Motherson Sumi Initiating Coverage Reearch Report By Motilal Oswal

Motherson Sumi Systems (MSS) is the flagship company of the Samvardhana Motherson Group. The company was promoted in 1986 in JV with Sumitomo Wiring Systems and Sojitz Corporation of Japan. MSSL had started out as a single product (wiring harness) company, but has since expanded its product range to include polymer products (through SMP), automotive mirrors (through SMR) and elastomers. The group has four divisions namely the wiring harness (15%), polymers (52%), mirrors (28%) and others components (5%). The latest acquisition of PKC (100% owned) strengthens MSS presence in commercial vehicle wiring harness segment. The group operates 230 plants in 37 countries and employs over 100k people.

Magical times ahead!

Supportive global trends | Strong growth visibility | Financial discipline

MSS has enviable track record of strong performance with unwavering focus on capital allocation. MSS has evolved as a partner of choice for all most all OEMs in the world, reflecting in increasing share of business and market leadership in all the key businesses that it operates in. It is in sweet spot to benefit from evolving disruptive global automotive trends, which would drive its next wave of growth. MSS is now entrenched in the virtuous cycle of “scale begets scale”, as it would significantly benefit from OEMs focus on vendor consolidation. MSS has strong organic growth opportunities in international as well as domestic market driven by increase in content per vehicle, strong order book and entry in new markets/segment. We estimate MSS’s consolidated revenues/EBITDA/PAT to grow 22%/30%/33.5% CAGR FY17-20E. Consequently, we expect RoCE (post-tax) to improve to 21.2% in FY20 (14.7% in FY17). We initiate coverage with buy rating and target price of INR458.

– On right side of global automotive megatrends: The global automotive industry is at the cusp of disruption, led by megatrends in the form of (a) EVs, (b) connect cars, (c) autonomous cars, (d) shared mobility, (e) stricter emission norms, and (f) platform and vendor consolidation. These trends have the potential to disrupt the automotive supply chain and challenge incumbents. We believe, with its diverse product base and market presence, MSS is set to leverage on these trends to drive its next wave of growth.

– PKC – Synergistic acquisition, opens up new businesses; Strong growth ahead: PKC would be biggest beneficiary of strong outlook (up to 25% growth estimates for CY18) for N.America Class 8 trucks as it enjoys ~62% market share of US Class 8 truck wiring harness and ~54% of revenues contribution from North America. PKC is also highly focused on worlds largest truck market of China, where it has entered recently through two JVs (3rd JV underway). These two JVs would result in market share addition of 15% in HD trucks and 5% in MD trucks. Lastly, PKC entered rolling stock business (~USD2b opportunity) in 2015. PKC has already won contract worth EUR280m from Bombardier since entering into global partnership in May 2016. It is in discussion with other OEMs to develop global supply chain for electrical system. PKC revenues are expected to grow at 15% CAGR over FY17- 20E, driving ~400bp EBITDA margin expansion to ~10.9% by FY20E.

– SMRPBV – the growth engine for MSS; SMP on track to improve margins, RoCE: SMRPBV’s (51% owned hold-co for SMP & SMR) order-book growth lends us comfort in building ~16% revenue CAGR over FY17-20 for SMRPBV. As of September 2017, order book stood at EUR15.2b (~2x in 3.5 years), excluding orders of EUR9.2b, for which execution started in the last 12 months. SMP is in a sweet spot, as revenue visibility is high and it is nearing the end of an amplified capex cycle. In the next 12-15 months, with bulk of SMP’s plants ramping up, it would derive twin benefits of operating leverage and non-recurrence of start-up costs. We estimate ~19% revenue CAGR to EUR5b by FY20 and EBITDA margin to expand 450bp to ~11% by FY20, driven by operating leverage, considering the high fixed cost nature of the business. SMR continues to be #1 PV mirror company globally and has gained share across markets through continuous innovation. We estimate 9% CAGR in SMR’s revenue to EUR2b by FY20 and EBITDA margin to expand further by 120bp to 11.8% by FY20.

– Standalone business on strong footing; Beneficiary of high growth in domestic PV segment, premiumization: The India wiring harness business is likely to grow faster than the PV industry, led by increase in content (due to ongoing premiumization). BS-6 would increase complexity of wiring harness and increase value by 20-50%. Also, it would open up the 2W segment for MSS, as 2Ws shift to electronic fuel injection systems with more sensors. MSS is already market leader in 2W wiring harness in EU. The India polymer (MATE) and elastomer (MAE) businesses are evolving from supporting to core businesses to growth drivers. Polymer business is focusing on leveraging its strengths in export markets like South Africa for global OEMs. We expect India standalone business to witness revenue CAGR of 16% and PAT CAGR of 19% over FY17-20E.

– Vision 2020 – Management confident to achieve it: In May 2015, MSS had shared its Vision 2020, targeting revenues of USD18b, RoCE of 40% and payout of 40%. Of USD18b revenues, it was expected organic revenues of USD12.4b and balance USD5.6b through M&A. M&A has been strategic tool for MSS to strengthen its relationship with customers and get more share of business. While acquisitions will play key role to attain revenue targets, management is very clear that acquisitions have to pass its 40% RoCE hurdle rate in 4-5 years.

– Valuation and view: MSS offers strong visibility of earnings growth along with improving capital efficiencies. We estimate MSS’s consolidated revenues/EBITDA/PAT to grow 22%/30%/33.5% CAGR FY17-20E. Consequently, we expect RoCE (post-tax) to improve to 21.2% in FY20 (14.7% in FY17). Although MSS is currently trading at premium to its 5 year average PE, premium valuations are justified considering sharp improvement in post-tax RoCE (~21.2% in FY20 v/s average ~13.4% in last 5 years) and possibility of stronger than expected earnings growth. The stock trades at 25.8x/20.3x FY19E/20E consol. EPS. We initiate coverage with buy rating and target price of INR458/share valuing 25x FY20 consolidated EPS (in-line with historical average).