Motherson Sumi (MSS), via its 51% owned subsidiary SMRPBV, has executed the transaction documents for the proposed acquisition of Reydel Automotive (Reydel; all cash deal). Prima facie, the deal is favorable as: (a) businesses & customer profiles of both companies are complementary. In fact, the acquisition will bolster MSS’ capabilities; (b) valuations at ~0.1x CY17E EV/sales & ~2x CY17E EV/EBIDT (~5-6x for SMRPBV) render it value accretive (similar to SMR in 2009) given RoCE of ~25%; and (c) capex needs of ~USD30mn indicates adequate FCF. We revise down FY20E EPS ~4% to INR15.3 to factor in lower growth across business. However, we upgrade to ‘BUY’ post the recent stock price correction with revised TP of INR375 (earlier INR 404).
Reydel buy: Key takeaways:
· Reydel a strategic fit: The acquisition provides MSS access to a diverse set of capabilities (versus SMP) in similar line of products (cockpit modules, instrument & door panels, consoles, etc). Also, it widens its customer base. Post the acquisition, revenue share from Renault/PSA to rise to 8%/5% from 5%/1% currently. Similarly, MSS will gain access to Indonesia, Croatia, Philippines, Morocco and Argentina where currently it has limited presence.
· Valuations attractive: At USD201mn, Reydel will be acquired at attractive valuation of EV/sales of ~0.1x and EV/EBIDT of ~2x (EBIDT of USD68mn, net cash at USD53mn). Management indicated that Reydel’s capex need will be well funded by its operations. Ample cross leverage opportunities for MSS and Reydel on best practices, accessing new locations and new platforms. Management indicated that it has been mulling the Reydel buy since a year and has the support of all the latter’s customers.
Outlook and valuations: Well placed; upgrade to ‘BUY’
We like MSS’ strong India franchise (~65% market share; >50% RoCE) as well as SMR (~25% market share; >40% RoCE). We expect SMP to also follow this trajectory driven by revenue traction and lower capex. We estimate 28% FY18-20E EPS CAGR. Post the recent correction, we upgrade to ‘BUY’ from HOLD with TP of INR375 (India business 30x, SMR: 20x, SMP/PKC: 18x FY20E PER). At CMP, the stock trades at 21x FY20E PER.
