A long-term growth story

Samvardhana Motherson Finance Ltd (SMFL) through its holdings is a twin play, both in the auto component growth markets of India as well as those outside the country. While there is a clutch of 30 joint ventures and companies that SMFL controls or has stakes in (ranging from 12 to 100 per cent), the three key entities which contribute about 94 per cent of its revenues (9M FY12) are its listed 36 per cent-owned unit Motherson Sumi Systems Ltd (MSSL), Visiocorp (renamed Samvardhana Motherson Reflectec or SMR) and Europe-based Peguform (now known as SMP). While MSSL makes wiring harnesses (signal transmitting cables), SMR supplies rear view mirrors and SMP makes auto plastic parts.

For the nine months ended FY12, SMFL reported a revenue of Rs 6,025 crore and a net loss of Rs 152 crore. The loss was mainly on account of Peguform acquisition (about Rs 62 crore, a one-off item), forex losses (Rs 70 crore) and higher capex.

Given the need to repay loans taken to fund its acquisitions, the last being Peguform in November last year as well as capex requirements, the company plans to raise Rs 1,344 crore. The IPO, which is for a total Rs 1,665 crore, includes an offer for sale by a promoter group company, Radha Rani Holdings, to the tune of Rs 321 crore.
 

ACQUISITIONS DRIVE GROWTH
	FY09	FY10*	FY11	9M'FY12
Net sales (Rs cr)	936	5,061	5,716	6,025
Change (%)	82.1	440.7	12.9	-

Ebitda (Rs cr)138377503263 Change (%)89.0173.233.4

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Ebitda margin (%)14.77.58.84.4 Change in bps

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-720130

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Net profit (Rs cr)5876192-152 Change (%)

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31.0152.6-179.2 Diluted EPS (Rs)1.81.93.0

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* Acquired Visiocorp in FY10                                                         Source: Company

Given that the profile of the company is unique (three-fourths overseas revenue, joint venture model), there are few peers. While the best valuation comparison is with the group’s listed entity MSSL as both companies have cross-holdings other auto component companies that could also serve as a valuation parameter are Bharat Forge and Amtek Auto. Both these companies, however, have a significant portion of their revenues from the non-auto space.
 

ISSUE DETAILS
Size (Rs crore)	1,665
Price band (Rs)	113-118
Opens/Closes on	May 2/4
IPO grading (Icra)	4/5

MSSL currently trades at seven times FY13 estimated enterprise value (EV) / Ebitda, roughly the same as Bharat Forge. At this multiple, the value of SMFL comes to about Rs 126 per share. At the price band of Rs 113- 118, it translates into a discount of 6-10 per cent. Given that MSSL and other auto component majors have established businesses, the discount should have been higher. This is even more so given the asset intensive nature of the business and the time it will take for achieving cost rationalisation and integrating operations /achieving stability for its many joint ventures (JV) and subsidiaries across the world. While prospects are bright, given the risks, only those investors with a long term horizon need to consider this investment. Thus far, the promoters of the company successfully used the JV model to grow their businesses. This involves tying up with a technology partner and using that to offer solutions to auto manufacturers, largely car makers. The longest of these associations is a JV (MSSL) with Sumitomo Wiring Systems that has lasted 24 years.

In India, the company has a strong presence (through MSSL) in the wiring harness, automotive plastic parts and mirrors segments with over 60 per cent market share. Prospects, going forward, are strong given its customer base, supply to SMR and growth in passenger car (PV) volumes. With domestic PV volumes expected to improve from the current two million in FY12 to 8-10 million over the next decade, growth for MSSL is likely to continue over the next few years.

In the overseas business, through the Visiocorp acquisition, SMFL has a 22 per cent global market share in the exterior rear view mirror segment. This segment is expected to witness a volume growth 7-11 per cent over the next few years. The rear view mirror and the plastic parts business are likely to piggyback on orders from the Volkswagen group, which accounts for roughly half of the sales of the consolidated SMFL (a key risk in terms of client concentration).

One of the issues the company will face is continuing capex in new businesses and those that it has acquired, which will be a drain on cash flows in the medium-term. For example, the company estimates that SMR will incur expenditure to the tune of Rs 164 crore for FY13.

Given consolidated debt of Rs 3,917 crore and debt to equity ratio of 2.3, the company could experience cash flow issues if the acquisitions do not stabilise, there is a spurt in expenditure or its operations hit a growth roadblock. However, thus far, the promoters have had a good track record of turning around companies and analysts expect margins in its acquisitions to improve. The money from the IPO to repay part of the debt and capex should also help.