Motherson Sumi wired for near-term earnings growth with Finland’s PKC buy

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Motherson Sumi’s acquisition of Finland-based PKC group for 571 million has potential to add value for the company in the medium-term thanks to incremental product portfolio, scalability of business and the company’s successful track record of turning around its acquisitions.

Although, based on the current financials of PKC it appears that 50% premium paid for Finnish company is on the higher side, but the potential for revenue growth in the next two years and synergy benefits from the deal may be able to dispel investors’ con cerns. There are several factors in play in the acquisition that may boost earnings growth of the Delhiheadquartered Motherson Sumi.
Firstly, PKC supplies wiring harness, which is a set of wires that runs throughout the vehicle to relay information and electric power–for the heavy and medium commercial vehicle makers of the USA and Europe.

Motherson has been so far supplying wiring harness mainly to passenger cars. The entry in the CV segment will expand its product portfolio. PKC is having 62% and 43% market share in the US and European heavy truck markets respectively .

Secondly, PKC generates income from US, Brazil, Europe and China.Hence, diversified revenue base will help Motherson expand its revenue base which has currently concentrated in Europe. Thirdly, the product portfolio has minimum overlap with the existing product line-up.

Lastly, the acquisition is likely to be neutral for the earning per share (EPS) for 2018 and expected to 7-8% accretive for 2019. The PKC acquisition will aid the company to achieve its revenue target of $6 billion by 2020. Based on financials of 2016, Motherson has valued PKC group at 9.7 times of its EVEBITDA. In the past two significant acquisitions -SMR and SMP -it paid 1.6 times and five times their respective EVEBITDA.

The revenues and margins of PKC have been floating in a narrow range over the last five years.

With a historical track record of Motherson’s management on improving profitability and ample room for the expanding addressable market of the PKC, revenue growth and margins are expected to improve.

The stock is trading at 50% premium to its long-term average price-earnings multiple which appears justified given its multi-year earnings visibility and option value from acquisitions.

Motherson has indicated that PKC may achieve revenue of 1.4 billion (2016: 846 million) and 10% operating margin (2016: 7.6%) by 2018. Thus, EVEBITDA based on 2018 earnings appears quite reasonable at 4.4 times.