Motherson Sumi Systems TO Demerge Domestic Wiring Harness Unit

Motherson Sumi Systems Limited has announced that it has sought in-principle approval from its board of directors to demerge the domestic wiring harness business into a separate legal entity (referred to as MSSL-1). All other remaining businesses including Samvardhana Motherson Automotive Systems Group B.V. (SMRPBV) would remain under the current legal entity (referred to as MSSL-2). This is mainly because MSSL's joint venture partner, Sumitomo Wiring Systems (SWS), Japan, wants to focus on the domestic wiring harness business.

Both the entities would have mirror shareholding. This reorganization would also lead to SMRPBV becoming a 100% subsidiary of MSSL-2. Samvardhana Motherson International Limited's (SAMIL) shareholding of SMRPBV of 49% would be transferred to MSSL-2. 51% of SMRPBV is held by MSSL. SAMIL would gain shareholding in MSSL-2 under a share swap transaction, thus, effectively lowering the shareholding of SWS and increasing the shareholding of the promoter group in MSSL-2. India Ratings and Research rates MSSL at ‘IND AAA’/Stable and SAMIL at ‘IND AA’/Stable.

As per the management, the reorganisation, if approved by the board, would aid in simplification of the group structure, and aid MSSL meet the longstanding request of SWS to keep its participation focussed on the domestic wiring harness business in India, which is SWS’s core area of interest.

This reorganisation is subject to final approval from the board of directors of MSSL, which is likely to take 90 to 120 days. The transaction is also subject to approval from SAMIL's board of directors and shareholders. Post these approvals, the reorganisation would also require the requisite regulatory and corporate approvals.

On a consolidated basis, MSSL recorded revenue of INR327 billion in 1HFY20 (1HFY19: INR298 billion) and EBITDA of INR25 billion (INR27 billion). It had a net adjusted leverage (net debt adjusted for lease liabilities/EBITDAR) of 2.4x and interest coverage (EBITDA/interest expense) of 9.2x as of 1HFY20.

India Ratings and Research believes the transaction is in preliminary stage and the agency would reassess the ratings of MSSL and SAMIL once the company seeks final approval from the board to reorganise and the restructuring is finalised.