Honda stake sale price may flag corporate governance issuePublished on Tue, Mar 08, 2011 at 17:24   |  Updated at Wed, Mar 09, 2011 at 16:50 |  Source : CNBC-TV18

Hero Investments is buying Honda’s 26% stake or 52 million shares for about Rs 739. The stock has taken a beating post the news as the market does not seem to be accepting an almost 50% discount to its current price of close to Rs 1500. In an interview with CNBC-TV18, Prayesh Jain of IIFL gave his perspective on the price.Below is a verbatim transcript. Also watch the accompanying video.Q: Does the price surprise you?A: Definitely it is too low considering the stock is trading currently at around Rs 1,500 and so we are talking about a 50% discount from the current market price. That is too low considering that Hero Investments would be selling stake to the PE players at close to market price. It is too

low and possibly there could be some corporate governance issues that could be raised going ahead.Q: Could this be a case that Honda sells out to Hero and then Hero compensates by way of royalty and that could be deemed in to the minority shareholder?A: Definitely if that is the case that they have worked out at a higher royalty, that means the margin should be significantly a hit and already Hero Honda margins are trailing currently at significantly lower levels compared to Bajaj Auto. So in that case margins would take a further hit and definitely that would be a big negative for the minority shareholders.Q: What were you expecting by way of a price, some discount was always expected, wasn't it?A: Definitely, we were expecting a discount possibly somewhere in the range of 15-20% would have been possibly accepted by the market easily. But this is too cheap a discount to be accepted by the market.Q: Nothing is known by way of the kind of royalties that Hero has promised to Honda?A: At the time of announcement of the break up of the venture what they had said was that there will be lump-sum payment and it would be capped at the current level and it will possibly not increase from current levels. But then there would be still a corporate governance issue on this.

Q: This Rs 739 price, do you think it can take the stock much lower from the Rs 1,500 mark?A: I think it could trade a bit lower going ahead and possibly further low, it is difficult to quantify what levels they would test but definitely it would trade on the lower side now.Q: Any idea you have on the kind of clauses both the parties would have had while Honda selling out its stake to Hero, was there any kind of a clause that you know of that could govern the stock price at such a low level in the transaction?A: Nothing that I am aware of - whatever was there in media that is what we know because there is nothing specific that has been given out by the company.