M&A seen helping JB Chemical; not Motherson Sumi: Equirus

Bhavin Shah of Equirus Securities talks to CNBC-TV18 regarding the recent overseas acquisitions and divestments of certain mid-cap companies and how it will bode for them. JB Chemical's plan to sell off its Russian over-the-counter business to Johnson & Johnson is a good move that will work in benefit of the shareholders of the company, Shah says. However, that might not be the case for Motherson Sumi's acquisition of Germany-based Peguform, he says.

Below is the verbatim transcript. Also watch the accompanying video Q: Let us start with JB Chemicals. What is it that you like about that story?
A: JB Chemicals announced plans to divest its Russia business to Johnson in US. That, we believe, will unlock a lot of value for the shareholders of JB Chemicals. Unlike many other sales of this nature, we believe JB Chemicals sales is loaded in favor of shareholders because the company is not exiting its core business, and also there is no compete fee taken by management, which obviously, in other cases means dilution of value for the shareholders. We do expect the company to announce large special dividend. Conservatively, we have assumed Rs 20 per share, but it could be as high as the Rs30-40 per share; that something that company has not disclosed yet. Essentially it will be sitting with a cash of Rs 900 crore or so. So when we look at the core business and take a 25% discount to this cash, we are basically looking at 10 times FY12 earnings at a target price of Rs170. Currently the stock trading at Rs 140. Q: Motherson Sumi also did a deal recently. The stock did not react very positively on the day of the deal but you think it is a value accretive proposition?
A: Actually we are concerned about this acquisition. Obviously, Motherson Sumi has done phenomenal job with an acquisition of Visiocorp and the company has very strong track record. We understand the depth the company has in terms of its ability to handle acquisitions. However, when you look at this Peguform acquisition, a Germany-based plastic component maker, we believe that it is far more comparative space; acquisitions in Germany are particularly difficult. Europe is potentially entering a period of slowdown and obviously, the news front is that European economies are looking more and more risky. So as a result of all that, we feel that to create value for shareholders from this acquisition, for Motherson Sumi, it could be very difficult, atleast on a first look basis. The risk reward for investors at current price is not particularly favorable. So we are actually becoming more cautious on Motherson Sumi. We were neutral before this announcement and we are reviewing our rating. Certainly, the acquisition itself will be tall view at least from our view for Motherson Sumi to generate value for shareholders.