Hold Motherson Sumi; target of Rs 105: ICICI Direct

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ICICI Direct's research report on Motherson Sumi

The board of directors at Motherson Sumi Systems (MSSL) approved a business restructuring plan, which is a tad more inclusive than plans shared earlier. As part of plan in the first leg of transaction, MSSL would demerge domestic wiring harness (DWH) business into a separate entity, mirroring the shareholding of the listed entity i.e. MSSL. In the second leg of transaction, however, MSSL now plans to acquire all other lines of promoter’s business in auto ancillary as well as support functions including 49% stake in SMRP BV (SMR+ SMP) hosted in Samvardhana Motherson International (SAMIL) vs. the initial plans on just acquiring the 49% stake in SMRP BV hosted in SAMIL. For the second leg of the transaction, it plans to issue 136 crore new shares to promoters with promoter’s stake increasing from 36.4% to 50.4%. Investors may now find comfort in all promoter’s line of businesses being consolidated into one entity (MSSL+SAMIL). The valuation at which SAMIL is envisaged to be merged with MSSL appears to be fair and is not adverse to the interest of minority shareholders. However, we do not see much upside in the stock price of MSSL given the healthy valuations at which it is trading amid complex nature of business with varied geographical and currency risk.

Outlook

MSSL is a global auto ancillary player with varied exposure to different geographies, foreign currencies as well as product profile. MSSL is, however, relatively better placed with respect to EV disruption. Given the complexities and healthy valuations at which it trades i.e. ~18x P/E, ~2.5x P/B with the return ratios metrics of mid-teens on FY22E numbers, we see limited upside to our target price calculation. We value MSSL at Rs 105 i.e. 19x P/E on FY22E EPS of Rs 5.4 with a HOLD rating on the stock.

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