Pressing the Pedal

In the aftermath of the global financial crisis triggered by the bankruptcy of Lehman Brothers, the world's largest rearview mirror maker, Visiocorp, found itself in dire straits in late 2008. It is then that nearly a dozen global automotive giants, including Daimler and Volkswagen, among others, chose to approach a hitherto unknown Indian parts maker, Motherson Sumi Systems, to bail the company out by acquiring it.

"The opportunity was brought to us by a customer, a German automaker," says Andreas Heuser, Head of Regional Chairman's Office, Europe, Motherson. "They were the first to come to us seeking a solution."

"What we needed to move forward was to gain the confidence and commitment of our global customers," says Barrie Painter, Executive Vice President, Global Sales, Marketing and Business Development, Samvardhana Motherson Automotive Systems Group BV (SMR BV) and Motherson Innovations. "It wasn't an easy pitch to make. Our takeover target was twice the size of our company. But customers expressed their support."

It took much more than just that. After several months of camping in hotel meeting rooms, late nights and endless cups of coffee, poring over figures and rechecking numbers, the company decided to bite the bullet. The deal was signed in early 2009, which almost tripled its size overnight. More importantly, it set the template for Motherson Group to acquire more firms in subsequent years.

"We have gained a reputation of not wasting time and doing it in a jiffy," says Vivek Chaand Sehgal, the 64-year-old Chairman and Co-Founder of the group. "Pankaj (COO) and Gauba (CFO) had gone to London as one of our customers had an issue and overnight they had to acquire a company - in four days flat. Similarly two years back, Vaman (Vice Chairman) acquired a company that was going bankrupt in a matter of just 18 days."

Acquisitions have been a major reason behind the company's growth. Since 2002, it has gobbled up two dozen companies - half of them in the last six years alone. The growth has been meteoric. Group revenues increased from Rs 153 crore at the start of the century to Rs 781 crore in 2005. The Visiocorp acquisition expanded it further to Rs 6,702 crore in 2010. Since then, it has grown to a completely different scale altogether - Rs 34,490 crore in 2015 and Rs 62,573 crore as on March 31, 2020. In the process, it became the first and the only Indian company to break into the league of the top 100 global automotive giants before breaching the top-50 barrier in 2018.

The group, which is present in 41 countries worldwide - 89 per cent of its revenues come from outside India - is guided by an unique five-year plan. Now into its sixth plan, its track record says it has a habit of over-achieving except for the last one. The target for 2020 was to become a $18-billion company, but the company missed out by 50 per cent and clocked $8.9 billion.

"We were close to achieving our last five-year plan but then Covid struck and that changed the whole dynamic. We were sure of announcing our target company's acquisition but then we got hit in end-February and so we decided to wait and watch since Covid was the unknown demon," says Sehgal.

"It will still turn out to be good for us as we can now buy similar target companies for a much cheaper price. The thought process is we will cover up whatever we are short from the last five-year plan and then double it," he adds.

Target 2025

Given that the group has for the first time missed its target by a wide margin, what would have been doubling revenues to $36 billion by 2024/25 has instead become more than trebling from current levels. The many uncertainties in the global economic context due to Covid-19 or rising protectionism and threats of long drawn out trade wars make the target seem ridiculous to some, but not for Sehgal. He believes he will get good assets for cheap in this distressed market just like in 2008/09.

"Our strength has been to set aggressive targets where our people would actually have to move and work hard to achieve it. There is a lot of pain in the system (global industry) accumulated over the last few years and Covid only exacerbates that," he says. "So customers are going to ask us to acquire more companies. We want to be a globally preferred solutions provider. Already some customers have started coming to us with a list of companies they think we should acquire."

Scaling up through acquisitions is nothing new. But the strategy has its flipside as well. Homegrown major Amtek Auto went belly-up in 2017 after the company failed to service the massive debt it had piled up while going for overseas acquisitions between2013 and 2015.

"We have all tried acquisitions and it is way more difficult to pull through than it sounds. Textbook says 85 per cent of them should fail," says Sunjay Kapur, Chairman of Sona Comstar, who has, as a contemporary and a rival, followed Sehgal closely. "In the case of Motherson Sumi, the reverse is true. They have a knack of picking the right asset at the right time and the right price."

The group is betting on acquisitions for future growth. Depressed valuations of companies in the post-pandemic world means Lakhsh Vaaman Sehgal, Pankaj Mital, G.N. Gauba and their teams are negotiating with multiple companies for a deal.

Sehgal offers a simple explanation for the high strike rate. "We don't wake up in the morning thinking which company we should acquire. We act on the basis of what our customers ask us to do. That is why we have 24 acquisitions, which are all absolutely successful. Whereas a lot of our peers have had good and bad times," he says. "We never acquire a company on our own, based just on our hypothesis. Only when a customer asks us to acquire a company, we step in. We have a committed team, which then hits the ground. On our own, we are happy sitting tight. Acquisition is a double-edged sword and a lot of problems need to be solved. You need the commitment from the buyer to make it successful."

In Restructuring Mode

Before going after the 2025 target in the right earnest, the Sehgal family has another task at hand. The frenetic pace of growth of the firm in the last decade has made it complex and unwieldy from an accounting and shareholding stand point. Before he hands over the reins to the next generation, Sehgal wants to sort it out. A restructuring of the parent and group companies is underway.

As part of the plan, holding company Samvardhana Motherson International Ltd (SAMIL) will be merged with listed entity Motherson Sumi Systems Ltd (MSSL) through a share swap agreement with a recommended ratio of 51 shares of MSSL (face value of Rs 1 each) allotted for every 10 shares of SAMIL (face value of Rs 10). Currently, SAMIL has a 33.4 per cent stake in MSSL and 49 per cent in Samvardhana Motherson Automotive System Group and other automotive businesses.

At the same time, the group's Domestic Wiring Harness (DWH) business will be demerged from MSSL and subsequently listed next year. This is being done to meet partner Sumitomo's long-standing request to restrict its participation to their stated business preference.

The merger of the two companies brings all group businesses such as LED lightings, shock absorbers, telematics, sheet metals, IT etc under the umbrella of the listed company. Further, SMRPBV, which houses the polymer and mirrors businesses, will be brought under MSSL. Sehgal believes the integration represents a gigantic opportunity of more than $200 billion for MSSL to participate, and boost its content per vehicle.

"The rejig is needed to simplify the group. We have acquired a lot of companies and have many JVs in the last few years. It will also help to realign - one of my main partners, Sumitomo," says Vaaman Sehgal, Vice Chairman of the group and the heir to the throne. "And it will unlock value. Fifty one per cent of SMRP, the biggest portion of our group, is owned by Motherson Sumi and 49 per cent directly owned by Vaman and me. We wanted all the shareholders to be part of the 100 per cent shareholding of the company," says elder Sehgal.

After restructuring, the Sehgal family's effective stake in DWH will reduce from 33.2 per cent to 19.8 per cent, while effective stake of public shareholders will increase from 38.3 per cent to 47.2 per cent.

The plan received board approval on July 2, but came under criticism from analysts who expressed doubts on whether the interests of minority shareholders were being taken care of adequately. Shares of the company tanked by over 5 per cent on the day and it remained at sub-Rs 100 levels for the rest of the month. The primary issue was the increase of the family's stake in the merged entity, which gave the impression that the promoters gained more from it than anybody else.

Sehgal, however, rubbishes these notions as misplaced. "If one looks at the family shareholding in MSSL pre and post-rejig, then people say our shareholding has gone up. But if you look deeper at what has come into the company then the family's shareholding is actually coming down from 67 to 50 per cent," says junior Sehgal.

The fall in share prices in July has turned out to be a momentary blip though. The company's plans for 2025 has enthused investors all over again. Since the start of November, share prices have jumped 38 per cent and are trading at near 12-month highs.

"Vision 2025, along with the ongoing restructuring of the group, will help the company shape up for the next phase of growth. We believe Motherson Sumi Systems is the best proxy to a global automotive recovery, which is supplemented by company-specific drivers of earnings," broking house Motilal Oswal said in note.

What looked like a tidal wave has turned out to be a mere ripple it seems.

Strength In diversity

The challenges for the company's growth, however, may not be merely sector-specific or macro-economical. One of the biggest concerns for the global economy in the last few years has been the trend towards deglobalisation and rise in protectionism in trade and business across countries.

Trade wars such as the one between the US and China have, for some time, threatened to undermine prospects of growth in the world economy. The added twist of the pandemic and the need to realign global supply chains is likely to make matters worse. Such a scenario could threaten a company like Motherson, which has customers spread across the world. But junior Sehgal feels even this may end up working in the company's favour. "We are vindicated. Wherever we are present, we are a local company with factories managed and run by people from that region. That is the huge advantage we have," he says.

"We used to be told to move manufacturing from this place to the other, to India or elsewhere, and we used to say no as every country has the right to manufacture for itself. We have a clear rule that if we are exporting more than say 25 per cent of production to some particular country, we will immediately set up a plant over there. Today we are in 41 countries with over 272 facilities and it vindicates us. We are laughing our way to the bank whereas everybody else is trying to figure out what to do," he adds.

However, he does concede that an unprecedented situation such as a trade ban by one country on another based on the whims of any politician may ultimately impact his company's prospects, but believes such a move could be so self-defeating for everybody that it will neever happen. Nevertheless, Motherson Group is still putting policies in place to potentially insulate it from any eventuality.

"We should not be too worried about the politics at any given time. If we start looking at that the industry will not be able to work. The multiplicity of our plants and the ability to produce from one plant to another in different geographies is what we find challenging and rewarding. Our companies in various different countries are run by locals. We don't send Indians all over the world," says senior Sehgal who is now getting ready for a mentor role in the group, while the onus of growing and managing day-to-day business falls on Vaaman Sehgal.

"We still want to ring-fence ourselves from any adverse situation. So our philosophy going ahead is simple - no country, or component, or customer should account for more than 10 per cent of our group's turnover. That's how we de-risk our situation."

A revenue of $36 billion will make the Motherson Group one of the world's top 10 automotive component companies. For a company that began its journey with silver trading, that would be worth its weight in gold.

@sumantbanerji