L J Ravi MM has largely impaired its investment of ~INR24.5b in SYMC MM’s 74.65% owned SsangYong Motor Company (SYMC) has applied for commencement of rehabilitation procedure with the Seoul Bankruptcy Court under the Debtor Rehabilitation and Bankruptcy Act of South Korea. SYMC has also applied for an Autonomous Restructuring Support (ARS) program, which is a court designed process. n If the court approves the ARS scheme, SYMC would continue to function under the supervision of its Board and negotiate with stakeholders for a revival package, which may include equity and debt financing and other related actions. Some of its decisions would be subject to the court’s approval. The Seoul Bankruptcy Court would deliberate and review SYMCs application to decide on the restructuring. n As part of the rehabilitation process, the court while admitting SYMC’s application would generally issue: a) a comprehensive stay or prohibition order to prevent SYMC’s creditors from enforcing any security claims, and b) a preservation order for SYMC not to engage in any disposal of property or assets without its approval so as to adversely impact the interests of creditors. As per a media report, under ARS, SYMC would get up to three months to negotiate with stakeholders, including creditors, to resolve issues. The management indicated that its negotiation for sale are on-going and wouldn’t be impacted by this filing. MM’s total investment in SYMC stood at INR24.5b (as of Mar’20) and we believe this is largely impaired as a part of the total impairment provision of INR53.3b made since 3QFY20. This filing for bankruptcy is in line with the management’s indication of no further investment in SYMC by MM. This is part of the on-going review of its capital allocation policy and focus to sell non-strategic loss-making businesses. Valuation and view: Since Apr’20, MM has decided to exit five loss-making businesses as part of its decision to exit non-strategic and loss-making businesses. SYMC has been MM’s biggest pain point and the former’s bankruptcy filing is the last option which it has to see if it can be sold. MM is the best proxy on a rural recovery in the Auto segment, with a strong footing in Tractors and LCVs. For the SUV business, we are not building in any major traction and have not built in benefits from any upcoming product launches or material benefit on product development from MM’s recent JV with Ford India. While MM’s core business would recover faster, its focus on tightening capital allocation could act as a re-rating catalyst. Hence, we see twin levers of EPS growth and re-rating. Maintain Buy with a SoTP-based TP of INR840/share (Dec-22E SoTP-based).
