Since we put Motherson Sumi Systems (MSS) under ‘review’ in July, demand in domestic and key global car markets like US/UK/Germany improved 15-30%. Also, MSS surprised many by announcing aggressive cost-cutting initiatives in August. These developments should compensate for excess valuation paid for SAMIL (implied P/E at ~22x vs our ~16x). We restore our ‘buy’ rating with target price (TP) of Rs 132 (vs last published TP of Rs 126), implying ~25x/~16x FY23E EPS of DWH (`36)/SAMIL (Rs 96); ~6% increase in FY22E earnings and rollover. SAMIL would generate ~$3 billion OCF in FY22-25E, which would add ~$15 billion inorganic revenue, assuming deals at ~20% EV/sales.
Through M&A, key target areas of MSS are light metal stampings, auto lightings, suspension systems, HVAC and telematics (~$100 billion size of opportunity). Risks- second wave of Covid-19 impacting demand revival globally and earnings-dilutive M&A.
Deal valued SAMIL at ~22x FY19 earnings vs our expectation of ~16x. Our analysis of restructuring suggests deal was done at 22x FY19 incremental earnings (~10x start-up cost-adjusted earnings). We arrived at this multiple-based on incremental earnings for minority shareholders through restructuring and corresponding impact of 43% equity dilution of SAMIL. We believe fair multiple should have been ~16x vs ~22x, going by global peer set mean P/E of ~12x and ~30% weightage of India-based earnings (~25x).
What changed since the restructuring announcement? Since June, key car markets for MSS like EU/US/India reported improvement of 15-30%. In 1QFY21 results, MSS announced that ~84% of its plants are operating in excess of ~50% capacity with further improvement in September. MSS’s cost-cutting initiatives like manpower rationalisation (Alabama plant staff cut from 2.6k to 1.8k), scrap reduction by ~3%, lower logistics cost and reduced employee training ahead would push SMP Ebitdam to 8-9% by FY23E. These would result in ~4% increase in MSS’s EBITDA in FY22E.
FY20 annual report(AR) reveals 4x target revenue by FY25. FY20 AR also reveals MSS targets revenue of ~$36 billion by FY25. In last five-year plan, MSS targeted ~$18 billion by FY20 vs ~$5.5 billion in FY15 and achieved ~$9 billion in FY20.