Accumulate Motherson Sumi; target of Rs 260: Emkay

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Accumulate Motherson Sumi; target of Rs 260: Emkay

Emkay Global Financial Services is bullish on Motherson Sumi Systems and has recommended accumulate rating on the stock with a target of Rs 260 in its July 14, 2011 research report.

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Emkay Global Financial Services is bullish on Motherson Sumi Systems and has recommended accumulate rating on the stock with a target of Rs 260 in its July 14, 2011 research report.

"Peguform (PF) is a leading full service supplier of differentiated high quality plastic products . It is a leading player in bumper, vehicle exteriors and cockpits, dashboard and interior trims for automotive and related industries . It is among top 8 players globally in its segments. It has a strong presence in Europe and commands a significant share of business of German OEM's like Volkswagen, Audi, BMW etc. PF had filed for bankruptcy in Oct 2002 and has changed hands five times since then. Cerebrus, private equity player, acquired the company from bankruptcy proceedings in 2005. Polytec group, a key player in plastic materials, natural fibre composites etc, acquired it from Cerebrus after 3 years in 2008. Thereafter, Pierer-Knünz Group took over its reins in 2009 which was finally overtaken by Cross Industries in Dec 2009."

"Motherson Sumi Systems Ltd. (MSSL) along with SMFL (parent of MSSL) will acquire 80% stake in PF through a SPV in which MSSL will hold 51% and balance will be held by SMFL. The balance 20% in PF will be retained by existing investor (Cross Industries). As PF holds 50% in Wethje Carbon Composite, MSSL and SMFL will also acquire stake in this company indirectly. It seems street is concerned with this JV arrangement. We believe that this could be due to resistance of Sumitomo Wiring Systems (SWS) who holds 25% in MSSL. SWS is a leader in wiring harnesses. Polymers do not fit in list of core focus area for SWS. This along with the size of the company (equivalent to MSSL consolidated) could be the reason why SWS would not have preferred to take 100% ownership in the company. It should be noted that the structure is similar to that of acquisition of SMR."

"PF is largely a plastic molding/polymer company. Its strength lies in creating new applications of plastics. We believe that the biggest advantage that Motherson (MSSL) has is access to technology. MSSL has identified Polymer products (current revenue ~ Euro 165mn) as one of the key growth drivers for its 2015 vision of USD 5bn turnover. However, currently MSSL lacks technological edge. PF provides access to latest technology and should help MSSL in accelerated growth and global ambitions."

"PF also commands a premium clientele which derives strong synergy with existing clients of SMR. It should be noted that both PF and SMR have a strong presence in Europe. It receives ~2/3rd of its revenue from Volkswagen group and ~50% of Audi's requirement. Other notable clients include BMW, Porsche, Renault Nissan, Daimler and GM. There exists a synergy in garnering higher business from existing clients given SMR's client profile (see chart below). The management has not yet disclosed the purchase price. We expect the valuation to be around 3.5x EV/EBIDTA (based on CY10 financials). This implies a EV of ~Euro 235 mn (0.18x CY10 EV/sales. These valuations are higher than that of acquiring SMR (Euro 80 mn EV for revenue of 660m or ~0.12x EV/Sales). Based on the above assumptions, we expect the acquisition to be earnings accretive in the first of year of acquisition (refer to table below)."

"We retain our ACCUMUATE rating on the stock with a target of Rs 260. We expect earnings upgrade to our FY13 EPS estimate of Rs 15.8 due to the acquisition of Peguform. At the current juncture, we are not incorporating PF due to limited information (acquisition price, turnaround plan, etc). At Rs 231 the stock trades at PER of 14.7x and EV/EBITDA of 7.2x our FY13 estimates," says Emkay Global Financial Services research report. 

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment