CNBC reported that Motherson Sumi (MSSL) is looking to merge its subsidiary SMRPBV, in which it holds 51% stake, with itself. The remaining 49% is held by promoter (Sehgal family)-owned entity Samvardhana Motherson International (SMIL, not listed), which will receive shares in MSS. This will also dilute Sumitomo Wiring Systems’ (not listed) stake in the company below 26%. The company in an official statement said that it has an empowered committee of directors to evaluate restructuring proposals. However no concrete viable proposal has been finalised so far.
The restructuring is not final and there are multiple structures possible. In this note, we perform an analysis to examine the implications on long-term growth potential and valuation of Motherson Sumi. Among the scenarios we discuss, the most likely in our view would be merging SMIL into MSSL. This would reduce all perceived conflict of interest, perceived corporate governance issues and open the company’s mandate to perform any auto component related business. This should unlock significant growth potential for the company and further support its vision to achieve $18 bn of revenue by 2020. Management has strong expectations for SMIL and given the track record investors should be optimistic about prospects. However, the current level of profitability of SMIL could raise concerns on fair valuation.
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, increasing complexity of parts, innovation in camera based technologies and use of modern interior architecture. We have a Hold rating given expectations of slower growth in the premium car market, concerns regarding its large customer VW and increasing competition in the domestic wiring harness and international interior business.
Valuation and risks
We value the company using Gordon Growth based PE multiple of 20x on Mar ’18 EPS and discount it back by a year to arrive at a fair value TP of R290. Key upside and downside risks include strength/ weakness in the euro and European sales, resolution on VW emissions scandal and China slowdown or pick up.
The holding structure
The Sehgal family runs a multiple auto components business under the Samvardhana Motherson Group. These entities are largely further divided into SMIL, the unlisted entity and MSSL, the listed entity. SMIL is 90% owned by the promoters and undertakes a variety of auto component businesses. It also owns 49% of SMRPBV. MSSL which is 4% owned directly by the Sehgal family is indirectly controlled through SMIL which owns 36%. Its JV partner—Sumitomo Wiring Systems owns a controlling 26% stake in the listed entity. The combined stake for calculation of promoter share as per SEBI is considered 66%.
We evaluate various restructuring options and the implications based on Motherson Sumi’s current share price of Rs 278 implying a market capitalisation of R368 bn. We believe 51% of SMRPBV accounts for 35% of the value of MSSL. Consequently, SMIL’s 49% stake would account for roughly the same value. In our model, while it accounts for 40-45% of earnings, it accounts for 35% of valuation which implies a value of R136 bn. Payment of cash from the company to purchase this stake will raise net debt for the listed company to R159 bn by end of FY17 taking net debt to Ebitda at about 3x. This will be perceived to have increased risks without adding any value to the listed
entity. We believe the company is unlikely to do this.