Motherson Sumi rating: Maintain ‘buy’ with target price of Rs 117

Our initial calculations indicate that the drop in MS’ profit share is ~7% for FY19.

Following its decision to demerge the domestic wiring harness (DWH) business, MSS has laid out a detailed plan thereof. Key highlights, valuations of various businesses are based on future earnings and derived differently (DCF, earnings-based, asset-based, etc). The management expects the arrangement to be EPS-accretive from first year itself. The deal takes effect on April 1, 2021, and management expects the demerger to take a year to fructify. DWH will have a mirror shareholding of MSS. However, minority shareholding (MS) interest in the new MSS (ex DWH) will drop from 38% to 27%, reflecting the assumption of a sharp turnaround at SMRPBV/SAMIL.

Our initial calculations indicate that the drop in MS’ profit share is ~7% for FY19 and ~24% in FY20 due to higher losses at SMRPBV. Based on our current SoTP assumptions, implied value ascribed to SAMIL is ~11% of current fair value. Unless there is a sharp turnaround at SMRPBV/SAMIL, implied valuation can lead to downside risk. After the de-merger, the DWH business will be listed. For at least a year, shareholding pattern of the business would remain as is.

Thereafter, both the partners (MSS and Sumitomo) have an option to modify their holdings. Excluding the profit from associates, SAMIL booked a PAT loss in FY20 due to impairment and interest cost. While the simplified business structure is welcome, our prima facie calculations indicate that management is assuming a sharp turnaround in current hotspots. In case that does fructify, valuation may face some downside. For the time being, we maintain ‘BUY’ with a target price of Rs 117.