Ashok Leyland Scales Back Hinduja Leyland Finance Stake Purchase Plan

Ashok Leyland Ltd. will acquire a smaller stake in a non-bank lending unit, after concerns raised by investors about the transaction sent the commercial vehicle maker’s shares plunging.

The company’s board of directors, at a meeting held on March 21, said they would acquire 6.99 percent stake in Hinduja Leyland Finance Ltd., from 19 percent previously after considering feedback from minority shareholders. Ashok Leyland had initially proposed to infuse over Rs 1,200 crore in the unit by acquiring stake in tranches, leading to near-30 percent fall in its shares on March 19 as investors turned cautious amid the current market scenario.

The maker of trucks to tippers and tractors would now buy shares worth Rs 390.49 crore from Everfin Holdings, an associate of Everstone Capital, and the Hinduja Group at Rs 119 apiece, taking its stake in Hinduja Leyland Finance to 68.82 percent, according to company data.

The acquisition is being made at a valuation of two times Hinduja Leyland Finance’s forward price-to-book ratio for first half of FY21. The valuation, Citi wrote in a report, is much higher than its peers like M&M Financial Services Ltd. and Shriram Transport Finance Co. Ltd. and nearly in line with Cholamandalam Investment & Finance Co. Ltd.

UBS agreed. It said that with a return on equity of 11.6 percent for FY19, which may fall further in FY20 given the economic slowdown, Hinduja Leyland Finance’s valuation looks high. The brokerage said that its gross and net non-performing assets stand at 10.5 percent and 6.7 percent, respectively.

Ashok Leyland, while making the initial acquisition announcement, had said that it was to provide an exit for Everfin Holdings as plans for an initial public offering didn’t fructify.

It had also said that Hinduja Leyland Finance is significant for financing the purchases of its vehicles and the objective was to simplify the lending unit’s holding structure for future capital raises.

Analysts, however, raised concerns over the deal valuation, related-party transactions and Ashok Leyland’s cash flows. The timing, quantum and valuation of deal would pressure Ashok Leyland’s cash flows in a weak demand environment and also weigh on its valuations, Chirag Shah, analyst at Edelweiss Securities, wrote in a report.

In an environment where demand is weak and cash generation is already stressed, cash outflow to group companies is expected to raise investors’ concerns, Citi analyst Arvind Sharma wrote in a report after last week’s announcement.

Sonal Gupta, analyst at UBS, questioned Ashok Leyland’s need to maintain above stake greater than 51 percent in Hinduja Leyland Finance, given that the unit would ideally finance less than 15 percent of the company’s volumes.