Ambit Capital

Motherson Sumi (Buy)

Target: ₹132

CMP: ₹114.85

Since we put Motherson Sumi Systems under review in July, demand in domestic and key global car markets like US/UK/Germany improved 15-30 per cent. Also, MSS surprised by announcing aggressive cost-cutting initiatives in August. These developments should compensate for excess valuation paid for Samvardhana Motherson International Ltd (SAMIL) implied P/E at nearly 22 multiples vs our estimates of about 16.

We restore our Buy rating with a target price of ₹132 (vs last published target of ₹126).

SAMIL would generate $3 billion operating cash flow in FY22-25E, which would add $15 billion inorganic revenue assuming deals at nearly 20 per cent EV/sales.

Through M&A, key target areas of MSS are light metal stampings, auto lightings, suspension systems, HVAC and telematics ($100 billion size of opportunity). Amidst improving fundamentals, restructuring exercise would lead to MSS getting demerged into Domestic Wiring Harness (DWH) and SAMIL.

Key risks are second wave of Covid impacting demand revival globally and earnings-dilutive M&A.