects of Hinduja Foundries and believes the capital investment required to grow the business will not be substantial,” said Religare Institutional Research in a note on Thursday.

The proposed date of amalgamation is October 1, 2016.