The shares of Motherson Sumi Systems Ltd fell up to 22% to Rs 182.85 on the NSE last Friday (January 14). Investors went into panic mode as most were unaware of the developments happening at the company.

Motherson Sumi Systems Ltd (MSSL) is a leading manufacturer of automotive components. It produces and sells wiring harnesses, interior & exterior mirrors, camera-based detection vision systems, and high-precision metal machined components to automakers. They also manufacture integrated electrical distribution systems and related components.

Now, let us understand why the company’s shares fell 22% on Jan 14.

Why Did MSSL’s Stock Price Fall?

Motherson Sumi’s stock price has grown at a compound annual growth rate (CAGR) of around 13% from ~Rs 145 levels in January 2017. It has widely outperformed the Nifty Auto index. MSSL’s shares had closed at Rs 235 levels on January 13.

The domestic wiring harness (DWH) business of Motherson Sumi Systems Ltd accounted for 17% of its overall business. As part of a restructuring exercise, the DWH business will be de-merged from MSSL and merged with its parent company— Samvardhana Motherson Group.

On January 14, MSSL’s stock started trading exclusive of the DWH business ahead of the record date. The company had fixed January 17 (yesterday) as the record date. Thus, the 17% fall that occurred last Friday is a direct impact of the de-merger. The remaining 5% decline in MSSL’s stock price can be attributed to panic selling by its investors.

Motherson Sumi Systems Ltd has determined shareholders for allocation of additional shares of DWH business in the entitlement ratio 1:1 on the record date (Jan 17). It means that one share of the DWH business will be allotted for each share held in MSSL to all existing shareholders. After the demerger of the DWH business, MSSL (the existing listed entity) will be renamed Samvardhana Motherson International Ltd (SAMIL)

Meanwhile, the DWH business will be known as Motherson Sumi Wiring India Ltd (MSWIL). The DWH segment’s merger with Samvardhana Motherson Group (the promoter entity) is expected to take place on January 24, 2022. The initial public offering (IPO) of MSWIL is scheduled for mid-March 2022, pending regulatory approvals.

What Next?

Industry experts expect a cyclical upturn in the global and domestic automobile markets in the coming months. Motherson Sumi Systems is also well-positioned to benefit from the increasing electric vehicle (EV) penetration. Analysts have also stated that MSSL’s restructuring exercise creates a platform for future growth through organic and inorganic routes. It is a step towards MSSL’s Vision 2025, which includes a revenue target of $36 billion (~Rs 2.65 lakh crore) and a Return on Capital Employed (ROCE) of 40%. [ROCE signifies the ability of a company to generate profits with respect to shareholders’ capital. For every Rs 100 worth of capital employed, MSSL aims to earn Rs 40 on it.]

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