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Saturday, January 8, 2011

Tata Autocomp Systems IPO_qualitative concerns_AVOID

Like most Indians, I believe(rightly so) that the Tata brand stands for trust, loyalty, faith etc. So when I noticed the first(in a long time) IPO offer from the group in terms of Tata Autocomp Systems (TAC), I initially thought of subscribing to it w/o reading the prospectus. But remembering the RPower IPO fiasco, I decided to read the full DHRP available here And quite a few aspects of it are surprising, in a negative way.
  • Entirely a stake sale by promoters:-The company will not receive anything from the IPO. It reflects on the confidence of the selling shareholders that they do not want to sell their sales in the secondary market but want an assured exit via IPO. This does not infuse funds into the company-and therefore is a risk factor when there are other opportunities out there that actually infuse funds into the firms.
  • Qualified accounts;-To quote from the prospectus(risk factor 6), "The Company has not made provision for any possible diminution in the value of long-term investments aggregating Rs. 919 million in two of its joint venture companies, Tata AutoComp GY Batteries Limited and Tata Yazaki Autocomp Limited, whose net worth has each substantially eroded on account of losses". This IS a regrettable practice followed by several Indian companies-postpone write downs calling the investment 'strategic' etc but is hardly expected from a Tata Group company.
  • Breach of covenants without renegotiating:-As per risk factor 8, the interest cover covenant on a   $23MM loan from HSBC  was breached in Oct-08. The default still continues with the only penalty being a higher interest rate. For such a small loan, it is surprising why the breach continues.
Despite all this, the company still remains a Tata Group company post IPO(with 75% majority holding) so may be considered as "Too Big to fail". But still, investing in better quality paper of the same group may be advisable from a fundamental aspect.

I have not considered the industry fundamentals or the pricing. This analysis is purely qualitative.

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