1. Motherson Sumi Systems gets ‘Buy’ rating; Nomura says firm offers best growth visibility in auto space

Motherson Sumi Systems gets ‘Buy’ rating; Nomura says firm offers best growth visibility in auto space

MSS offers the best growth visibility in auto component space

By: | Published: October 18, 2016 6:34 AM

For the Standalone business, we expect revenue CAGR to accelerate to 15% over FY16-19F from 9% over the past two years, helped by an upswing in domestic PV volumes in India and premiumisation in cars. For Mirrors (SMR), we expect a 15% revenue CAGR over FY16-19F and Ebitda margins to improve to 12% in FY19F, from 10.5% in FY16 driven by new technology mirrors for Driver Assistance Systems (DAS). For Plastic Parts (SMP), we expect a 17% revenue CAGR over FY16-19F and Ebitda margins to improve to 9.5% in FY19F, from 6.2% in FY16. This will be driven by new orders with a better margin mix and increasing use of plastic parts for lighter-weight cars.

Overall we expect the company to deliver 16% revenue CAGR and 29% EPS CAGR over FY16-19F which is among the highest in our India Autos coverage universe. Visibility is quite high given current orderbook of EUR 13.5 bn for SMRPBV including order wins worth EUR 8.8 bn in FY16 alone.

We value MSS based on 25x P/E for domestic business and 15x P/E for overseas businesses on FY19 EPS, and discount it to arrive at our Sep-17 TP of R387. This implies consolidated P/E of 21x on average FY18-19F EPS, in line with its past three-year average.

MSS has set a revenue target of $18bn by FY20F ($12 bn organic + $6 bn inorganic). Our estimates are conservative, factoring in organic revenues of

$10.7 bn by FY20F and no acquisitions. Still our FY19F EPS estimates are 12% ahead of consensus. Given the track record, there could be further value-accretion through acquisitions.

Executive summary

In our view, Motherson Sumi Systems offers the best growth visibility in the Indian auto component space given its strong orderbook, execution capabilities and track record. Two of its businesses—wiring harness (in India) and mirrors (SMR)—remain on solid footing with strong growth visibility and industry-leading margins and ROCEs.

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Overall, we expect MSS revenues to reach $10.7 bn by FY20 through organic growth and it delivering 29% consolidated EPS CAGR over FY16-19F; and ROCEs to improve to 31% by FY19F (25% in FY16). Thus, we expect its premium valuations to sustain compared to global peers.

Strong growth visibility

Motherson Sumi has three major business segments: Domestic wiring harness; Mirrors (through the acquisition of SMR in 2009); Polymers & plastic parts (through the acquisition of SMP in 2011). The latter two are held through a holding entity, SMRP BV. The company is a leader in domestic wiring harness business with a market share of 65%. SMR has 24% market share in the global mirrors business and SMP has 18% share in the bumper segment for premium cars.

Over the past three years, SMR and SMP have been able to cross-leverage most clients across geographies. Thus, the pace of new order wins has improved significantly from EUR 3 bn in FY12/13 to EUR 8.8 bn in FY16. With an order book of EUR 13.5 bn, there is high visibility for consolidated revenues to increase from $6 bn in FY16 to $10.7 bn in FY20F

(16% revenue CAGR).

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