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Motherson's Peguform buy see shares slip

business Updated: Jul 13, 2011 17:07 IST

Reuters
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Auto parts maker Motherson Sumi Systems on Wednesday said it would buy a majority stake in German Peguform Group, but the euphoria gave way to worries about margins that dragged its shares down after the initial rise.

Auto ancillary firms in India typically look outside their home turf for buying opportunities as high expectations from founders of smaller Indian companies have thwarted many potential deals.

Motherson would buy the debt-free Peguform whose revenue is expected to rise about 17% to 1.6 billion euros in calendar 2011, Vivek Chaand Sehgal, vice chairman of the Indian firm said. The company did not disclose the deal value.

By comparison, Motherson Sumi had posted net sales of $1.8 billion in FY11, but the group's revenue is expected to grow almost five-fold to $10 billion by end-March 2015, from $2.2 billion in 2009/10, Sehgal had told Reuters in May.

"Motherson does not have the capacity to serve the size of the global market. It brings a lot of knowhow and technology," Sehgal said on Wednesday referring to the Peguform buy.

Peguform makes and distributes bumper systems, plastic components for vehicle exteriors, cockpits, dashboards and vehicle interior trims. Volkswagen contributes about two thirds to Peguform's revenue.

Motherson Sumi makes a range of auto parts from rear-view mirrors to wiring harness and high-tension cords, serves Volkswagen, Ford, General Motors, Hyundai Motor and Maruti Suzuki among others.

The deal is expected to close in 2-3 months and will be funded through debt tied up from Indian lenders, Sehgal added.

The firm had in May this year said it was pursuing overseas acquisitions and joint ventures in the auto ancillary space and was conducting due diligences across the globe.

Motherson Sumi, which has earmarked a capex of about 5 billion rupees ($112 million) in 2011/12, expects to commission four plants in India and one each in South Africa and Hungary in 2011. Its unit SMR will commission a mirror plant each in Brazil and Thailand by end-2012.

The acquisition of 80% in Peguform would be made through a special purpose vehicle in which Motherson Sumi Systems will hold 51% and group firm Samvardhana Motherson Finance would hold 49% stake.

Motherson would buy the stake in Peguform from Cross Industries, who would retain 20% holding.

Margins fear pulls down shares
Motherson Sumi shares had rallied more than 7% in the morning session, but shed all gains after the announcement of the European buy to be down as much as 7%. It ended 3.53% lower at 230.85 rupees in a Mumbai market that rose 1%.

"There are concerns that the company they are acquiring has lower margins of only around 5%," a Mumbai-based auto analyst, who declined to be named, said.

Peguform has reported an EBITDA of 66.87 million euros in calendar 2010 and had sales of 1.37 billion euros.

Motherson Sumi itself has a much higher EBITDA margin at about 11.5%, the analyst added.
The stock has risen more than 31% so far in 2011, while the broader market fell more than 10%.

"While looking at margins we should look at the synergies. We are already in the business that is generating good return on capital. So margins will be considered only to determine the price," Motherson Sumi's Chief Financial Officer G N Gauba said.