Further paring of stake will remain an overhang for Samvardhana Motherson

Given the Japanese company's remaining stake in SAMIL and 25.34 per cent stake in Motherson Sumi Wiring India, investors will keep an eye on the continued participation of the joint venture partner

The Samvardhana Motherson International (SAMIL) stock fell about 10.87 per cent on Thursday after Sumitomo Wiring Systems (SWS), its co-promoter sold 3.4 per cent stake in the company. The Japanese automotive wiring harness major and its subsidiaries had a 17.72 per cent stake in SAMIL, which will reduce to 14.32 per cent after the transaction.

It was reported on Tuesday that Sumitomo Wiring intended to sell 230 million shares at a floor price of Rs 69.90 a share, which was at a 9 per cent discount to the closing price on Tuesday.

In a release, SWS said the decision to sell its stake in SAMIL was part of a global deleveraging strategy to fund partial debt repayment of SWS group in a rising interest rate environment. Given the Japanese company’s remaining stake in SAMIL and 25.34 per cent stake in Motherson Sumi Wiring India (MSWI), investors will keep an eye on the continued participation of the joint venture partner.

The Japanese major could reduce its holding in SAMIL further as one of the key reasons for the reorganisation of the businesses into two listed entities (SAMIL and MSWI) was its desire to focus on the Indian wiring harness business. SWS, however, indicated that it will continue to remain a promoter in SAMIL and that the entity has a robust global growth potential.

An analyst at a foreign brokerage, however, said SWS had from the beginning intended to exit SAMIL completely. The discount (9-10 per cent) to existing price, however, indicates how desperate SWS is to pare its holding. Given that it will completely exit and the large discount means that it will remain an overhang on the stock till the transaction is completed, the analyst added. 

While shares of MSWI also fell by 2.76 per cent, SWS indicated that it will continue its long standing engagement with the India wiring business and support the company with evolving technologies and technical know-how. Analysts believe SWS is committed to the India business and would continue to retain the current stake in the India entity.

The stake sale and the related overhang are technical reasons, but analysts say the Motherson twins are on solid ground as far as fundamental outlook is concerned. Some brokerages prefer MSWI over SAMIL as it has a high return on capital employed, requires no major capital investments and has much higher profit margins. In comparison, a global presence with operations in multiple geographies and diverse product categories, capital expenditure, acquisitions and product cycles make the SAMIL business more complicated.

Others, however, believe lower valuation after the recent fall in price and smart acquisitions such as SAS have made SAMIL an attractive option for investors. The company recently bought the SAS business from France-based Faurecia group for an enterprise value (EV) of €540 million. This will help it enter a new product segment of cockpit module assembly where it controls a fifth of the global share. In addition to this, the deal will enable it to derive multiple synergy benefits, allow it to gain from high electric vehicle exposure of SAS and improve the consolidated financials, given better margins and return ratios of the acquired entity. Further, at 5.2 times CY22 EV to operating profit valuation is reasonable and earnings accretive, says brokerages.

At the current price, SAMIL is trading at a reasonable 12.6 times its FY25 consensus earnings estimate with target price of Rs 95.