Samvardhana Motherson: ADI Group acquisition; scaling up Aero vertical

23 Oct 2023 , 10:40 AM

Recommendation: Buy; Target price: Rs 116

Motherson has entered into an agreement to acquire SSCP Aero Topco, which holds 100% of AD Industries and its subs (“ADI Group”). ADI Group is engaged in the manufacturing Aero Engine components and Medical devices. It has a total booked business of EUR850mn, with revenue coverage over next four to five years. This is a step towards SAMIL’s Vision 2025 with diversification into non-auto segments. The transaction is at an equity valuation of EUR35-45mn, implying CY23 EV/Ebitda of ~11x. Additionally, Motherson announced two minor acquisitions. These three acquisitions would add 1.2-1.3% to Motherson’s revenue and Ebitda. Combined with the larger acquisitions announced in the preceding quarters, they would add 23%, 22% and 10% to the revenue, Ebitda and EPS respectively. These are not in analysts of IIFL Capital Services estimates yet, pending completion. At 15x FY25 EPS, the stock is quite cheap (even cheaper, if analysts of IIFL Capital Services build in the announced acquisitions). Maintain BUY with TP of Rs116 (24% upside).

About ADI Group: 

ADI is a French group engaged in the manufacturing of Aero Engine components (90%) and Medical equipment (10%) such as sheet metal, hydraulics, composites, etc. With 11 manufacturing facilities across France, Morocco and Tunisia, it has presence over 95% aircraft platforms. In H1CY23, ADI clocked rev of EUR74mn with 8.6% margin. Total booked business stands at EUR850mn over the next 4-5 years. ADI boasts of marquee customers – Airbus, Rolls Royce, Safran, GE, Dassault. 

Transaction EPS-neutral: 

The transaction is at an equity value of EUR35mn (potential upside of EUR10mn based on CY23 performance), implying EV/Ebitda of ~11x. Additionally, Motherson announced two smaller acquisitions (combined rev EUR1mn). Overall, the three acquisitions would add 1.2-1.3% to Motherson’s revenue and Ebitda. The deal is expected to close in 4QFY24, subject to regulatory approvals. 

Strengthening non-auto capabilities: The acquisition is a step towards SAMIL’s Vision 2025, which is USD36bn in revenue including USD9bn from non-auto verticals. Motherson has completed four acquisitions in the Aerospace vertical in the last two years. The suite of strategically acquired and organically developed competencies will help Motherson provide a much broader range of services to aerospace OEMs globally.