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(Photo: Reuters)
(Photo: Reuters)

Shareholders of Motherson Sumi are unhappy with its restructuring

It is key to know further financial details of the new businesses to assess the impact of the move, say analysts

News of a business restructuring at Motherson Sumi Systems Ltd drove down the shares of the auto components supplier by about 5.4% on Friday.

The complex restructuring has two components. One, Motherson will de-merge its domestic wiring harness (DWH) division, which will be listed eventually. Two, promoter holding company, Samvardhana Motherson International Ltd (Samvardhana) will be merged into Motherson through a share swap, and will be renamed Samil. The newly formed Samil would also own a 100% stake in the international subsidiary, SMRP BV. Currently, Motherson and Samvardhana hold a 51% and a 49% stake in SMRP, respectively.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

There are good reasons for investors’ displeasure over this byzantine arrangement. The merger valuation is skewed towards the promoter entity, Samvardhana, which is valued at 45 times FY20 earnings excluding SMRP earnings, said analysts from Antique Stock Broking Ltd. It added that these valuations were far higher than rival businesses in India and Europe such as Valeo and Faurecia.

Jefferies India Pvt. Ltd analysts said it was critical to know further financial details of the newly-formed businesses to assess the impact of the move. Note that the de-merged DWH business would have same shareholding as that of Motherson currently.

On the other hand, the stake of the promoter group would rise to 50.4% in the new consolidated Samil. According to Antique, the promoter group’s current stake stands at 36.4% in the existing consolidated entity. The valuation prospects for the new consolidated Samil aren’t looking up either. “Most of the peer group such as Valeo or Faurecia etc trades at about 3.5-4.0 times trailing 12 months EV/Ebitda valuation," said Antique. Accordingly, the new business, sans DWH, should also start commanding lower valuation multiple, and in line with global peers.

Meanwhile, even as the Motherson stock recovered a fair bit from its March lows, the shares are still 34% lower than its highs seen in January. The stock now languishes at less than 100 apiece, a far cry from the 250 levels in early 2018. For valuations to get a near-term reprieve, minority shareholders will need to stand up against the restructuring. The fall in the stock, after all, shows that they believe the move will destroy value for them.

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