To merge holdco, including other unlisted businesses
Implied valuations for holdco (ex MSS & SMRPBV) – ~INR60b for FY19 PAT of ~INR1.8b
* In the follow-up to its Jan’20 proposal to demerge the Domestic Wiring Harness business and acquire 49% stake in SMRPBV, the board today approved the merger of SAMIL (holdco) with its unlisted businesses. At the proposed share-swap and benchmark valuation, the implied value of the other businesses of SAMIL is ~INR60b for FY19/FY20 derived PAT of the core business at ~INR1.8b/INR0.9b. This solution simplifies the structure well and aligns the interest of all the stakeholders. However, considering the limited understanding (as details are limited) of the core businesses of SAMIL, implied valuations seem to fully capture the medium-term growth potential of its key businesses. We believe this would drive a better value discovery of the Non-India Wiring Harness business, also giving the minority shareholder the option to invest in either or both of the businesses.
Specifics of group’s business reorganization proposal
* The Board of Directors of MSS granted in-principle approval for the reorganization of business with the group: The demerger of the Domestic Wiring Harness (DWH) business of MSS into a new company that shall have mirror shareholding as MSS and shall be listed.
* The Board of Directors today approved the merger of SAMIL into MSS. SAMIL is the promoter-owned entity owning 49% stake in SMRPBV and other auto component & allied businesses. In the original proposal, it was proposed to merge just 49% stake of SMRPBV into MSS.
* Post the demerger of the DWH business, SAMIL would be merged into MSS. The share-swap ratio is proposed at 51 share issues of MSS (of INR1 face value) for every 10 shares of SAMIL (of INR10 face value). This merged entity would be renamed Samvardhana Motherson International Ltd (SMIL).
* The demerger of the India Wiring Harness business would not include the 50% JV with Kyungshin Industrial Motherson, which manufactures wiring harnesses for Hyundai India.
* Effectively, the current listed entity (MSS) would be left with the global businesses (100% of SMRPBV and PKC) and remaining India business, including the JVs. The India Wiring Harness (DWH) business would be focused on the India business, as desired by Sumitomo.
* This entire restructuring is expected to be completed by 2QFY22, effective from 1st Apr’21. This restructuring would require majority approval of the minority shareholders.
* The merger is expected to be EPS-accretive in FY22 itself.
* Post the merger of SAMIL, the shareholding of the promoters would increase to 68.15% from 61.73% currently, with the Sehgal family controlling 50.4% and Sumitomo Wiring System owning 17.7%.
Analysis of the deal
* What are the key businesses of SAMIL? Apart from owning 33.43% stake in MSS and 49% stake in SMRPBV, it has a presence in areas such as Auto Lighting, Metal Products, Shock Absorbers, Air Conditioning Systems, IT, etc. Over 80% of SAMIL’s business (ex SMRPBV) is derived from the Indian market.
* How do SAMIL’s financials look? For the core business, revenue and EBITDA are at ~INR28b and INR3.6b, respectively (not on a pro-rata basis). SAMIL has net debt of ~INR11.1b.
* What is the valuation for acquiring SAMIL? The benchmark valuation of SAMIL works out to ~INR244b. Adjusted for its 33.43% stake in the listed entity (~INR129b at our fair value) and 49% stake in SMRPBV (~INR55b at 15x Jun’22 EPS), the implied core business valuation works out to ~INR60b. Core business implied PAT for FY19/FY20 was ~INR1.8b/INR0.9b.
* What does the merged entity SMIL have to offer? The merger of SAMIL into MSSL would create a strong listed entity with: a) a diversified product portfolio that would enhance the 3CX10 strategy and reinforce MSSL’s position as a leading, globally diversified, preferred component supplier, b) a platform for future growth – through both the organic and inorganic routes, c) a powertrain neutral portfolio, favorably positioned for megatrends, d) significant technological capabilities in partnership with industry leaders, and e) participation in the 100% future growth of SMRPBV for the minority investors. This arrangement provides exposure to new business segments and aligns the pursuits of inorganic growth opportunities.
Valuation and view
* We believe this reorganization would lead to better value discovery of the NonIndia Wiring Harness business. However, MSS-2 would increasingly be benchmarked to its global peers in the automotive supply chain.
* Also, this organization would give the minority shareholder the option of investing in either or both of the businesses. This needs to be seen in the context of increasing exposure to the global automotive cycle in the current structure, which may not fit the mandate of many investors (with focus on India plays).
* Our fundamental view on MSS remains intact: the stabilization of SMP’s greenfield plant is critical in driving earnings recovery for MSS, which we estimate would reflect in FY21. This, coupled with the execution of a strong order book and limited capex at SMPBV as well as the India business benefitting from the content increase in BS6, augurs well for MSS.
* Implied valuations for SAMIL’s core business appear to fully capture mediumterm potential. However, this arrangement does align the interest of the minority with that of the promoters and creates a platform for the next leg of growth for the group. We maintain Buy with TP of ~INR122.
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