Avoid Samvardhana Motherson Finance Ltd. IPO - Stretched Valuations - Angel Broking

Samvardhana Motherson Finance Ltd. (SMFL) is the principal holding company of the Samvardhana Motherson group with 18 subsidiaries, 19 Joint Ventures and 86 other consolidated entities catering to the domestic and global automotive industry. The principal investments of SMFL constitute a 36.1% stake in Motherson Sumi Systems (MSSL), 49% stake in Samvardhana Motherson Reflectec Group Holdings Ltd. (SMR, erstwhile Visiocorp) and 49% stake in Samvardhana Motherson Polymers Ltd. (SMPL). Together the three companies accounted for ~94% of the consolidated revenues in 9MFY2012.

MSSL: MSSL is the flagship company of the group and is the market leader in the domestic wiring harness segment with a market share of ~65%.

SMR: SMR, acquired in March 2009, is the world's second largest exterior rear view mirror manufacturer with ~22% global market share.

SMPL: SMPL is engaged in the business of high quality plastic components and assemblies for exterior and interior trims for passenger vehicles through Peguform companies acquired in November 2011.

SMFL's major customers include the Volkswagen group, BMW, Daimler, Renault Nissan, Ford India Private Limited, Volvo Car Corporation, Maruti Suzuki, Tata Motors, Honda Siel Cars India Limited, Toyota Kirloskar Motor Private Limited and Fiat India Automobiles Limited.

Outlook and valuation: We value SMFL's 36.1% stake in MSSL based on our target price for the company (Rs.216 based on 15x FY2014E consolidated earnings). We value SMFL's stake in SMR and SMPL on an EV/Sales basis instead of earnings based multiples as current earnings of these companies' do not reflect their true potential. Currently the profitability at SMR and SMPL has been impacted due to significant start up costs in relation to new manufacturing facilities and due to one-time costs related to the acquisition and refinancing of Peguform Group.

Based on our SOTP methodology we arrive at a value of Rs.97/share against the IPO price band of Rs.113-Rs.118. Management expects to turnaround the financial performances of SMR and SMPL over the medium term. However, we believe that it is early to factor in the anticipated turnaround in these two subsidiaries and valuations in our view are not providing sufficient margin of safety to investors considering the execution risks involved in the turnaround process. Hence we recommend Avoid on the issue.

Source : Equity Bulls

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