Motherson Sumi stock: Reydel Automotive deal key for incremental growth

The Motherson Sumi stock has gained 2.6 per cent after the company announced its 21st acquisition in the auto component space. The company will acquire Netherland-based Reydel Automotive for $201 million. The acquired company, which makes instruments, door panels, console and cockpit modules, will add to Motherson Sumi’s global product offerings, offer access to technology and expand its geographical presence.

The management said large scale of interior business would help the company bid for bigger platforms. Also, the deal comes at an attractive valuation of 2 times enterprise value to operating profit compared with 6-8 times for peers.

Motherson expects the deal to help it improve the cost synergies related to procurement, tax savings and lower capital expenditure. It will also help the company to achieve the stated goal of no component, country or client share moving above the 15-per cent-mark. After the deal, share of PSA and Renault will move to 11 per cent from 5 per cent.

The company has so far made some good acquisitions such as that of Peguform (SMP) and rear-view mirror business of Visiocorp (SMR). But, how much value can be derived from the Reydel deal will depend on its growth prospects and synergy gains.

Unlike the two large European acquisitions before the Reydel deal, which required additional capital expenditure and were a strain on cash flows, the current deal should be earnings accretive, and a regular capex of $30 million can be funded from internal accruals.

The management reiterated its intention of sticking to the 40 per cent return on capital employed (ROCE) target as well as the $18 billion consolidated turnover by 2020. 

While the India business and SMR are achieving the 40 per cent ROCE target, SMP and Reydel are yet to achieve that metric. Analysts said higher revenue traction and lower capex would help it to achieve the return ratio goal.

On the revenue target, including the Reydel acquisition, the firm would be able to achieve $13 billion by 2020 from the estimated FY18 revenues of $9 billion. Given this, expect more acquisitions.