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Bettering portfolio via Yachiyo’s 4W biz acquisition; deal valuation attractive

Samvardhana Motherson (SAMIL) has entered into an agreement with Honda Motors to acquire 81% stake in Yachiyo Industry's 4W component business (Honda group currently owns 51% stake in it and is a publicly listed entity) for an equity consideration of Euro145mn, with the entity being net cash. With 9% share in global car sunroof market and catering across key geographies, we believe this acquisition would help SAMIL in expanding its presence amongst Japanese OEMs, especially Honda, as 90% of Yachiyo's revenue comes from Honda itself. This deal would not only add fuel tanks and sunroofs to SAMIL's portfolio but also help it cross sell other key products (such as plastic parts, wiring harness and vision systems) across key Japanese OEMs, including Honda (revenue mix of Honda to move from 1% to 6%). A sub-3x EV/EBITDA valuation for the deal, we believe, is a reflection of fuel tank business going extinct in the longer run and Honda's willingness to associate with Motherson group in a larger way. We retain BUY on SAMIL with a revised target price of Rs98 (earlier Rs95), implying 20x FY25E earnings. Revision in target price is driven by a quarter's rollover in DCF valuation.

Key highlights of the deal and our takeaways:

* The 4W business of Yachiyo Industry in FY23 delivered revenue of Euro824mn, EBITDA of Euro92mn at an EBITDAM of ~11%. Approximately half of its revenue comes from plastic/metallic fuel tanks and the half from sunroofs (including panoramic ones for premium models). With 9% share in global sunroof market, Yachiyo caters to multiple large OEMs globally including the large Japanese OEMs beyond Honda. From growth perspective, rising penetration of sunroofs, larger client access through SAMIL, development of plastic fuel tanks for hydrogen-powered vehicles are the key catalysts ahead for this business.

* Nearly 90% of Yachiyo’s revenue comes from Honda with sunroof capacity of 2.5mn units. With no condition of limiting supply to select OEMs going ahead, we believe this deal would open doors for SAMIL to tap the sunroof business opportunity in India and EU with more OEMs. Japan constitutes 18% of its revenue vs China at 43% and US at 33%. We believe this deal is likely to give SAMIL scope to cross sell its existing products to the Japanese market in a better way, including Honda, whose revenue mix for SAMIL would increase from mere 1% to 6% post the deal.

* With equity consideration for 81% of Yachiyo's 4W component business being valued at Euro145mn as against FY23 EBITDA of Euro92mn along with it being a net cash entity, the deal valuation looks extremely attractive. We believe the aspect of Honda's 4W business getting associated with a diversified global component supplier SAMIL has been factored in the valuation as against mere operational numbers. This would also help SAMIL enhance its consolidated RoCE from current sub-10% levels, we believe. The deal would get closed in Q1FY25E and thus, help SAMIL move one step forward towards its targeted revenue level of ~US$30bn by FY26 from current ~US$12bn level.

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