Motherson sumi (MSS) has an enviable track record of strong performance with unwavering focus on capital allocation. MSS has evolved as a partner of choice for almost 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 a 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. It has strong organic growth opportunities in international as well as domestic market. 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 Rs 458.

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

PKC would be biggest beneficiary of strong outlook 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 the world’s 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 ($2 bn opportunity) in 2015. PKC has already won contract worth 280 m euros from Bombardier.

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 15.2 bn euros (~2x in 3.5 years), excluding orders of 9.2 bn euros , 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 5 bn euros by FY20 and Ebitda margin to expand 450bp to ~11% by FY20. 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 2 bn euros by FY20 and Ebitda margin to expand further by 120bp to 11.8% by FY20.

Standalone business on strong footing

The India wiring harness business is likely to grow faster than the PV industry, led by increase in content (due to ongoing premiumisation). 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 the 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. We expect India standalone business to witness revenue CAGR of 16% and PAT CAGR of 19% over FY17-20E.

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 the 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 Rs 458/share valuing 25x FY20 consolidated EPS (in-line with historical average).