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Samvardhana Motherson Finance

A holding company

The principal businesses in the automotive sector are held through Motherson Sumi Systems, Samvardhana Motherson Reflectec Group Holdings and Peguform Group

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CM RATING

30/100

Samvardhana Motherson Finance (SMF), incorporated in 2004, is a holding company of Samvardhana Motherson Group (SMG). It was set up by Vivek Chaand Seghal, who is the chairman, in 1975. The Group predominantly focuses on a range of auto components such as wiring harnesses, rearview mirrors, molded plastic parts, injection molding tools, assemblies and modules, elastomer products, cutting tools and thin film coating metals, IT services, design engineering, cabins for off-highway vehicles etc. It has presence in 25 countries with 120 plants across the globe.

SMF operates by holding consolidated interest in most of SMG businesses i.e. it holds stake in its various joint ventures, associates and subsidiaries. As a consolidated entity, it is end-to-end solution provider with automotive industry being the principal focus. Almost 95% of its consolidated revenue is from automotive industry (global and India) while the balance is from the non-auto industries. Its major customers include Toyota Kirloskar, Volkswagen Group, Tata Motors, BMW, Daimler, Ford India, Maruti Suzuki, Fiat India, and Honda Siel Cars India.

SMF's principal businesses in the automotive sector are held through Motherson Sumi Systems (MSSL), Samvardhana Motherson Reflectec Group Holdings (SMR) and Peguform Group. SMF holds 36.12% equity interest in MSSL. MSSL, the Flagship Company of SMG and listed entity in Indian bourses, is JV between SMG and Sumitomo Wiring Systems. It is engaged in the manufacture of wiring harnesses, polymer processing and tool manufacturing and elastomer and leading player in domestic wiring harness for passenger vehicles. It reported 22% growth in consolidated net sales to Rs 8176 crore in FY 2011 and 42% growth to Rs 8334.01 crore in nine months (9M) of FY 2012. MSSL is largest investment of SMF constituting 80.5% of SMF's total long-term investments as on 31 December 2011.

SMR is global manufacturer of exterior and interior rear view vision systems for automobiles in which SMF holds 93.63% stake directly and indirectly. SMR is one of largest manufacturers of external exterior rear view vision systems for passenger cars in the world. SMR reported 9% growth in its topline to Rs 4547 crore in FY 2011.

The Peguform Group is Europe-based manufacturer of plastic injection molded components with revenue of euro over 1.4 billion in calendar year 2010. SMF together with MSSL in 49:51 venture (JV) acquired 80% stake in Peguform in November 2011. It is one of the largest suppliers of door panels and instrument panels in Germany. SMF's other automotive businesses include metal-working and modules such as automotive lighting products and heating, ventilation and air-conditioning systems, all of which are undertaken through various subsidiaries, joint ventures and other consolidated entities.

Its principal non-automotive businesses are Fritzmeier Motherson Cabin Engineering, which is engaged in the manufacture of drop-down cabins for off-highway vehicles and Motherson Zanotti Refrigeration System, which manufactures transport and stationary refrigeration systems. Motherson Sumi Infotech and Designs looks into IT, engineering and design services for non-automotive customers.

The company is coming out with IPO of Rs 1665 crore at price band of Rs 113-118 per equity share of Rs 10 each. The IPO consists of fresh issue of equity shares worth Rs 1344 crore and offer for sale by Radha Rani Holdings PTE worth Rs 321 crore. Radha Rani Holdings currently has 14.10% stake in pre issue capital of SMF. The company has reserved 35% of net issue towards retail investors and 50% to qualified institutional investors (QIBs). Out of the QIBs, 30% is allocated to anchor investors.

The fresh issue of Rs 1344 crore will be utilized towards prepayment and repayment of debt facilities of SMF and some of its subsidiaries worth Rs 338.50 crore, strategic investments in Samvardhana Motherson Polymers and Samvardhana Motherson Holding (M) worth Rs 627.50 crore, investments in rear view vision systems business, i.e., SMR worth Rs 156 crore (meet capex requirement) and balance towards general corporate purposes.

• The company has track record of consistently widening and diversifying its product portfolio, clients and geographical reach and technological up-gradation through joint ventures and acquisitions. As a result, its product range stretches from wire harness, rear view mirrors to non auto products such as refrigeration systems, cabins for off highway vehicles, and polymer processing In effect, its consolidated revenue has jumped up from Rs 65.69 crore in FY 2007 to Rs 5512.14 crore in FY 2011.

• International automotive OEMs are setting strong base in India to cater to booming Indian automobile demand. Most of the international automotive OEMs prefer to retain their supplier base irrespective of the new geography it enters. This provides SMF's companies an edge as it already has established supplier relationship with international OEMs including the world's top 5 automotive OEMs. As of now only 23% of its consolidated revenue is from Indian market and balance 77% is from international market.

• The company has management presence in all its JVs and associates irrespective of the company's stake in it. This provides two advantages for the company – one, it has access to technology of its various JV partners while at the same time enables it to continue to have controlling stand in the various JVs and associates.

Weaknesses:

• The company has overdependence on select few customers, i.e., its top five customers contribute over 70% to its consolidated income as on 31 December 2011. Among these, Volkswagen Group alone contributes over 50% to its consolidated income as on 31 December 2011. Disruptions in production of any of these top five customers could impact the topline of the company.

• Despite the company catering to diversified industries, its prime consumer market is the automobile industry. With almost 77% of its consolidated income from international markets, there are concerns of the profitability of its operations due to weakening of auto demand in Europe though demand is improving in US.

• There is concern with regard to turning around of the Peguform Group, which reported net loss of Rs 162.30 crore in nine months ended December 2011 (i.e., represents only 39 days from completion of acquisition in November 2011).

• SMF's total debt to equity ratio has shot up to 4.9 in nine month ended December 2011 from 1.6 times in financial year 2011 due to loans raised to acquire the Peguform Group.

• As a holding company, the standalone financials of the company has no major revenue generating operations other than interest income and dividend payouts by its various subsidiaries, JVs and consolidated companies. The company will be consolidating the revenues of even its associates wherein its stake is less than 50%, including the flagship listed entity Motherson Sumi Systems, in which it has 36.35% stake as of March 2012. Thus the ability of the company to meet its financial obligation and pay dividend is dependent on free cash flow of its subsidiaries, cash dividends from JVs and investment income. However its subsidiaries, JVs are under no obligation to make dividend payment.

• The company, as an investing one, would need prior approval from the Government of India for any investment in domestic company due to over 50% of its promoters being non residents. Further the company's investment in a domestic company would need to be in compliance with sectoral relevant entry route, equity caps and conditions. Further, the company would need fund the investments from abroad for such investments thereby increasing its foreign loan portfolio.

• The company is prone to foreign currency fluctuations as 77% of consolidated sales are from outside India.

Post the large acquisition of rear-view vision business, the company has performed impressively in financial year 2010-11. On consolidated basis, the company reported impressive net profit growth of 152% to Rs 192.21 crore on 15% growth topline to Rs 5634.51 crore in FY 2010-11. The spike in net profit was aided by whopping 280 bps spurt in operating profit margin and lower tax rate. However in nine months ended December 2011, the company reported consolidated net loss of Rs 152.79 crore on net sales of Rs 5957.47 crore affected by acquisition costs of the Peguform Group, including operating loss of the Peguform Group for period of 39 days (from date of acquisition), poor performance of non SMR related sales of MSSL owing to labor unrest at Maruti Suzuki, start up costs of SMR's plants in Brazil and Hungary and forex loss on restatement of loans in foreign currency.

The offer price discounts the FY 2011 earnings (on post-IPO equity) of the company by 36.1 -38.1 at lower and higher end of the price band, respectively. However, subsequently the company acquired the Peguform Group in November 2011 and included the same in its nine months ended December 2011 financial results, which show loss of Rs 152.77 crore.

Normally holding companies are valued based on sum of parts valuation of the stakes they hold in various subsidiaries, associates and JVs. Moreover, valuation attributed to holding company is normally at significant discount to the possible valuation of its stakes. Thus valuing holding companies is a very difficult and subjective process and hence normally retail investors avoid such scrips.

Financial results for FY 2010 is not comparable with that of FY 2009 as it includes the acquired business of Visicorp in FY 2010.