Motherson Sumi Rating ‘hold’; restructuring exercise has promise

Workers assemble wire harnesses at the Motherson Sumi Systems Ltd. wiring harness plant in Faridabad, India, on Thursday, Feb. 28, 2013. Motherson Sumi Systems Ltd., 25 percent owned by Sumitomo Electric Industries Ltd. and India’s biggest auto parts maker, supplies rear view mirrors, bumpers and body panels to clients including Porsche Automobil Holding SE, Bayerische Motoren Werke AG and Volkswagen AG. Photographer: Brent Lewin/Bloomberg

MSS, at the investor day, shared details of key businesses of promoter-entity SAMIL, which will be merged into MSS as part of ongoing restructuring. SAMIL has presence across lighting, metal solutions, IT solutions and engineering & tools; lighting formed 46% of Ebitda in FY20. MSS said that merging SAMIL into MSS would significantly expand MSS’s portfolio and provide large potential for global growth, especially inorganic. We retain Hold.

SAMIL, a diversified business profile: Excluding the contribution of stakes in MSS and jointly-owned overseas subsidiary SMRP, SAMIL generated revenues of Rs 28 bn and Ebitda of Rs 3.7 bn (13.2% margin) in FY20 — 4% and 7% respectively of MSS’s consolidated FY20 financials. Total capital invested in SAMIL’s businesses is ~Rs 28 bn (~$385mn).

Lighting the biggest business for SAMIL: SAMIL has a 50-50 joint venture with Marelli for automotive lighting in India — Marelli Motherson Automotive Lighting (MMIL). MMIL formed 31% of its revenues and 46% of Ebitda in FY20. The ongoing shift from lamps to LEDs is providing a strong price tailwind to the business.

Metal solutions, IT solutions, and engineering & tools other key businesses: SAMIL has multiple subsidiaries and JVs for metal solutions such as shock absorbers, gas balancers, cutting tools, body-in-white, chassis, etc. The six entities in the metal solution business together contributed 32% of SAMIL’s revenues and 22% of its Ebitda in FY20. SAMIL’s IT subsidiary (MIND) formed ~15% and 7% of SAMIL’s FY20 revenues and Ebitda respectively. The engineering & tools subsidiary CTM contributed ~4% and 10% of SAMIL’s FY20 revenues and Ebitda. Most of these businesses have delivered double-digit CAGR over the last five years, albeit on a low base in some cases.

Growth potential from a wider portfolio: MSS announced a restructuring plan in July 2020 where it will first de-merge the domestic wiring harness business into a separate entity (DWH); DWH will eventually be listed. Subsequently, SAMIL will be merged into MSS via a share swap, and MSS will be renamed SAMIL. The stake of MSS’s current minority holders will stay at 38% in DWH but will fall to 27% in the new MSS, which will include SAMIL and 100% stake in SMRP. We retain a Hold rating with a revised PT of Rs120.

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