Motherson Sumi okays business rejig; what’s in it for minority shareholders?

NEW DELHI: Stock investors on Friday gave a thumbs down to Motherson Sumi Systems’ business reorganization plan, under which it will demerge its domestic wiring harness (DWH) business into a new company and merge SAMIL (Samvardhana Motherson International Limited) with self.

SAMIL is the holding company, which has stakes in listed Motherson Sumi Systems and unlisted SMRPBV (Samvardhana Motherson Automotive Systems Group BV).

With SAMIL getting merged with Motherson Sumi Systems (post DHW demerger), the latter would consolidate its stake in SMRPBV to 100 per cent. The move would bring all auto component and allied businesses of SAMIL under Motherson Sumi Systems.

The share-swap ratio is proposed to be 51 shares of Motherson Sumi Systems of Re 1 face value for every 10 shares of SAMIL (of Rs 10 face value) held. SAMIL stakeholders at present include the Sehgal family, which holds 90.4 per cent. Sojitz (6.5 per cent) and employees (3.1 per cent) account for the rest. The merged entity would be renamed as Samvardhana Motherson International Ltd (SMIL).

In the case of Motherson Sumi, Sehgals hold 3 per cent stake directly, SAMIL holds 33.4 per cent and SWS (Sumitomo Wiring Systems) 25.5 per cent.

Post restructuring, the promoters’ shareholding would increase to 68.15 per cent from 61.73 per cent currently, with the Sehgal family controlling 50.4 per cent and Sumitomo Wiring System 17.7 per cent.

In the case of DHW – the new entity – the stakeholding will be proportionate to Motherson Sumi’s prevailing levels -- i.e. Sehgals (3 per cent), SWS (25.3 per cent) and public shareholders (38.3 per cent).


Motherson Sumi’s merged entity would be left with the global businesses – 100 per cent of SMRPBV and Finland’s PKC – and remaining India businesses, including the JVs. Motherson, through the merger of SAMIL, would gain access to new business verticals such as automotive lighting, shock absorbers, HVACs, vehicle telematics, which were not accessible under the existing business setup.

The India wiring harness (DWH) business would be focused on India business, as desired by Sumitomo. It would be a pureplay proxy to passenger vehicles growth facilitating OEMs.

What’s in it for investors?
The company management expects the arrangement to be EPS-accretive from the first year itself. But excluding the profit from associates, SAMIL booked a PAT loss in FY20 due to impairment and interest costs. The management is expecting a turnaround for SAMIL’s greenfield facilities.

Edelweiss Securities said minority shareholding interest in the new Motherson Sumi (SMIL), excluding DWH, will drop from 38 per cent to 27 per cent. “Our initial calculations indicate that the drop in Motherson’s profit share will be 7 per cent for FY19 and 24 per cent for FY20 due to higher losses at SMRPBV.”

“Based on our current SoTP assumptions, the implied value ascribed to SAMIL is 11 per cent of current fair value. Unless there is a sharp turnaround at SMRPBV/SAMIL, the implied valuation can lead to downside risk,” it said.


On Friday, the stock fell 5.3 per cent to hit a low of Rs 98.15.

Motilal Oswal said that the reorganisation would lead to better value discovery of the non-India wiring harness business. “However, MSS-2 would increasingly be benchmarked to its global peers in the automotive supply chain. Also, this organisation would give minority shareholders the option to invest in either or both the businesses. This needs to be seen in the context of increasing exposure to the global automotive cycle in the current structure, which may not fit the mandate of many investors (with focus on India plays),” it said.

Considering the limited understanding of the core businesses of SAMIL, the implied valuations seem to fully capture the medium-term growth potential of its key businesses, Motilal Oswal said.

Both Motilal Oswal and Edelweiss maintained ‘buy’ ratings on the stock for now.

“The key derivative takeaway for us was increased confidence on India business (wiring/non-wiring), as both seem strong in terms of profitability. We continue to like the stock as FCF generation continues. However, we upgrade our target India multiple to 24 times (from 22 times ) valuing it on an SoTP basis, while keeping other portions’ valuation unchanged,” ICICI Securities said.