Discussions on Motherson Sumi are often focused on the domestic wiring harness business, its larger subsidiaries SMP, SMR and now PKC. But it has a total of 134 subsidiaries and 6 joint ventures (JV). Our analysis of subsidiaries and JVs not included in the three subsidiaries above suggests they now account for 16-21% of consolidated reported profit and contribute meaningfully to growth in profitability, even though their contribution to reported consolidated sales is small. These subsidiaries support complementary businesses or act as a supplier base for the key large subsidiaries.
Some investors argue that all major subsidiaries should be valued independently at different multiples depending on the nature of business. We believe this often distorts the real value the combined business generates, as most subsidiaries often have some dependency on each other, which is dynamic in nature. As a result, the profitability of one entity is often reflected in other subsidiaries. Smaller subsidiaries and those that are suppliers to major subsidiaries tend to be under-appreciated in this process and so are undervalued; thus we prefer to value the company on its consolidated earnings.
We remain positive on Motherson Sumi in the long term as it is well placed to benefit from the increasing role of auto component suppliers, with the increasing complexity of parts and electronic content helping the wiring harness business, innovation in camera-based technologies and use of modern interior architecture. In addition, with the recent fundraising, we think Motherson is ready for acquisitions, which would help it achieve its 2020 goal.
We adjust our 2018-20 estimates by 4-5% to account for depreciation in EUR-INR currency rates, improvement in US Class 8 trucks and improvement in smaller subsidiaries. We value the company on a Gordon growth- based PE of 24x on Sep’19 EPS. We discount this back by a year to arrive at a fair value target price of Rs 365, and we maintain our Buy rating on the stock. Key downside risks to our view: Slowdown in the global car market, INR appreciation.