Raising Private Equity in India

Investment Banking, Private Equity and Venture Capital Academic Group 1

Aashank Ambe-PGP-19-001
Aditi Patni-PGP-19-005
Karan Vats- PGP-19-27
Kriti Sharma- PGP-19-030
Arpit Bhatt- PGP-19-174

History
• Rico Auto Industries – An India based designer
and manufacturer of auto components and
assemblies
• Initially sewing machine manufacturers.
Gradually, diversified into high precision auto
components from 1984 onwards
• Founded by Arvind Kapur (Current - MD and
CEO). Listed on BSE and 51% shares held by
Kapur family
Operations Characteristics
• Major supplier to Indian and Global firms
• FY 2004 – Revenue = $161 MN ($3.8 MN of
exports included) (grew at a CAGR of 30%); PAT
= $11 MN (7.04% profitability)
• In a 50:50 J.V. with FCC (Japan)
• In house CAD/CAM/CAE capabilities
• Conformance to ISO/TS16949 quality
certification in manufacturing
• Among Top 10 domestic producers and Top 30
exporters of auto components in India
Case Background
Future Strategy and Plans
• Domestic Strategy – Consolidate and grow with the existing customer base. Also,
explore possibility of getting new customers
• Export Strategy – Focus on purchasing program of future products and platforms
by building design expertise and manufacturing flexibility with a low cost model
• Plans – (i) New plants in South India and Manesar
(ii) Acquisitions in US or India
(iii) Increase casting capacity (ferrous by 50% and aluminum by 33%)
(iv) Add new CNC machines and R&D facility to include more value added
components in the product line
PIPE
Debt Instruments
How to fund these
plans and the
expansion strategy? Joint Venture
Partnership with
Global Firms
 Industry & Company analysis
at the time of the deal
Analysis of Auto components industry
• Highly Fragmented industry
• Top 25 manufacturers together held a market share
of 44%
• Business complementary to the manufacture of
automotives
• Automobile and motorcycle industries were expected
to grow at a CAGR of 11.6% in the next 5 years
• Automobile companies in developed countries faced
strained margins on account of excess capacity, high
labour costs, etc
• Most of the auto manufacturers had plans of sourcing
raw materials from low cost countries such as India
• Indian auto component players had the advantage of
strong design and engineering capabilities and low
wages
• Focus of Indian companies was on scaling up to serve
as a destination for outsourcing
Analysis of Rico Auto Industries
• Headquartered in Gurgaon
• Engaged in manufacture of auto components and
assemblies
• Reputed global customers such as Ford, Cummins,
Caterpillar, Volvo, etc.
• Indigenous customers include Hero Honda, Maruti
Suzuki and Honda–primarily dependent on local sales
• Largest customer – Hero Honda, which contributed to
68% of revenues
• Among the top 10 domestic producers and top 30
exporters
• FY 2005 performance – Revenues of $161m, EBITDA
of $24m and net income of $11m
• Rico’s domestic customers – expected to grow much
higher than industry growth rate
• Focus on export business which was seen an
opportunity to secure its future
 Players and their Motivation
Consortium
PLAYERS Rico Automotive
•Morgan Stanley India investment
• Initially started as a sewing company,
fund and mutual fund
went public in 1985 on BSE
•New Vernon, an India focussed
• Specialised in auto component
investment fund
design and engineering, catering to
•BVP, an LP and co-investor of New
clients like Ford, GM, Cummins
Vernon, willing to invest in Indiac
• Revenue growth 30%, EBITDA - 35%
Motivation
Motivation
•Expectation to take advantage of
currently undervalued firms •Aim to achieve a revenue of $1 billion
•Dearth of capital in Indian markets •Exports to fuel revenue growth
•Belief in strong underlying •Drive competitive advantage via
fundamentals of firm and ability to design and development, not labor
sustain and grow cost arbitrage
Apprehension •Maintain debt-to-equity ratio at 1:1

Apprehension
•Unwillingness to take risks, Appalling
infrastructure ,excessive bureaucracy Apprehensions on investors’
•Lack of governance rights, soaring understanding of firm specific cyclicity
stock prices
 Deal Details

$28 Rs. 67 15.4 3

($1.56) 44.7%
Million million million

Total Investment Deal Price per share New issues of Family Ownership (%) Warrants to Promoter
shares

Convertible to equity shares

• Valuation (in Rs. Millions) 7180 within 18 months at the
Pre-Money details • Investor Ownership (%) 14 same price
• Outstanding Stocks (in Million) 107.17
• P/E Multiple 14.9

• The investors had a bullish view about the auto components sector in India
• The Indian auto sector was continuously positioning itself well to benefit from
the structural adjustment in the global auto sector
• Similar backgrounds of a few investors and the company made them a good fit Post this the family
• Moreover, there were personal connections as well-added to the credibility ownership would be 47%
 Post Deal Analysis

Share Issuance Pattern Major Disinvestments

1. Morgan Stanley India Pvt. Ltd. – 5.50 MN
2. Morgan Stanley Mutual Fund – 4.40 MN
3. New Vernon Bharat Ltd. – 3.45 MN
Issuance Price
– Rs. 67 per share (Book value – Rs. 1 per share ;
Premium – Rs. 66 per share)
1. New Vernon Bharat Ltd. – 2.2 MN
(Exercise Price = Rs. 26.25 per share; Date = 04/09/2009)
2. Morgan Stanley India Pvt. Ltd. – 1.24 MN
(Exercise Price = Rs. 45.50 per share; Date = 12/07/2007)
3. Morgan Stanley Growth Fund – 0.98 MN
(Exercise Price = Rs. 45.50 per share; Date = 12/07/2007)
4. Morgan Stanley Mutual Fund – 1.13 MN
(Exercise Price = Rs. 44.62 per share; Date = 22/06/2007)
5. New Vernon Bharat Ltd. – 1.02 MN
(Exercise Price = Rs. 49.49 per share; Date = 14/03/2007)

• Cash profits of Rico Auto jumped by 40% in FY 2005 while at the same time, it increased by mere 13% for the peers

• Exports improved in the upcoming years but were affected from 2007 onwards because of the falling dollar

Developments on the Operational Front

1. Signed a J.V. agreement with Zhejiang Jinfei Co. Ltd (JINFEI) of China to manufacture alloy wheels in India (2007)
2. Signed a J.V. agreement with Continental AG of Germany to manufacture Hydraulic Brake System (HBS) in India (2007)
3. Started a new R&D center in India
 Subsequent Developments &
Current Status

2010-2014 Started facilities in Haridwar, Sanand and Bhiwadi

Added new customers: Toyota, Musashi, Kohler, Avtec

2014-2019 Started plants in Bawal, Pathredi and Chennai

Added new customers: Bentley, Daimler, Kia, Punch Powertrain

2012 2014

Rico Auto sold its entire 50% stake Rico Auto divests its entire stake in
held in the Joint Venture with 50:50 JV with FCC Ltd., Japan to its JV
Continental AG to another Continental partner itself for a consideration of
Group company based in Netherlands ~Rs.495 crores

2020 2019

In the absence of manufacturing It purchased the shares of its JV

activity on account of covid and lack of partner Magna Powetrain GMBH in
support from the Government, the the joint venture for a consideration pf
company has decided to lay off 70% of Rs. 8.56 crores
its staff
 References

1. https://economictimes.indiatimes.com/rico-auto-industries-ltd/infocompanyhistory/companyid-13205.cms
2. http://www.capitalmarket.com/Company-Information/Corporate-Actions/EGM/Rico-Auto-Industries-Ltd/702
3. https://www.moneycontrol.com/stocks/company_info/blockdeals_query.php?sc_id=RA04&post_flg=1&myexchg=Both&cl
assic=true
4. https://www.ricoauto.com/investor-relation.html
5. https://auto.economictimes.indiatimes.com/news/auto-components/rico-auto-sheds-70-staff-as-covid-19-hit-
business-plans/75935888
6. Marketline report on Rico Auto Industries - Published on 11th Februrary, 2020
Thank You!