Buy Motherson Sumi, target price Rs 115: Emkay Global

Emkay Global has given a buy rating to Motherson Sumi Systems with a 12-month target price of Rs 115. The share price moved up by 1.02 per cent from its previous close of Rs 98.10. The stock’s last traded price is Rs 99.10.

The company’s restructuring exercise proposes to create a separate entity for the domestic wiring harness business (new company DWH), and a merger of parent entity SAMIL into MSS to bring in the remaining 49 per cent SMR PBV stake and other auto/non-auto businesses. The proposed share swap implies a valuation of Rs 244 billion for SAMIL. The transaction would be EPS dilutive on our estimates, and to be EPS accretive by FY22E, a strong turnaround would be needed in SMR PBV and SAIML’s auto/non-auto businesses.

Investment Rationale

The brokerage’s positive view on the stock is underpinned by strong management capabilities and hopes of a gradual pick-up in underlying segments from the second half of FY21 onward. The restructuring exercise is a step toward the company’s Vision 2025 – revenue target of $33-35 billion with ROCE of 40 per cent. The brokerage retains a buy rating with a target price of Rs115, based on 20 times FY22E EPS.

Key downside risks are demand contraction in target markets, weak performance of larger clients and adverse currency rates, among others.



Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 14870.32 crore, down -3.67 per cent from last quarter sales of Rs 15436.46 crore and down -12.12 per cent from last year's same quarter sales of Rs 16921.40 crore. The company reported net profit after tax of Rs 144.40 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 61.73 per cent stake in the company as of the fourth quarter ending March 31, 2020, while FIIs held 15.50 per cent, DIIs 13.55 per cent and public & others 9.22 per cent.