A depreciating rupee and the steady fall in the stock market may present an attractive opportunity for multinational firms to buy into their Indian subsidiaries. One such likely candidate is Cummins Inc, the parent company of Cummins India.
In a recent research note, Phillip Capital said the recent depreciation of rupee and the subsequent fall in markets gives the Columbus-based parent an ideal opportunity to buy further shares in Cummins India through an open offer. ?Cummins Inc currently holds 51% stake in Cummins India and would need $400 million to increase its stake to 75%. To put it in perspective, it would have needed $500 million at the start of the year and $550 million as of January, 2012.?
The Phillip Capital analysts Ankur Sharma and Jishar Thoombath added, ?We have used R411 as the open offer price, which is the average price of Cummins India over the last 60 days and has to be the minimum offer price as per Sebi regulations. Note that the slide in Cummins India?s price over the past four months (-40%) also results in a lower open offer price to be offered as per Sebi regulations.?
In year to date, the rupee has fallen more than 20%, while the Cummins India share has shed 24.74%. The stock is currently priced at R380 on the BSE.
Market watchers add that the current market scenario gives a good opportunity to multinational parent companies looking to consolidate their holdings in Indian subsidiaries. ?Whether this offer will come through or not really depends on the strategy of the parent company for India,? said Samir Bahl, executive director, investment banking, Centrum Capital.
Apart from this, the huge cash reserves of the parent means that the open offer would not have any negative impact on the balance sheet. In fact, analysts feel that the open offer would improve the consolidated earnings. ?In H12013, Cummins generated free cash flow (operating cash flow less capex) of $700 million and should easily generate more than $1 billion in free cash flow for CY13,? the research note added. ?If it decides to buy back an additional 24% stake in Cummins India ($400 million investment), it would be earnings accretive to the parent as it yields 6% (on additional earnings being consolidated) vs the 1.8% it is getting as interest income currently.?
India contributes 5% to Cummins? overall revenues. Cummins India has also been designated as the global export hub (less than 200 kilo volt amps) for its low power gensets. The engine and generator manufacturer set up a plant in Phaltan recently for domestic and export markets. Recently, another multi-national company, Unilever, successfully increased its stake in its Indian subsidiary, HUL, to over 67% from 52% via an open offer.
