Samvardhana Motherson: SAMIL partners with Honda, acquires Yachiyo

5 Jul 2023 , 11:13 AM

Recommendation: Buy; Target price: Rs 100

Motherson has entered into an agreement to acquire 81% stake in Yachiyo. The acquisition will strengthen Motherson’s relationship with Honda, opening up the doors for sale of the Group’s existing products to the OEM. In addition, there is scope to grow revenues by diversifying Yachiyo’s customer base to non-Honda OEMs. Increasing use of sunroofs in cars is a big growth driver. However, revenue from fuel tanks may moderate with higher rate of electrification. The transaction is at an equity valuation (100%) of EUR145mn, implying FY23 EV/Ebitda of 1.5x. The inexplicably cheap valuation means that Motherson would generate very high ROCE on the purchase consideration, making it EPS accretive.

Motherson to acquire 81% of Yachiyo: 

Yachiyo is a 50.4% subsidiary of Honda (public shareholders 49.6%), engaged in production of sunroofs, fuel tanks and resin products. In sunroofs, Yachiyo has >90% share of the business in Honda, translating to 9% global mkt share in sunroofs. In fuel tanks, Yachiyo has 100% share of the business in Honda. Yachiyo also has a 52.4% stake in a subsidiary engaged in 2W business; this stake would be transferred to Honda. Motherson has agreed to buy 81% in the 4W business (revenue of JPY116.1bn i.e. EUR824mn, 11.4% Ebitda margin).

The deal is inexplicably cheap at 1.5x FY23 EV/Ebitda: 

Honda would first launch a tender offer to mop up the 49.6% public shareholding. Honda would then acquire Yachiyo’s 52.4% stake in the 2W business subsidiary. Finally, Motherson would buy 81% stake in Yachiyo (4W business); Honda retains 19%. Yachiyo’s current market-cap is JPY28.4bn. Surprisingly, the transaction value is lower at JPY22.9bn i.e. EUR 145mn (for 100% equity), translating to 1.5x FY23 EV/Ebitda. Yachiyo (4W+2W) has net cash of EUR45mn. If this cash is preserved at the deal closure (1QFY25), valuation would be even lower. Analysts of IIFL Capital Services have also not accounted for cash inflow on sale of stake in 2W subsidiary.

Significant cross-selling opportunities: 

Currently, Honda accounts for 1% of Motherson’s revenue; this will increase to 6% post this transaction. Mgmt mentioned that there is significant scope to sell Motherson Group’s existing components to Honda, as well as to sell Yachiyo’s core products (sunroof, fuel tanks, etc.) to Motherson’s other global customers. These cross-selling benefits may translate into revenue beyond FY26, given the typical 2yr lag between order wins and delivery.