Vivek Chaand Sehgal, the avuncular chairman of Motherson SumiSystems Limited (MSSL), who travels over 300 days a year, had only landed day before from Germany and as he was getting ready to launch his most audacious takeover bid till date, he had to first convince his own board via video conferencing why it was key to buy a company that is almost ten times bigger than the largest acquisition that the company has ever done.
But for a man who has spearheaded 14 acquisitions in the last 15 years to make MSSL the largest auto components player in the country, both by revenues and profitability, convincing comes easy.
“We have been studying this company for the last eight months and we became very sure that this company was worth going for so we brought this to the board,” Sehgal told ET on a quick call from the Finnish capital, where he is camping temporarily along with his brain trusts including Pankaj Miital COO, colleagues from his corporate finance and M&A teams along with his investment banking advisor Girish Nandkarni from Motilal OswalBSE -2.02 %.
Since the summer of 2016, MSSL has been in hot pursuit of at least 3 large targets in US and Europe. First they had zeroed in on a Wilbur Ross company Automotive Components (IAC) Group for $750-800 million to diversify further into newer product categories in the auto interiors space and more importantly break into key markets like US where it has so far shopped only once – – the wiring harness business of Stoneridge in 2014-15. But those negotiations did not fructify and PFC seemed far more attractive.
For a company whose lion’s share of revenues come from overseas, namely Germany, a breakthrough in US was become strategic. Like IAC, PFC too gives Sehgal that opportunity. MSSL has strong presence in passenger car wiring harness and had been eyeing the space for trucks. 90% of PKC revenues come from wiring harness and US alone contributes 60% of its topline where it dominates 62% market share amongst heavy trucks.
The combination and synergies — highly value accretive with minimum geographical and product overlaps — couldn’t have been better.
“The reason for choosing this was obvious. It gives us opportunity to strengthen our business in wiring harness business and gives an opportunity to strengthen our North American presence,” explains G N Guaba, Chief Financial Officer at MSSL.
EXPENSIVE PRICE TAG?
Even though MSSL’s offer comes at a 51% premium to PFC’s last traded price, the market believes Sehgal can make it work. In many ways, this is an outlier. So far its targets have normally been done at the behest of the consumer and generally involve companies in stress in stress, which has meant that previous acquisitions have been much cheaper. As a result, the ROCE improvement targeted by Motherson has been easier been easier as the capital employed itself has been fairly low. Sehgal and his team though are confident of improving the ROCE of their target from high single digits to 30-40% in the coming years.
” He is passionate about his business and knows very well what his customers (OEMs) want. This is the strength on which he made 12 acquisitions in as many years and successfully turned them around. His goals seem ambitious but his track record proves there’s a robust execution backing his strategy,” said Shashank Joshi, head, corporate banking at Bank of Tokyo-Mitsubishi UFJ.
Once completed this will be MSSL’s 2nd buy focused on the global CV and CE wiring harness business, the first being Stoneridge in 2014. ” Combined with PKC; Motherson would have a very dominant presence in the US CV market and this also helps it enter the European CV market for wiring harnesses. PKC has been targeting to expand presence in the APAC market; Motherson should be able to help with this,” feels Jatin Chawla and Rohit Kadam, analysts at brokerage firm Credit Suisse.
At its core, lies MSSL’s derisking 3CX15 vision wherein no country, no commodity or no customer should account for more than 15% of turnover. By 2020, the management is confident of reaching near 3CX10. In 2015 the company also bagged its biggest order from Daimler worth approximately Rs 15400 crores, supply for which is expected to start from next year. To support the Daimler’s expansion, MSSL has already invested in 2 new plants, one each in USA and Hungary, along with brownfield capacity expansion in Germany. Majority of the company’s fresh capex is going to be in Americas.
“What has helped is his sharp focus on business. He runs it with meticulous integrity. Sehgal is a great delegator and motivator of his managers; he empowers and trust them completely,” says RC Bhargava, Chairman Maruti Suzuki India, who knows Sehgal even since he inaugurated his plant as chief guest in 1984 at Noida.
From a modest T-Couple maker for the Maruti 800, the quintessential middle class car that changed mobility in India, and Rs 83 crore revenues in 1999, MSSL is now a Rs 38,395-crore (consolidated revenues) gorilla, with profits of Rs 1,364 crore in FY16. Few expected a venture rolled out by a first-generation entrepreneur with a Rs 1,000 ‘seed capital’ from his mother — hence theMotherson moniker — to make electrical wires will emerge on a global scale like it has. But largely it is on account of Sehgal’s counter intuitive instincts. When the world was reeling from the aftershocks of the Lehman crisis, he hit gold with the acquisition of UK-based Visiocorp’s global rear view mirror business. A $750-million company fell on his lap for a meagre for $32 million in a stock cum cash deal. For a company that seemed to have humble aspirations there was no looking back. Equally at the heart of this pulsating growth lie his ability to digest the companies he buys.
“He’s is one of the very bold, audacious entrepreneur that we have in our industry. He has unique ability to spot great opportunity,” quips Ashok Taneja, MD & CEO of Shriram Pistons & Rings, an industry peer.
This in turn helps MSSL beat its own five year growth blueprints. If in 2010 its target was $1 billion in revenues; it achieved $1.5 billion. The 2015 target was $5 billion, which Motherson has hit with a year to spare. The next milestone — $18 billion by 2020 — may not be a cakewalk either in a Trump and Brexit world. Sehgal is about to bite into his boldest bet till date, a slowdown in the global auto cycle may derail that global triumph. As long as big order keeps coming or China rebounds sharply, the road ahead should be smooth.