Accumulate Motherson Sumi; target of Rs 258: PLilladher

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Accumulate Motherson Sumi; target of Rs 258: PLilladher

Prabhudas Lilladher is bullish on Motherson Sumi Systems and has recommended accumulate rating on the stock with a target of Rs 258 in its July 14, 2011 research report.

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Prabhudas Lilladher is bullish on Motherson Sumi Systems and has recommended accumulate rating on the stock with a target of Rs 258 in its July 14, 2011 research report.

"Motherson Sumi Systems, board today finalised the acquisition of 80% of the shareholding of Peguform Group, Germany from Cross Industries AC, who would continue to hold 20% shareholding. Acquisition would be made through a joint venture Company in which Motherson Sumi Systems Limited would hold 51% and Samvardhana Motherson Finance Limited would hold 49% share. Effective stake of Motherson Sumi Systems would translate into 40.8% in the company."

"Peguform is 2nd largest supplier of door panels and the 3rd largest supplier of instrument panels in Germany. The turnover of the company stood at 1.37bn Euros (US $1.9bn) in 2010 with reported EBITDA of Euro 66.87mn (Margin ~5%). 2011 turnover is projected to grow by 12.0% to 1.6bn Euros (US $2.25bn). Given that the EBITDA margin of the new acquired company is lower at 5% compared to 6.5% for SMR and 10.6% for the consolidated business, there could be some drag on the overall consolidated margins of MSSL. MSSL is likely to acquire the debtfree Peguform via debt route. POLYTEC GROUP had acquired 100% of the shares of PEGUFORM GROUP from Cerberus Capital Management L.P. for a purchase price of Euro 218.5 mn in August 2008. Drawing the same parlance, we believe Samvardhan Motherson Group (SMG) to not pay more than Euro 300mn."

"The acquisition price will be disclosed only by October'11 when the deal would be closed. Assuming the acquisition price @ Euro 300mn, MSSL's would be required to raise debt to the tune of Rs7bn (Taking the effective Debt: Equity to 0.8x FY13E). In our view, there will not be deterioration in the balance sheet. MSSL through its division has been in the field on Plastic Moulding, assemblies and module integration for more than a decade, with the division accounting for 9% of FY11E consolidated sales. This acquisition would be in line with the existing business in India and would add significant value by integrating and consolidating the business in India and globally. According to the management this acquisition brings a lot of knowhow and technology and also enhances their capacity to serve the global market."

"We expect near term pressure on the stock as the acquisition price would be disclosed only by October. However, going by the track record and the experience of the management we believe they will acquire the company at low valuations. Given the management's vision to become a $5bn company by 2015, this acquisition is a right step towards achieving the same. We believe the acquisition is a positive step and bank on the management experience and capability of turning around the company at a fast clip."

"MSSL is the largest supplier of wiring harness to automobiles in the country, with about 65% market share. With the acquisition of Visiocorp (SMR), it commands a global market share of 26% in the exterior rear view mirrors. With RoE in excess of 25% and robust earnings CAGR of 34.4% for FY11-FY13E, the current valuation at 18.5x FY12E and 15.4x FY13E seems reasonable. Maintain 'Accumulate'. However, we see near term pressure on the stock till further financial details are available and the acquisition price is announced (October 2011)," says Prabhudas Lilladher research report. 

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