Tag - demerge

Corporate rejig plan will take care of long-term requirements – Motherson Sumi

Update on the Indian Equity Market:
On Friday, Nifty ended -0.4% lower at 10,768. The top gainers for Nifty 50 were Reliance (+3.1%),
HUL (+2.5%), and Sun Pharma (+2.3%) while the losing stocks were Axis Bank (-3.2%), GAIL (-2.8%)
and ICICI Bank (-2.8%). Sectoral gainers for the day were Pharma (+0.9%), Realty (+0.7%) and FMCG
(+0.5%) while the losers were PSU Bank (-2.7%), Pvt Bank (-2.4%) and Bank (-2.2%).

Edited excerpts of an interview with Mr GN Guaba, CFO, Motherson Sumi Systems Ltd (MSSL); dated 07th July 2020 from Economic Times:

  • The Motherson Group last week announced a major rejig in its corporate structure, deciding to demerge its domestic wiring business into a separate listed entity.
  • As per the scheme, MSSL will first demerge the domestic wiring harness business and will get it listed separately. The second stage of the restructuring involves merging the principal holding company Samvardhana Motherson International Ltd (SAMIL) into the MSSL.
  • From the shareholders perspective, for every one share held by them of the MSSL pre-demerger, they will be allotted one new share of the demerged entity.
  • The proposed reorganisation will simplify the Group structure and protect the interest of all shareholders. It will give a fillip to the company’s M&A strategy.
  • MSSL’s partner Sumitomo had been for long keen to have a shareholding in the business which is purely focussed on Indian customers. MSSL was also looking to simplify the structure for the last eight years. They had looked at various alternatives, but could not pursue it on account of changing laws and regulations. 
  • On January 30 2020, the Company decided to have two separate listed companies as they thought this was the best way to protect the interest of all stakeholders including the minority shareholders.  
  • The contribution from the wiring harness business was at Rs 39 billion in FY20 and Rs 44.8 billion in FY19. The business constitutes 5-6 % of the total turnover.
  • MSSL is a leading manufacturer, supplying wiring harness to almost every OEM, including in all categories, CVs, bikes, trucks, passenger cars, etc. They are not chasing market share, since that proposition may compromise the bottom line. Sumitomo’s technical assistance and strategic guidance auger well for the wiring harness business in future. The idea is to clearly focus on the growing trends in the domestic market.
  • MSSL sees this restructuring to be EPS accretive in the first year of the merger’s scheme itself which is FY22E. From the semi-merger point of view, the substantial part of valuation is derived from MSSL itself; this ensures that they have protected the interests of the minority shareholders. This would be as a win-win situation for all.
  • The rejig process is likely to take 12 months or so. Based on the feedback from the Company’s bankers, restructuring will be completed by June 2021; the listing and trading of both the demerged entity as well as the SAMIL are likely to take place from July 2021.
  • The proposed restructuring scheme is a big step taken by MSSL Group. Thus, it will take care of their future long-term requirements.

Consensus Estimate: (Source: market screener website)

  • The closing price of Motherson Sumi System Ltd was ₹ 96/- as of 10-July-2020. It is trading at 41x/17x the consensus EPS estimate of ₹ 2.4/5.7 for FY21E/FY22E respectively.
  • The consensus target price of ₹ 111/- implies a PE multiple of 19.5x on FY22E EPS of ₹ 5.7/-.

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