Promoter entity valuation in restructured entity weighs on Motherson

The positives, according to analysts, are a simplified group structure, investment options for minority shareholders and value discovery of international business

The stock of Motherson Sumi slipped 5.34 per cent on Friday on concerns that the promoter-controlled international operations were given higher valuations as part of the restructuring exercise. While domestic wiring harness business will be demerged and listed separately, all other businesses (unlisted) will be merged into the current listed entity. 

The proposal to have two entities was based on the request of joint venture partner Sumitomo, which wants an exposure only to the India wiring harness business. The other objective was to simplify the group holding structure and bring all international entities under one umbrella. The two listed entities will then give shareholders the choice of participating in either of the businesses. The current structure, with multiple cross entity holdings in a single listed entity and growth differential between domestic and foreign operations, did not allow this flexibility. 

However, the concerns over the restructuring exercise are largely on the valuations assigned to the unlisted promoter entity Samvardhana Motherson International (SAMIL), which will be merged into the listed Motherson Sumi. SAMIL owns 49 per cent in the group’s international business, while Motherson Sumi owns 51 per cent. 

 

 

SAMIL has been given a valuation of Rs 24,400 crore. Analysts at Antique Stock Broking, say merger valuations are skewed towards the promoter entity and are higher than peers in India and Europe. Analysts add that the valuations are based on a peak profitable year (FY19) rather than the recently concluded FY20. 

Other brokerages such as IIFL, however, believe while the deal valuations are fair if looked at from the near-term earnings, they might be undervalued given that earnings recovery will be sharp when new plants turn profitable. Though there will be a dilution, the management indicated that the new entity will be earnings accretive from the first year of operation. 

In addition to giving minority shareholders investment options, analysts at Motilal Oswal Financial Services believe the reorganisation will lead to better value discovery of non-India wiring harness business.