* Motherson Sumi Systems (MSS) has announced another prudent deal – the EPSaccretive acquisition of Reydel group. This acquisition is yet another step towards meeting the company’s 2020 revenue (of US$18bn) and diversification (3CX15) targets.
* The acquisition price of US$201mn implies a valuation of 0.1x EV/Sales and 2x EV/EBITDA, based on CY17 financials. It has ROCE of ~25%. It supplies cockpit modules, instrument/door panels, consoles and decorative parts in markets such as Europe, South America and Asia.
* Reydel acquisition would increase penetration of MSS in geographies such as Korea, Philippines, Indonesia, Morocco, Brazil, Argentina etc. Going forward, management expects improvement in terms of better pricing/purchasing power, access to more global platforms and lower R&D/capex due to sharing of resources and tax savings.
* Reydel registered EBIT of US$48mn in CY17, which is ~8% of MSS’ consolidated EBIT in FY18E. As the acquisition is under SMRP BV, Reydel’s PAT as a percentage of consolidated PAT would be lower (at ~3%). We retain our positive view on MSS, with a BUY rating and TP of Rs390, based on 25x FY20E earnings.
Conference call highlights
* Reydel acquisition is through a cash consideration of US$201mn, which is expected to be financed using existing cash and banking limits at SMRP BV. The transaction is expected to be executed over next 4-6 months. It is structured under a Lockbox arrangement from 1 st Jan 2017, which means that all the business cash flows from lockbox date will accrue to the buyer.
* Reydel group has strong customer relationships (average duration of over 25 years) with global OEMs. Major customers include PSA, Renault, RSM, Ssangyong/Mahindra, Volkswagen, General Motors, etc. MSS’ share of revenue from Renault/PSA would increase from 4%/1% to 7%/4%.
* Reydel group is a portfolio company of Cerberus Capital Management. The group has 20 manufacturing plants and presence across Europe, South America and Asia (presence in 16 countries). It is close to adding another plant, which will take the total to 21 plants.
* Reydel derives 66%, 28% and 6% of its revenue from Europe, Asia and South America, respectively. Korea contributes 12% to revenue, where they have a JV. MSS’ share of revenue from Korea/France would increase from 3%/1% to 5%/5%.
* Reydel acquisition would benefit MSS by enabling its entry into new geographies like Korea, the Philippines, Indonesia, Morocco, Brazil, and Argentina.
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