Published on 15/04/2020 11:23:54 AM | Source: Motilal Oswal Financial Securities Ltd

Buy Motherson Sumi Ltd For Target Rs. 84 - Motilal Oswal

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Mar’20-end debt lowest in 11 quarters

Comfortable liquidity, with focus on further growing liquid assets

* Motherson Sumi (MSS) issued an update on the COVID-19 situation, financial gearing/liquidity, and M&A opportunities. The company announced it was wellpositioned on liquidity, with an 11-quarter low debt and adequate liquidity as well as a focus on generating further cash. It expects the current crisis to introduce M&A opportunities, and key customers are already pointing it in the direction of certain troubled companies. Here are the key highlights from the press release:

* MSS is seeing positive development in demand from its China plants, which had initially been shut down at the onset of the pandemic but have since recovered their production levels to nearly the pre-COVID-19 state soon after resuming operations.

* For all other plants (India, the EU, and the US), MSS has received positive reopening dates for the vast majority of its plants by end-April / early May.

* Governments in various parts of the world have instituted employment protection schemes during the shutdown period, as per which they are bearing part of the employee cost. MSS is actively working with the governments to further reduce fixed cost during this period of non-production.

* The company is monetizing engineering working capital by actively working with customers.

* It is working closely with its customers to realize receivables as well as with the supply chain for smooth continuity in operations as lockdown restrictions are lifted.


Comfortable with liquidity

* MSS’ net debt as of Mar’20 stood at an 11-quarter low of INR71.5b at a consolidated level and EUR702m at Samvardhana Motherson Automotive Systems Group BV (SMRPBV).

* Consol cash stood at INR46.9b, with EUR412m at SMRPBV.

* Consol drawable committed/uncommitted facilities stood at INR55b, with EUR458m (committed lines) at SMRPBV.

* It has adequate headroom in its bond documents to utilize the above, and no major debt maturities are scheduled over the next 12 months.

* To further enhance liquidity in these uncertain times, the Board of Directors has accorded in-principle approval to raise debt of up to INR10b.

* On pledged shares: SAMIL has repaid part of its debt, and subsequently 30.5m MSS shares (a total pledge of 254.4m or 8.05% of equity) are expected to be released from the pledge this week. SAMIL intends to pay back more facilities from internal accruals and dividends going forward.


Mr V C Sehgal on M&A

* Mr Sehgal stated that while aspirational five-year plans could not be timed perfectly, and the unprecedented COVID-19 situation had hampered the closings of many of MSS’ target acquisitions, the company believed these same opportunities had turned more attractive in valuation since the COVID-19 crisis.

* With its strong financial position and customer faith intact, MSS is also being approached by customers to look at more specific companies in trouble, which it opines can be acquired at low valuations.


Valuation and view

Our positive view on MSS remains intact (owing to the stabilization of its greenfield plants, execution of SMRPBV’s strong order book, and recovery in India). However, near-term stock performance would be influenced by COVID-19 developments (China exposure for SMRPBV and PKC Group) as well as ongoing restructuring exercises. Maintain Buy, with TP of ~INR 84 (Mar’22 SOTP).

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