Deal to give Motherson group access to technology and strengthen relationship with Europe’s top car makers.
Given a debt of euro 166.5 million (Rs 1,044 crore) the total acquisition cost or enterprise value comes to euro 308 million (Rs 1,931 crore). While the price paid for the deal at EV/Ebitda of 4.6 times is slightly on the higher side (estimates were at Rs 1,500-2,000 crore), analysts believe that given the synergies, improving margins and manageable debt, the deal is a positive for the Motherson group.
| MSSL: PREMIUM VALUATIONS | ||
| in Rs crore | FY11E | FY12E |
| Revenues | 8,371 | 10,101 |
| % change | 20.9 | 20.7 |
| Ebitda | 921 | 1,273 |
| % change | 115 | 38 |
| Ebitda (%) | 11 | 12.6 |
| Net profit | 390 | 516 |
| % change | 61.2 | 32.3 |
| P/E (x) | 23.7 | 18.2 |
| E - Estimates x=multiple % change is year-on-year Source: BofA Merrill Lynch | ||
| PEGUFORM: GOOD DEAL | |
| In Rs | |
| Revenues | 8,467.20 |
| Ebitda | 419.40 |
| Ebidta margin (%) | 5.00 |
| Net profit | 42.60 |
| Net debt | 1,044.30 |
| EV/Ebitda (x) | 4.60 |
| EV/sales (x) | 0.20 |
| Source: Company, analyst reports | |
Emkay analysts Chirag Shah and Siddhartha Bera feel the acquired entity will be EPS-accretive in the first year, even at a lower Ebitda margin of four per cent (current margins at five per cent) and interest costs on the debt taken to fund the acquisition. Though there will be benefits of an operational improvement at Peguform, the MSSL stock (Rs 239), which has returned 56 per cent in the past one year, is unlikely to yield much, going by the given price targets of Rs 255-260.
SYNERGIES
While MSSL has a presence in plastic moulding (Peguform’s focus), the segment contributes under 10 per cent of turnover. The key benefits from the acquisition will be access to plastic parts technology and improvement of the supply relationship with Volkswagen, which accounts for 60 per cent of Peguform’s sales. Says G N Gauba, chief financial officer, Motherson Sumi, “The acquisition will not only help improve our relationship with Volkswagen, Audi and BMW, but also enable us to tap into the technology for supplies in India.” While Ebitda margins at Peguform have moved up over the past three years from 3.5 per cent to five per cent, further improvement will be key if Peguform is to improve its margins to match those of MSSL (see table).
$5-BN TARGET
The Motherson group has set itself a target of $5 billion, with return on capital employed (ROCE) for the consolidated entity at 40 per cent by 2015. While the company will be able to achieve the turnover target (FY11 turnover $2.7 billion) on the back of inorganic acquisitions (Visiocorp and Peguform), improving the ROCE for the acquired firms will be a challenge. Sanjaya Satapathy, research analyst at DSP Merrill Lynch, believes to be able to achieve the ROCE target, Peguform needs to grow its sales by 30 per cent and double its Ebitda margins to 10 per cent.
TURNAROUND CHALLENGE
While MSSL has a good record and has been able to turn around Visiocorp, improvement at Peguform could take longer, especially if the offtake of parts slows due to lower demand. Further, Peguform, which was declared insolvent in 2002, has gone through multiple management changes since then. Satapathy of Merrill Lynch says the key challenges for the group are to turn around Peguform and manage debt, which will rise after the acquisition. While MSSL has debt of Rs 1,250 crore, a proportionate share of debt (51 per cent) in the new entity would increase its total debt to Rs 1,652 crore. While its debt to to equity ratio will move to 0.8, analysts are not too worried, as the company is expected to generate an operating cash flow of Rs 790 crore for 2011-12. Further, foreign debt taken to fund the acquisition is likely to be sourced at attractive rates of four to five per cent.