Buy Motherson Sumi,target price Rs 122: ICICI Securities

ICICI Securities has given a buy rating to Motherson Sumi Systems with a target price of Rs 122. The share price moved up by 1.53% from its previous close of Rs 98.10. The last traded price is Rs 99.60.

Motherson Sumi Systems’ board of directors has approved the reorganisation proposal which entails: a) Demerger of domestic wiring harness business (DWH) with mirror shareholding, which would have 1:1 share entitlement; b) merger of SAMIL, the promoter entity which owns 49% of SMRPBVm into MSSL at a share swap of 51 of MSSL (face value 1) for 10 shares of SAMIL (face value 10); c) the management expects the merger to be EPS accretive from FY22.

Investment Rationale

In brokerage view, from a strategic perspective, the rejig is positive as this not only reduces the ownership complexity but also provides an opportunity ($200bn+ global) to participate in further accelerating content per vehicle increases via new businesses (e.g. LED lighting). On the transaction front, the brokerage expects a potential upside of ~22% on transaction consummation.

The key takeaway , according to the brokerage, is increased confidence in India business (wiring/non-wiring) as both seem strong in terms of profitability. ICICI Securities continues to like the stock as free cash flow generation continues. It has upgraded its target India multiple to 24 times from 22 times earlier, valuing it on SoTP basis, while keeping other portions’ valuation unchanged. It has maintained a buy rating with a revised target price of Rs122/share from Rs116/share earlier.

SoTP Valuation


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