Samvardhana Motherson set to bloom from its Japanese play

• Samvardhana Motherson hit a 52-week high on Wednesday, and has kept up with its run on Thursday.
• Yachiyo acquisition will have an earnings upside say brokerages which have upgraded its target price.
• The company can gain from new market access in addition to a better product mix from the acquisition.

The stock of auto component company Samvardhana Motherson has been on a bull run after it announced two strategic acquisitions. It has hit a 52-week high on Wednesday, and has kept up with its run even on Thursday — aided by brokerage upgrades.

The Noida-based company has reached an agreement to acquire 81% of Yachiyo’s four-wheeler business for 117 million Euro; in addition to a $14 million investment into Prysm Systems which makes touch-enabled display screens.

As per J M Financial, the Yachiyo acquisition is attractively valued as its 1.7 times the trailing EBITDA and 0.2 times the sales.

“Transaction closure is expected by 1QFY25 and will be funded through internal accruals,” says J M Financial. Yachiyo is a strategic supplier to Honda Motors, and has a decades-long relationship with the Japanese auto major. Honda also has a stake in Yachiyo.

Following the acquisition, Motherson will form an 81:19% strategic partnership with Honda Motors, which owns the rest of the stake in Yachiko.

Sunroofs in the mix

Yachiko mostly manufactures and supplies sunroofs where it has a 9% global market share; in addition to fuel tanks. This addition will propel Samvardhana Motherson into the global markets,

“This acquisition would help Samvardhana Motherson partner with Honda Motor for global business, access strong R&D capabilities in sunroof and fuel tanks, foray into the global sunroof market,” says J M Financial.

Sunroof systems have high growth potential globally, with increasing adoption across segments. “It (Yachiko) is also developing next gen products like lightweight tailgate module etc,” says a research note by Nomura.

Moreso, it gives Samvardhana Motherson a leg up when it comes to cross-selling its existing products to Honda Motor, and diversifying its product and client mix.

As of now, Volkswagen, Audi and Mercedes Benz are its biggest customers, in addition to Indian auto major Maruti Suzuki. A large part of the products Motherson makes are wiring harness, vision systems, bumpers, door panels and more.

More importantly it gives Motherson a headway into the Japanese market, where it can build relationships with other automakers.

“Further upside can come from its ability to add new customers across Japan, USA and EU. Japanese OEMs are likely to be the biggest beneficiary of a US recovery due to very low inventory, and EU growth estimates have also been revised up,” says Nomura.

Past performance on D-Street

In the last one year, the stock has been volatile as it hit two steep lows once in October last year, and March this year, before rising steadily. It has given 13% returns in the last one year, and performed better over a six-month period — with 20% returns.

Market analysts are however betting on it to have a better run-rate ahead. The stock is hovering around ₹90, but J M Financial has a target price of ₹120. Nomura too recently upgraded it to ₹105, after the acquisition as it believes the acquisition will give it earnings upsides.

J M Financial however sees value beyond the acquisition too. “Easing supply chain, sustained recovery in global auto sales, higher operating leverage and improving profitability is expected to drive return on capital employed (ROCE) going ahead,” the brokerage firm says.

$MOTHERSON.NSE looks very strong on charts. The rally is sustainable in my opinion as the auto sector is in tailwinds and is doing well at the moment. The share formed a double bottom around 60 and has since rallied back up. Previous high could be a good target and therefore, levels of 120 can be expected in the coming months. If the stock breaks above 120, then it would end its long term correction and one can expect further rally.

— (@thebullofdalalstreet) July 06, 2023

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