Detailed report

Motherson Sumi BUY Institutional Equities

CMP Rs353 A behemoth in the making Target 12m Rs450 (28%) Market cap (US$ m) 11,350 Motherson has grown into a USD7.3bn global auto parts major, helped by sound operating and financial principles. We Enterprise value (US$ m) 11,855 believe a good mix of businesses with steady growth Bloomberg MSS IN (standalone, SMR) and turnaround potential (SMP, PKC) Sector Auto would drive 28% EPS Cagr over FY17-20. Motherson is a

turnaround specialist with a highly credible history of value

14 November 2017 creation through acquisitions. Motherson’s FY20 revenue target of USD18bn entails acquisitions of USD6.2bn that 52Wk High/Low (Rs) 374/185 would result in EPS accretion and offer sizeable upside risk. Shares o/s (m) 2105 A global giant built on sound operating/financial principles: Daily volume (US$ m) 14 Starting out as a wiring harness (WH) supplier to Maruti in 1986, Dividend yield FY18ii (%) 0.7 Motherson has grown to become the WH leader in India, the leader Free float (%) 36.9 in CV WH globally, the second largest auto mirror maker globally, Shareholding pattern (%) and a leading global supplier of plastic auto components. Promoter 63.1 Motherson’s growth has been supported by sound operating/financial FII 19.7 principles: i) focus on quality, costs, ROCE; ii) increasing content per DII 6.8 car to drive growth; iii) backward integration to increase value- Others 10.4 addition, cost/competitive advantage; and iv) making acquisitions with customer buy-ins, which significantly protects the downside. Price performance (%) Mix of businesses with steady growth and turnaround 1M 3M 1Y potential to drive 28% EPS Cagr: Motherson’s standalone Motherson (0.8) 9.1 75.5 operations (WH) and its subsidiary SMR (mirrors) are well established, Absolute (US$) (1.5) 7.6 81.5 in terms of market standing, margins, and return ratios. We forecast Rel. to Sensex (2.6) 3.3 52.3 mid-to-high-teen earnings growth in standalone (led by volume and CAGR (%) 3 yrs 5 yrs value) and SMR (led by market share gain, slight margin expansion). EPS 28.0 36.1 On the other hand, SMP (plastics) and PKC (CV WH) are operating at low margins (sub-2% net margin) and return ratios. We forecast Stock movement 220bp/400bp Ebitda margin expansion for SMP/PKC by FY20. This Vol('000, LHS) Price (Rs., RHS) would result in multi-fold rise in earnings of these two subsidiaries. 40,000 400 History of value creation through acquisitions offers sizeable 30,000 300 upside risk: Motherson’s stock is up ~19x in the past 10 years. We 20,000 200 estimate ~40% of these returns have been generated through cheap 10,000 100 acquisitions and their subsequent turnaround. Motherson’s FY20 revenue 0 0 target of USD18bn implies acquisitions of USD6.2bn. Low cost of 16 15 16 16 16 16 17 16 17 17 17 17 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ borrowing (last debt raise was at 1.8%) and potential turnarounds Jul Jul Jan Jan Sep Sep Nov Nov Nov Mar Mar May May should make these acquisitions highly EPS-accretive.

Financial summary (Rs m) Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii

Revenues (Rs m) 372,163 424,934 564,744 663,081 768,746

Ebitda margins (%) 9.5 10.1 9.7 10.7 11.3

Pre‐exceptional PAT (Rs m) 12,276 16,517 19,259 26,920 35,388

Reported PAT (Rs m) 12,923 15,543 19,259 26,920 35,388

Pre‐exceptional EPS (Rs) 6.2 8.1 9.1 12.8 16.8

Growth (%) 22.5 30.6 13.3 39.8 31.5

Joseph George IIFL vs consensus (%) (13.9) (9.6) (3.7) [email protected] PER (x) 57.0 43.7 38.6 27.6 21.0 91 22 4646 4667 ROE (%) 31.8 26.1 21.6 25.6 28.0 Net debt/equity (x) 1.0 0.7 0.4 0.2 (0.1) Suraj Chheda EV/Ebitda (x) 29.5 26.0 19.6 15.1 11.8 [email protected] 91 22 4646 4656 Price/book (x) 15.9 8.7 7.8 6.5 5.4 Source: Company, IIFL Research. Price as at close of business on 13 November 2017. www.iiflcap.com

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Contents:

Company profile and investment summary ...... 3 The Motherson Philosophy ...... 5

Strong management team...... 6 Standalone: Strong growth, margins, FCF ...... 7 Global CV WH: Acquisition at ‘bottom of cycle’ ...... 18

SMRP BV (Holding company of SMR, SMP) ...... 25 SMR: Global No. 2 in rear-view mirrors ...... 29 SMP: Expect multi-fold growth in earnings ...... 35

Increasing content per car...... 40 The global car market scenario ...... 41 Will the advent of EVs impact Motherson?...... 42 FY20 targets imply upside to estimates ...... 43

Estimates and valuation ...... 46 Annexure 1 – History & timeline ...... 49 Annexure 2 – Key products ...... 50

Annexure 3 – Group Holding company...... 52 Annexure 4 – Leading Global Auto Component Suppliers...... 54 Financial summary – Standalone ...... 55

SMR & SMP Financials ...... 57 PKC Financials ...... 58 Financial summary – Consolidated ...... 59

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Europe

UK Estonia Poland Germany Portugal Hungary Finland France Serbia Russia Lithuania Spain Slovakia

USA South Korea Japan Mexico China

Thailand India

Sharjah Srilanka Plant locations Brazil Wiring Harness Australia Mirrors (SMR) South Africa Polymer (SMP)

Entity-wise sales split - Consolidated (FY17) Region-wise sales split - Consolidated (FY17) Customer-wise sales split - Consolidated (FY17)

Others Asia Others, Others, 5% Standalone Pacific, PKC 2% 24% Audi, 20% 13% 13% 12%

Porsche, India, 4% Daimler, 14% Europe, 11% SMR 55% Hyundai, 24% 4% VW, 8% Renault SMP America, Nissan, 5% Seat, 7% 46% 17% BMW, 5% Ford, 6% Maruti, 6% Key Charts Institutional Equities

Consolidated revenues have grown at 35% Cagr over the past 20 years Contribution to FY17-20 Consol. EPS growth Standalone growth to pick up 18 500 ZĞǀĞŶƵĞƐ;ZƐďŶͿ Others(EPS, Rs)Standalone SMR SMP PKC 120 tŝƌŝŶŐŚĂƌŶĞƐƐƌĞǀĞŶƵĞƐ Other products (Rs bn) 2.3 23% Cagr 15 400 100 3.4 12 300 58% Cagr 80 2.8 9 200 39% Cagr 0.6 60 1.7 22% Cagr 6 40 100 6.2 4.0 3 20 0 8% Cagr 1.7 2.1 0 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY17 FY20 FY07 FY12 FY17 FY20

Consolidated Ebit has grown at 37% Cagr over the past 20 years MSSL ahead of peers on operating metrics Backward integration to drive PKC margin 25% 35,000 Ebit (Rs mn, LHS) ROCE ex-cash % (RHS) 50% ROCE (LHS) Ebitda margin (LHS) Motherson India 30,000 38% Cagr 20% 40% 50% FCF as % of PAT (RHS) 120% 25,000 40% 100% 15% 31% Cagr 30% 80% 20,000 30% Yazaki 60% 10% India 15,000 20% 33% Cagr 20% 40% PKC

Ebitda margin Ebitda 5% Minda 10,000 10% 20% 44% Cagr 10% Furukaw 5,000 0% 0% 0% a Exide

0 0% Gabriel -5% Endurance Motherson Amara Raja Amara Minda Corp 0123456 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Bharat ForgeBharat Munj. Showa Gross fixed asset turnover

Consolidated earnings have grown at 30% Cagr over the past 20 years SMP and SMR gaining market share Strong value accretion through acquisitions

20,000 30% CY14 CY15 CY16 Acquiree Purchase Acquiree's Value Re- Contribu- PAT (Rs mn) 28% ĐŽŶƐŝĚĞƌĂƟŽŶ contribu- per turns ƟŽŶŽĨǀĂůƵĞ 27% 37% Cagr (Rs per Moth- ƟŽŶƚŽ share @ (x) ĂĐĐƌĞƟŽŶƚŽ 16,000 25% 24%24% erson share) FY19 EPS 28x Motherson's 22% 22% stock price 20% 20% SMR 18%18% 0.4 2.35 65.7 161.9 18% 12,000 22% Cagr (95%) SMP 15% 2.4 1.74 48.8 20.6 13% 8,000 50% Cagr (80%) 11% MWSI 1.9 0.30 8.5 4.5 2% 10% 10% (100%) 8% 16% Cagr S&T 4,000 0.5 0.39 11.0 20.4 3% 5% (100%) PKC 20.3 1.14 31.9 1.6 3% 0 (100%) 0% Instrument Bumpers Door Exterior FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 panels panels mirrors Institutional Equities Motherson Sumi – BUY

Company profile and investment summary

Motherson was established in 1986 as a JV between Samvardhana Motherson International Ltd. and Japan-based Sumitomo Wiring Systems, to manufacture wiring harness. Maruti Suzuki was its first customer. Over the years, Motherson diversified into other components (mainly automotive), organically and through a series of acquisitions and joint ventures. Currently, Motherson is a leader in wiring harnesses in India and in CV wiring harnesses globally, the second largest manufacturer of automotive rear-view mirrors globally, and a leading manufacturer of automotive plastic components globally.

Figure 1: Holding Structure

Source: Company, IIFL Research

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Figure 2: Region‐wise sales split ‐ Consolidated (FY17) Figure 3: Customer‐wise sales split ‐ Consolidated (FY17)

Others, Asia Others, 2% Audi, 24.0% Pacific, 19.9% 12%

India, 14% Porsche, Europe, Daimler, 4.3% 11.1% 55% Hyundai, 4.3% Renault VW, 7.8% America, Nissan, BMW, Seat, 6.7% 17% 5.2% Ford, 5.8% 5.4% Maruti, 5.5% Source: Company, IIFL Research Source: Company, IIFL Research

Figure 4: Standalone business accounts for more than half of consolidated earnings Others PKC SMP SMR Standalone 100% 5% 7% 13% 16% 9% 2% 80% 8% 30% 60% 46% 22%

40% 26% 24% 52% 20% 27% 13% 0% Revenues EBITDA PAT

Source: Company, IIFL Research; *Note: Based on FY17 Pro Forma financials (incl. PKC)

Figure 5: Investment summary Segment Description FY17 Rev FY17 FY17 Earnings drivers (USD bn) PAT ROCE margin (%) (%) Motherson ‐ leader in PV WH in India 0.95 13.0 47 ‐ pick‐up in Indian auto volumes standalone ‐ significant presence in 2W, CV WH ‐ 7‐10% annual increase in content per car ‐ highly backward integrated ‐ market‐share gain in 2W/CV post BSVI PKC + MWSI ‐ largest global CV harness maker PKC 0.95 PKC 1.4 PKC 11 ‐ up‐cycle in US CVs ‐ leader in North America and EU MWSI 0.3 MWSI 2.1 ‐ entry into China and rolling stock ‐ growing presence in China ‐ margin expansion from cost efficiencies ‐ backward integration/value addition SMR ‐ 24% global share in exterior mirrors 1.7 5.9 47 ‐ continued market‐share gain ‐ 8% global share in interior mirrors ‐ moderate margin improvement potential SMP ‐ large plastic component maker 3.3 1.8 14* ‐ significant scope to gain market‐share ‐ bumpers, dashboards, door trims ‐ margin/ROCE is below company avg. ‐ high share in German/Spanish OEMs ‐ significant margin improvement potential through cost management, better pricing in new contracts and lower start‐up costs Total 7.3 4.6 25 Source: IIFL Research; Notes: FY17 total is pro forma incl. PKC; ROCE is ex‐cash; *SMP RoCE is IIFL est., in the absence of detailed balance sheet

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The Motherson Philosophy

Starting as a wiring harness supplier to Maruti in 1986, Motherson has grown to become the WH leader in India, a leader in CV WH globally, the second largest auto mirror maker globally, and one of the world’s leading plastic auto components suppliers. Motherson’s growth has been supported by some sound operating/financial principles, some of which we highlight below.

QCDDMSES Motherson has a relentless focus on “QCDDMSES” (Quality, Cost, Design and Development, Delivery, Management, Safety, Environment and Sustainability) across all divisions and companies. The following tenets capture Motherson’s philosophy:  Seamlessly fit global quality standards of the customer  Work at leading cost levels  Provide design support for current models and new products  Deliver globally, follow customers where they need  Manage the organisation with the highest governance standards  Work to the highest standards of safety  Meet the highest environmental standards  Sustainability: Be committed to the long term

Strong focus on ROCE Motherson’s standalone The focus on ROCE brings with it efforts to minimise capital employed business and SMR are (by lowering working capital, keeping capital expenditure to the operating at an ROCE of more than 40%. minimum required, etc.) and improve margins through cost controls and operational efficiencies. Each of Motherson’s five-year plans had a ROCE target of 40%. Motherson’s standalone business and SMR are operating at an ROCE of more than 40%. Motherson’s consolidated ROCE has suffered in the initial years of the acquisitions, prior to the imminent turnaround and synergy benefits. We expect consolidated ROCE (ex-cash) to improve from 25% in FY17 to 38% in FY20, driven primarily by margin expansion in SMP and PKC.

Increasing content per car Motherson’s revenue from Motherson has focussed on increasing its content/revenue share per Maruti increased from an car in the global and domestic markets by constantly adding new equivalent of 2.5% of products. The rise in content per car has not only been through Maruti’s COGS in FY05 to 5.0% in FY17. acquisitions but also through market share gains in existing components and through cross-selling. As a case in point, Motherson’s revenue from Maruti Suzuki increased from an equivalent of 2.5% of Maruti’s COGS in FY05 to almost 5.0% of Maruti’s COGS in FY17.

Backward integration A high degree of backward integration increases value addition and margins, while enhancing the cost advantage and competitive edge over peers. In wiring harnesses, Motherson has backward-integrated key inputs such as wires, connectors, terminals, and fuse boxes. In the mirrors business, Motherson has started manufacturing key inputs such as glass, wiring harnesses, and actuators.

Making acquisitions with customer buy-ins Most of Motherson’s acquisitions have been at the behest of its customers. We understand that in many cases, customers have supported the acquisition target by way of new/continued orders and easier working capital terms. Such support substantially reduces downside risk of the acquisition/turnaround not going well.

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Strong management team

Mr. Vivek Chaand Sehgal established the Samwardhana Motherson Group in 1975. Under Mr. Sehgal’s leadership, the Group has now grown to USD9.1bn in revenues and become a global major in auto components. This was achieved through growth in existing businesses, multiple collaborations with global leaders, and audacious acquisitions of large corporations (a couple of which were larger than Motherson at the time of acquisition).

Figure 6: Key management personnel Management Designation Remarks Mr. Vivek Chaand Sehgal Chairman  Established Samvardhana Motherson Group in 1975.  Instrumental in the overall functioning and operation of the Group. Mr. Laksh Vaaman Sehgal Director  Associated with the company since 2009.  Chairman and CEO of SRMP BV; Head of Motherson Innovations. Mr. Pankaj Mital Whole‐time Director &  Associated with the company since 1990. COO  COO of Motherson; Business head of global wiring harness division. Mr. G. N. Gauba CFO & Company  Associated with the Company since 1997. Secretary  Over 35 years of experience in cost accounting and compliance. Source: Company, IIFL Research

Decentralised management Motherson and its subsidiaries/JVs operate 180 facilities across 33 countries. This would not have been possible without decentralisation of operational decision-making to the plant level. Motherson ensures a common culture and a common set of values throughout the organisation by extending them to each plant and each employee. The company establishes clear targets for each facility. This helps the company produce aggregate consolidated results in line with their long-term targets.

Turnaround specialists

Turnaround of cheap Motherson has made multiple acquisitions over the years, integrated acquisitions has contributed them into the company, and turned them around. This involves ~40% to the ~19x jump in identifying weak spots and taking a series of actions to improve stock price over the past 10 quality, rationalise costs, and optimise overall operations. This also years. entails partnering with existing employees of these organisations and extending Motherson’s operational/financial best practices to these companies. Based on our estimate, turnaround of cheap acquisitions has contributed ~40% to the ~19x jump in stock price over the past 10 years.

Succession planning Laksh Vaaman Sehgal is Mr. V C Sehgal’s son Mr. Laksh Vaaman Sehgal joined Motherson in now the Chairman and CEO 2009. Laksh took up a leadership role as the CEO of SMR during its of SMRP BV. Laksh also acquisition (2009). Laksh is now the Chairman and CEO of SMRP BV. heads Motherson Laksh has played a significant role in turning around SMR and SMP Innovations. and in nurturing their growth. Laksh also heads Motherson Innovation, which is focused on bringing new ideas and technologies to life.

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Standalone: Strong growth, margins, FCF

Motherson’s standalone business boasts of high revenue growth, strong 18-20% Ebitda margin, 40%+ ROCE and an average 90% PAT-to-FCF conversion ratio (pre-investments). Over FY12-17, despite the Indian auto industry going through a relatively weak period (PV, 2W volume Cagr of 4-5%), Motherson’s standalone revenue grew at a strong 12% Cagr, helped by increase in content per vehicle. Its margins and ROCE continued to improve during this period. The auto industry is showing signs of revival with potential double- digit growth in FY18 and beyond. This should drive acceleration in Motherson’s growth. We forecast 16% Cagr in standalone revenue/Ebitda over FY17-20.

High revenue growth, Wiring harness is the mainstay of the standalone business, with strong 18-20% Ebitda ~70% revenue contribution, of which ~10% comes from exports. margin, 40%+ ROCE and an Motherson supplies wiring harnesses to most OEMs in India, average 90% PAT-to-FCF conversion ratio spanning PV, CV, 2W, 3W and tractors. Motherson’s most important wiring harness customer in India is Maruti, the PV leader in the country by far, and its first customer. Motherson is the exclusive supplier of wiring harnesses to Hyundai (the second largest PV player in India); however, these are supplied through a 50:50 JV (Kyungshin Industrial Motherson Ltd.). Motherson exports wiring harness to 2W and material handling equipment segments in Europe, and to the CV segment in the US. It also supplies wiring harnesses to its European subsidiary (SMR) through a Sharjah-based subsidiary, as wiring harness is a key input in SMR’s mirror manufacturing operations.

The remaining 30% revenues are derived mainly from plastics, through Motherson Automotive Technologies & Engineering (MATE, into polymers), Motherson Polymer Solutions (MPS, into thermoplastic compounding) and SMIIEL (tooling). All three are divisions of Motherson. Motherson is a supplier of moulded parts, assemblies and modules, besides high precision plastic parts such as connectors, fuse boxes, and junction boxes for wiring harnesses.

Figure 7: Wiring harness accounts for ~70% of standalone revenues Break‐up of standalone revenues ‐ FY17

Wiring harness ‐ exports 10%

Wiring harness Others ‐ domestic domestic ‐ 59% mainly plastics 28%

Others exports 3%

Source: Company, IIFL Research

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Pick-up in autos to drive acceleration in Motherson’s growth Motherson’s standalone revenues grew at 27% Cagr over FY07-12, a result of strong volume growth in the Indian auto industry. Over FY07-12, PV/2W volumes in India (including exports) grew at 15%/ 13% Cagr. Starting FY12, volume growth in the industry slowed, with PVs growing at 4% and 2W at 5%. Consequently, Motherson also saw a moderation in growth vs. its own history. However, Motherson’s revenue Cagr of 12% over FY12-17 was still strong by auto industry standards.

Figure 8: Expect revenue growth to pick up after moderation in FY12‐17 (Rs bn) Wiring harness revenues Other products 120

100

80

60

40

20

0 FY07 FY12 FY17 FY20 Source: Company, IIFL Research

Figure 9: PV sales slowed in FY12‐17, set to pick up Figure 10: 2W sales slowed in FY12‐17, set to pick up (Mn units) PV volumes ‐ India (incl. exports) (Mn units) 2W volumes ‐ India (incl. exports) 6.0 30.0 25.0 27.7 5.0 5.4 4.0 20.0 19.9 3.8 3.0 15.0 3.1 15.4 2.0 10.0

1.0 1.6 5.0 8.5

0.0 0.0 FY07 FY12 FY17 FY20 FY07 FY12 FY17 FY20

Source: SIAM, IIFL Research Source: SIAM, IIFL Research

The auto industry (PV and 2W) has started showing signs of revival, growing 9-10% in 1HFY18. We see high probability of the industry ending FY18 with double-digit growth. With the impact of demonetisation and GST adoption on the economy gradually receding, we expect this revival to continue in FY19 and beyond. We forecast PV and 2W volumes to grow at 12% Cagr over FY17-20.

In addition to a pickup in domestic vehicle volumes, Motherson would also benefit from OEMs using India as an export hub. The share of vehicle exports as a proportion of total production in India has been on the rise. About 20% of PVs produced in India are currently exported, higher than 15% in FY11.

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Figure 11: OEMs are incrementally using India as a low‐cost production hub (%) Share of exports in PV production 25%

20%

15%

10%

5%

0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 Source: SIAM, IIFL Research

In case of 2Ws, about 12% of India’s production is exported. This number has been flattish in recent years, due to slowdown in the export markets. However, we see a revival in 2W export markets such as Africa, LatAm and Asia; hence, share of exports should rise.

With a 12% growth in underlying volumes, we expect Motherson’s standalone revenues to grow at 16% Cagr over FY17-20.

Increase in content per vehicle a key growth driver Motherson has historically grown faster than the auto industry volumes, due to increase in electronic/electrical content in vehicles. This is driven by i) OEMs offering new advanced features in vehicles, or higher-segment features in lower-segment vehicles; and ii) Consumers upgrading from lower-segment vehicles to higher segments.

80% of Maruti’s car Consumers’ need and willingness to pay for better features, variants have airbags as increasing focus on safety standards, and regulatory requirements standard equipment vs. are forcing OEMs to offer new advanced features in vehicles, or only 16% in 2011. higher-segment features in lower-segment vehicles. For instance, only 16% of Maruti’s car variants had airbags as standard equipment in 2011. The number has increased to 80% now. Similarly, the proportion of car variants with Anti-lock Braking System (ABS) has increased from 24% to 65% over 2011-2017.

Figure 12: Maruti offers Standard Airbags in 80% of variants Figure 13: Maruti offers Standard ABS in 65% of variants (% of Maruti car Standard Airbags (% of Maruti car Standard ABS variants with) variants with) 65% 100% 70% 80% 80% 60% 50% 60% 40%

40% 30% 24% 16% 20% 20% 10% 0% 0% 2011 2017 2011 2017 Source: Autocar, IIFL Research Source: Autocar, IIFL Research

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Higher electronic/electrical content results in higher number of wiring harnesses. To quote the company, “The wiring harness is the nervous system of the car…as vehicles become more complex and rely more on electronics, this nervous system needs to evolve with it. So the car has to have more circuits than ever before, to connect all the additional electronics and other features.”

Upgradation by consumers driving up content Although industry volumes saw moderation in growth over FY12-17, the premiumisation trend has been fairly strong. We have seen a sharp rise in volume share of Compact/Super-compact cars and UVs whereas the share of low-priced van and Mini segments has seen a fall.

Upgradation by customers Figure 14: Share of Compact, UV segments rising; low‐priced Vans and Mini falling evident from 7% Cagr rise Break‐up of domestic PV market in Maruti’s ASP and 9% Cagr rise in Hyundai’s ASP. Vans Micro + Mini Compact + Super compact SUV Mid‐size and higher 100% 10% 9% 7% 8% 7% 6% 80% 14% 21% 21% 21% 21% 25%

60% 40% 38% 41% 43% 45% 44% 40%

20% 27% 23% 24% 21% 20% 19% 0% 9% 9% 8% 7% 6% 6% FY12 FY13 FY14 FY15 FY16 FY17 Source: SIAM, IIFL Research

Upgrading by customers is evident in Maruti’s average selling price (ASP) rising at 7% Cagr over the past 5-6 years. Hyundai India has seen a 9% ASP Cagr over the past five years. Both Maruti and Hyundai have a portfolio of models covering most segments that are relevant in the Indian context. Hence, movement in their mix is a good reflection of the trend in the PV industry as a whole.

Figure 15: Maruti’s ASP increased at 7% Cagr in recent years Figure 16: Hyundai’s ASP has increased at 9% Cagr (Rs '000) Maruti ASP (LHS) YoY growth (RHS) (Rs '000) Hyundai ASP (LHS) YoY growth (RHS) 500 20% 600 12% 10% 400 15% 500 8% 400 300 10% 6% 300 200 5% 4% 200 2% 100 0% 100 0% 0 ‐5% 0 ‐2%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: Company filings, IIFL Research Source: Company filings, IIFL Research

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Kyungshin JV’s financials throw light on increasing content As highlighted earlier, Motherson supplies wiring harnesses to Hyundai India through Kyungshin Industrial Motherson Ltd., a 50:50 JV with Kyungshin Corp of Korea. This JV supplies exclusively to Hyundai India and is the sole supplier of wiring harnesses to Hyundai (100% market-share). Revenue trend of this JV is a good indicator of a pure-play wiring harness business.

Value of wiring harness per The JV’s revenue per car produced by Hyundai has grown at 10% Hyundai car has increased Cagr over the years. The increase in content per car has not been in at 10% Cagr over the past a straight line; however, it has grown at 10% Cagr over the past 3- 10 years year, 5-year and 10-year time horizons.

Figure 17: Wiring harness revenue per Hyundai car has grown at 10% Cagr (Rs) Kyungshin JV Revenue per Hyundai car (LHS) YoY growth (RHS) 20,000 35% 30% 15,000 25% 20% 10,000 15%

5,000 10% 5% 0 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: Company filings, IIFL Research

The result of increasing content is also evident from the fact that cost of wiring harness (revenues for Kyungshin JV) has increased from 3.1% of Hyundai’s revenues in FY11 to around 3.5% currently.

Figure 18: Wiring harness cost has increased from 3.1% of Hyundai revenues to 3.5% (%) Kyungshin JV wiring harness rev as % of Hyundai revs 3.6% 3.5% 3.4% 3.3% 3.2% 3.1% 3.0% 2.9% 2.8% FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: Company filings, IIFL Research

Wiring harness industry: High on growth and consolidation We estimate the domestic wiring harness industry to be around Rs90bn in FY17. The above number does not include export of wiring harnesses to OEMs/vendors located outside India. About 70-75% of the industry is accounted for by PVs, with the remaining split between 2W and CV/tractors.

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We estimate Motherson to have lost a small market share in recent years; hence, revenue growth of the industry would have been slightly higher than that of Motherson.

The domestic wiring Figure 19: PVs account for 70‐75% of the domestic wiring harness industry harness industry is Break‐up of India auto wiring harness industry primarily in PVs; 2W and CV are relat ive ly sma ll. 2W 13%

PV 72% CV + Tractors 15%

Source: IIFL Estimates

In domestic PV wiring In PV wiring harness, Motherson has around 60% market share. This harness, Motherson has is mainly driven by an estimated 70% share in Maruti and 100% around 60% market share. share in Hyundai (through Kyungshin JV). Yazaki (the global leader) is second with around 23% share. Furukawa’s India JV with Minda is the third largest with 8-10% share. In effect, the three players control more than 90% of the PV wiring harness industry.

Figure 20: Motherson has around 60% share in PV wiring harness PV Wiring harness mkt share

Motherson Yazaki through 23% Kyungshin JV 18% Minda Furukawa 8%

Others Motherson 7% standalone 44% Source: IIFL Estimates

We understand from industry sources that 2W and CV wiring harness segments are less consolidated. The key players in 2W wiring harnesses are Minda Sai (key customer – TVS, Honda), Napino Auto (key customer – Hero), Dhoot Transmission (key customer – Bajaj), in addition to Motherson (Hero, Honda, Suzuki, Yamaha). Minda Sai (key customer – Ashok Leyland) and Motherson (key customer – Tata Motors) are also present in the CV segment.

BSVI may result in higher content and specialised participation in 2W/CV wiring harness Our interactions with industry sources indicate that 2W wiring harnesses are simple structures with ‘easy-to-develop’ connectors and other sub-components. This has enabled local players to develop them at low cost.

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The advent of mandatory ABS/CBS from April 2018 and potentially BSVI emission norms in 2020 may make wiring harnesses more technologically advanced. This would result in higher value per vehicle (currently Rs500-600 per 2W) as well as need for higher industry participation by specialists such as Motherson and Yazaki.

CVs are also likely to see increase in complexity in wiring harnesses and hence content per vehicle post BSVI.

Profile of domestic competitors

Yazaki India Pvt. Ltd. The company was formed as Tata Yazaki AutoComp Ltd. in 1998 as a JV between Tata AutoComp and Yazaki Corporation. Tata AutoComp exited the JV in 2012 and Yazaki acquired Tata’s 50% stake. Yazaki India has about 23% share in PV wiring harness in India. We understand that it is not present in the 2W segment.

Yazaki India (with 23% PV Figure 21: Yazaki India Financials wiring harness share) Particulars (Rs mn) FY16 FY17 clocks much lower margins than Motherson. Revenues 12,913 14,877 Ebitda 429 1,365 Ebitda % 3.3% 9.2% Ebit (494) 384 Ebit % ‐3.8% 2.6% PBT (712) 207 PAT (712) 207 Gross fixed asset t/o 3.2 3.0 ROCE ‐14.2% 7.8% Source: Company filings, IIFL Research

Minda Furukawa Electric Pvt. Ltd Minda Furukawa is a JV between the Minda Corporation Ltd. (51%) and Furukawa of Japan (49%). The scope of the JV extends only to supplies to Japanese OEMs in the PV space namely, Maruti Suzuki, Honda, Toyota and Renault-Nissan.

Minda Furukawa made Figure 22: Minda Furukawa Financials Ebitda loss in FY17. Particulars (Rs mn) FY16 FY17 Revenue 4,382 4,995 Ebitda 35 (66) Ebitda % 0.8% ‐1.3% Ebit (81) (198) Ebit % ‐1.9% ‐4.0% PBT (277) (261) PAT (277) (261) Gross fixed asset t/o 3.1 3.3 ROCE ‐7.1% ‐29.1% Source: Company filings, IIFL Research

It is evident from the above financials that Yazaki India is in good health but is operating at much lower margins and return ratios compared to Motherson. Minda Furukawa is operating at a loss. We understand that Minda Furukawa bid for contracts with aggressive

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pricing, which turned out to be unsustainable. For instance, Minda Furukawa recently conceded the Renault Kwid business to competitors, due to it becoming unviable. It ended up incurring a significant write-off.

Wiring harness: Process efficiency and backward integration are important The key input categories for manufacturing wiring harnesses are copper wires, connectors, and terminals. Many wiring harness manufacturers are more of assemblers, sourcing sub-components from third parties. Overall profitability is determined by total value addition by the manufacturer. A high degree of backward integration into manufacturing of the above-mentioned sub-components would ensure high margins on the end-product and add to the vendor’s competitiveness.

Backward integration and Figure 23: Wiring harness: Break‐up of inputs process efficiency drives Break‐up of Raw materials vendor margins Tubes & Tapes 4% Others Terminals 30% 13%

Connectors 19% Wires (copper) 34%

Source: Yazaki India financials

The complexity comes from high number of wiring harness SKUs in a single vehicle variant and high number of variants in a single car/2W/CV model. Manufacturing of wiring harnesses is a complex, workforce-intensive process. This is evident from the fact that Motherson’s employee cost is ~13% of revenues, whereas most auto OEMs and component manufacturers spend only 4-8%.

Higher backward integration ensures higher margins for Motherson The auto component industry is extremely competitive from a pricing perspective. OEMs would like to keep cost of purchases at the minimum. Quality of parts manufactured by vendors and efficiencies through cost-controls and backward integration determine vendors’ margins.

Motherson has backward Motherson’s standalone Ebitda margin of 20% is much higher than integrated key inputs such that of competition. Yazaki clocked 9% margin in FY17 whereas as wires, connectors, Minda Furukawa made an Ebitda loss. In our view, high margin is terminals, fuse boxes, etc. attributable to high degree of backward integration and operational efficiencies rather than higher pricing. Motherson has backward integrated key inputs such as wires, connectors, terminals and fuse boxes, tube clamps and binders, grommets and seals, caps and sleeves etc.; this enables Motherson to increase its share of business. It has well-established tool rooms, which develop moulds for a wide range of applications, including wiring harness components.

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Figure 24: Motherson clocks higher Ebitda margin vs. peers Figure 25: High gross margin is an indicator of higher value addition by Motherson rather than higher pricing (%) (%) Gross margin ‐ FY17 Ebitda margin ‐ FY17 EBIT margin 47% 25% 50% 20% 20% 17% 40% 15% 36% 10% 9% 30% 21% 5% 3% 20% 0% ‐1% 10% ‐5% ‐4% ‐10% Motherson Yazaki India Minda Furukawa 0% Motherson Yazaki India Minda Furukawa

Source: IIFL Research Source: IIFL Research

High gross margin is a result of higher backward integration vs. Higher gross margin, lower competition, in our view. Motherson has a much lower asset turnover asset turnover and higher vs. competition. Backward integration increases the asset base, emplo yee costs indicate higher degree of backward without increasing turnover; this is supported by higher margins on integration the same turnover. Motherson’s higher employee cost as a percentage of revenues vs. competition (despite Motherson’s larger scale) is also indicative of higher in-house value addition.

Figure 26: Lower gross fixed asset turnover confirms the high Figure 27: So does higher employee costs backward integration (x) Gross fixed asset turnover ‐ FY17 (%) Employee cost as % of revenues ‐ FY17 4.0 16% 3.3 13.5% 3.0 11.4% 3.0 12% 11.2% 2.1 2.0 8%

1.0 4%

0.0 0% Motherson Yazaki India Minda Furukawa Motherson Yazaki India Minda Furukawa

Source: IIFL Research Source: IIFL Research

Analysis of the Kyungshin JV’s financials reveals how sourcing is integrated within the Group or JV partners.

Figure 28: Kyungshin JV ‐ FY16 financials Particulars (Rs mn) FY16 % of revs Revenues 10,977 Costs 9,389 86% Of which purchases from: ‐ Kyungshin Corp (JV partner) 4,311 39% ‐ Motherson Sumi 1,308 12% ‐ Motherson Electrical Wires Lanka 936 9% ‐ Others 2,834 26% Ebitda 1,588 14% Source: Company filings, IIFL Research

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Steady margins, high return ratios and cash flow generation Motherson’s standalone business has seen a steady improvement in margins and return ratios, despite moderation in growth compared with its own history. Low capex and working capital needs result in strong cash flows. In the past five years, FCF has averaged more than 90% of PAT. We expect these vital signs of the business to remain strong in future, especially with growth picking up.

Figure 29: Standalone margins are rock‐steady Figure 30: ROCE has been on an upward trajectory Standalone Ebitda margin (% margin) (%) Motherson standalone ROCE (ex investments) Standalone Ebit margin 60% 25% 50% 20% 40% 15% 30% 10% 20%

5% 10%

0% 0% FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source: Company, IIFL Research Source: Company, IIFL Research

Figure 31: Capex spend has been low at 4% of revs Figure 32: FCF has averaged 90% of PAT (%) Standalone capex as % of revenues (%) Standalone FCFF (pre investments) % of PAT 8% 200% 7% 6% 150% 5% 4% 100% 3% 2% 50% 1% 0% 0% FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source: Company, IIFL Research Source: Company, IIFL Research

Figure 33: Motherson superior to peers on most metrics FY15‐FY17 average Ebitda Gross fixed Revenue Capex as % FCF as % ROCE margin asset turnover Cagr of revs of PAT Motherson (S) 19.2% 2.0 11.8% 3.7% 100.3% 41.9% Exide (S) 14.1% 2.8 8.5% 5.2% 59.3% 41.7% Amara Raja (S) 16.9% 2.5 15.7% 9.3% 16.8% 37.2% Bharat Forge (S) 29.1% 0.9 4.4% 10.4% 96.7% 26.0% Minda Corp (C) 8.4% 1.9 22.5% 4.4% 99.8% 12.6% Munja Showa (S) 7.2% 3.4 ‐3.0% 0.9% 90.0% 23.8% Gabriel (S) 8.9% 2.7 5.9% 2.6% 86.2% 26.8% Endurance (S) 11.9% 1.9 7.4% 4.7% 71.0% 23.7% Avg. peer set 13.8% 2.3 8.8% 5.4% 74.2% 27.4% Source: Company filings, IIFL Research

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Pass-through of JPY, copper helps maintain stable margins Motherson has pass-through arrangements with customers for copper prices and Yen fluctuations for imports. As a result, Motherson’s margins are protected from fluctuations in these input factors. However, this does affect ASPs and reported revenue growth. Over FY13-FY17, JPY and copper price fell in most of the years. This negatively impacted Motherson’s standalone revenue growth, although margins were stable.

Figure 34: FY12‐17 revenue growth was affected by fall in JPY and copper prices but margin were maintained due to pass‐through clause Copper (INR) JPY‐INR 40%

30%

20%

10%

0%

‐10%

‐20% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18ytd Source: Bloomberg, IIFL Research

We forecast 16% revenue/Ebitda growth over FY17-20 Strong mandates for Our forecast is built on 10-12% growth in auto volumes and 5-6% successful Maruti models increase in content per vehicle. We understand that Motherson has such as Baleno, Vitara Brezza, Dzire, and Sw ift won 100% mandates for recently launched Maruti models such as Baleno and Vitara Brezza and 60-70% mandate for new models such as Ignis, all-new Dzire, and the upcoming all-new Swift. As these models are doing very well in the market place, and given that they are more feature-rich compared with Maruti’s old models, we expect both volume and content growth to remain strong for Motherson. Weak competition would support high market share.

Figure 35: Motherson Standalone – Summary of estimates FY17 FY18 FY19 FY20 Domestic revenue 53,075 64,274 75,843 89,495 Growth 21.5% 21.1% 18.0% 18.0% Export revenue 8,342 7,762 8,150 8,558 Growth 4.7% ‐7.0% 5.0% 5.0% Total rev 63,478 73,586 85,776 100,103 Growth 19.9% 15.9% 16.6% 16.7%

Ebitda 12,760 14,349 17,155 20,021 Ebitda margin 20.1% 19.5% 20.0% 20.0% Ebitda growth 23.8% 12.5% 19.6% 16.7%

PAT 8,273 9,286 11,008 13,008 PAT Growth 15.1% 12.2% 18.5% 18.2% EPS 4.05 4.41 5.23 6.18 Source: IIFL estimates; Note: Lower PAT growth in FY18 is due to fall in other income

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Global CV WH: Acquisition at ‘bottom of cycle’

Motherson gained significant scale in the global CV wiring harness (WH) business by acquiring the wiring harness business of Stoneridge (later renamed as MSSL Wiring System Inc. - MWSI) in 2014. With the recent acquisition of PKC Group in early 2017, Motherson attained global leadership in segment. The acquisition of PKC (strong in US and Europe) complements Motherson’s existing presence in the US (through MWSI), India (through Motherson standalone) and Japan (through MSSL Japan Ltd.).

Motherson acquired PKC at Motherson turned around the loss-making MWSI in no time post its the bottom of the US CV acquisition, despite headwinds from an adverse CV cycle in the US in cycle. FY16 and FY17. Motherson acquired PKC at the bottom of the US CV cycle. We believe it would be able to drive significant turnaround in PKC from the current low margin and return ratios, with good support from the US CV cycle, which has now turned favourable. In addition, we see significant scope for synergies between Motherson’s existing wiring harness businesses (incl. MWSI) and PKC. This should drive group-wide synergies in terms of sourcing, technology sharing, and cross-selling.

MSSL Wiring System Inc. (MWSI, acquired from Stoneridge) MSSL acquired the wiring harness business of Stoneridge Inc. effective August 2014, via asset purchase agreement for a consideration of US$65.7mn. Including the rise in working capital and cash balances, the total cash outlay was US$71.4mn. MWSI designs and manufactures wiring harness products for North American CV, agricultural and off-highway vehicle makers. It had revenue of ~US$300mn at the time of acquisition. It also makes instrument panels for CVs. The transaction covered six manufacturing facilities (one in US, five in Mexico).

MWSI was impacted by down-cycle in US CV in FY16/FY17 MWSI’s top line is highly dependent on North America’s CV cycle. MWSI’s revenues declined YoY in both FY16 and FY17. FY17 revenues declined 17% YoY, dragged down by a sharp 29% YoY fall in US Class-8 truck production.

Figure 36: US CV segment was weak in FY16/FY17

N.A. class‐8 truck production (LHS) YoY growth (RHS) 350,000 70% 60% 250,000 50% 40% 150,000 30% 20% 50,000 10% 0% (50,000) ‐10% ‐20% (150,000) ‐30% CY11 CY12 CY13 FY15 FY16 FY17

Source: Bloomberg, IIFL Research

The impact on MWSI’s revenues was somewhat cushioned by market share gains and higher content per vehicle.

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Motherson’s turnaround magic worked despite adverse macro Despite MWSI’s subdued top-line performance, MWSI turned profitable within a year of acquisition, with PBT margin improving sharply from -2.3% in FY15 to +2.7% in FY17. MWSI’s Mexican subsidiaries were profitable even in FY15, but the larger US parent entity turned around significantly with a profit of Rs217mn in FY17 (vs. Rs414mn loss in FY15).

MWSI PBT margin improved Figure 37: Motherson engineered a turnaround despite a weak CV cycle from -2.3% in FY15 to +2.7% in FY17 (US$ mn) MWSI sales (LHS) PBT margin (RHS) 350 4% 300 2% 250 200 0% 150 ‐2% 100 ‐4% 50 0 ‐6% CY11 CY12 CY13 FY15 FY16 FY17 Pre‐acquisition Post‐acquisition

Source: Company, IIFL Research

Motherson undertook various initiatives such as merging the three plants into two at one of the locations, cost-cutting, and bringing in process efficiencies. These led to significant improvement in operational performance and positive customer response. As a result, the company gained more traction in terms of winning new orders from existing customers as well as adding new customers.

Improved margins, turnaround in US CVs to drive earnings Since the beginning of CY17, the North America orders (especially heavy trucks) are on an upswing, and have consistently shown strong YoY growth. This is helped by a low base and improved demand environment. A better top-line outlook combined with steadily improving margin profile puts MWSI in a strong position, enabling it to contribute meaningfully to Motherson’s earnings.

Figure 38: US Class 8 truck orders seeing a turnaround Figure 39: US Truck retails have started turning positive North America net orders (LHS) YoY growth (RHS) (Truck retail sales Class 8 Class 6‐7 50,000 100% growth, 3mma) Class 4‐5 40% 40,000 50% 30% 20% 30,000 10% 0% 20,000 0% ‐10% ‐50% 10,000 ‐20% ‐30% 0 ‐100% ‐40% 15 15 15 16 16 16 17 17 17 14 15 16 15 16 17 14 15 15 15 16 16 16 17 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jun Jun Jun Jun Jun Jun Sep Sep Sep Dec Dec Dec Sep Sep Sep Dec Dec Dec Mar Mar Mar Mar Mar Mar Source: Bloomberg, IIFL Research Source: Bloomberg, IIFL Research

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PKC Group (acquired in 2017 at the bottom of US CV cycle)

Motherson acquired Finland-based PKC Group Plc (PKC), a Tier-1 wiring harnesses and component supplier to CV OEMs and locomotive segments, for a total price of EUR571mn (at 51% premium to closing stock price). PKC derives majority of its revenue from North America (54%) and European (36%) markets. The company now intends to focus on the APAC region to drive high growth.

Figure 40: PKC – Geographical revenue mix (CY16)

North America 54% South America 4% APAC 6%

Europe 36%

Source: Company, IIFL Research

PKC is dominant in North PKC has a dominant presence in the North America and European America and EU heavy-duty markets for heavy-duty trucks with a market share of 62% and truck markets with a share of 62% and 43%, 43%, respectively. In Brazil, it has a market share of 31%. Although respectively. it is a relatively small player in China (8% share), it is aiming to expand reach. In medium-duty trucks, PKC has a strong market position in North America and Europe.

Figure 41: PKC’s market share in various geographies – CY16 Heavy Duty Trucks Medium Duty Trucks 70% 62% 60%

50% 43% 40% 31% 31% 30% 24% 20% 8% 10% 2% 0% 0% North America EU Brazil China

Source: PKC 4QCY16 presentation

PKC’s transition to a global leader driven by acquisitions PKC Group grew in size over the years, driven by number of M&A deals, some of which were larger than itself (e.g. AEES in 2011). Through these acquisitions, PKC was able to expand into new geographies and segments, and widen its customer base. AEES enabled the company to gain access to the large North American and Brazilian market. The Groclin acquisition allowed PKC to enter the new rolling stock segment (one of the future growth drivers). PKC

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has also formed a number of JVs in China (identified as another key growth driver).

Figure 42: Details of acquisitions by PKC Acquiree Revenues Cost of Region Details acquisition MAN's EUR66mn EUR21.6mn Europe Entered into a long‐term supply wiring (2008) contract with MAN Group, post harness unit the acquisition. Strengthened CV (2008) presence in Western Europe. SEGU (2011) EUR43mn EUR13.7mn Central Caters to wiring harness for trucks (2011) Europe in Central Europe. AEES (2011) EUR454mn EUR109mn North & Leading North American wiring (2010) and 1.25mn South harness manufacturer for heavy PKC shares America and medium duty trucks. Groclin S.A. EUR56mn EUR50mn EV Europe Supplies electrical cabinets and (2015) (2014) wire harnesses to leading rolling stock and on/off highway commercial vehicle OEMs Jiangsu Huakai revs EUR22mn for China Huakai contributed its existing Huakai ‐ JV EUR43mn 50% stake wiring harness business, catering (2015) (2014) to Chinese trucks, construction vehicle and bus OEMs. JAC ‐ JV EUR50mn EUR7mn for China JAC contributed its existing wiring (2016) expected in 50% stake harness business, catering to light, year 1 medium and heavy duty trucks in China. Source: Company, IIFL Research

Figure 43: PKC’s 2010‐2012 revenues grew multi‐fold through acquisitions (EUR mn) Revenue (LHS) Ebitda margin (RHS) 1,000 14% 12% 800 10% 600 8%

400 6% 4% 200 2% 0 0% CY10 CY11 CY12 CY13 CY14 CY15 CY16 Source: Company, IIFL Research

Deal not cheap, unlike Motherson’s earlier acquisitions The price that Motherson paid for PKC (0.73x EV/Sales, 10.4x EV/Ebitda) looks much higher, compared to its previous acquisitions. This may be reflective of PKC’s market leadership and the general market conditions, with respect to valuations.

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Figure 44: PKC acquisition – Implied valuations (Eur mn) Cost of acquisition 571 Net Debt as on Dec'16 47 EV 618

CY16 EV / Ebitda 10.4 CY16 EV / Sales 0.73 CY16 P/E 46.7 Source: Company, IIFL Research

Figure 45: PKC Acquisition ‐ Timeline Date Transaction Details 19‐Jan‐17 Board approved a proposal to launch public tender offer to acquire outstanding shares of PKC Group 6‐Feb‐17 Voluntary tender offer launched 27‐Mar‐17 Successfully acquired 93.75% of PKC's outstanding shares; Motherson became controlling shareholder 6‐Oct‐17 Motherson gained title to remaining minority shares and consequently, PKC shares de‐listed from Helsinki stock exchange Source: Company, IIFL Research

Deal rationale – leadership in global CV wiring harness and high synergy potential with Motherson’s existing businesses Significant scope for Acquisition of PKC has enabled Motherson to attain leadership in the synergies between global CV wiring harness business. Motherson is now the clear Motherson’s existing wiring harness businesses and market leader in heavy-duty CV wiring harness in North America and PKC Group. Europe, in addition to a strong presence in Brazil and China. The acquisition of PKC (strong in US and Europe) has complemented Motherson’s existing strength in the US (through MWSI), India (through Motherson standalone) and Japan (through MSSL Japan Ltd.). We see significant scope for synergies between Motherson’s existing wiring harness businesses (incl. MWSI) and PKC Group, in terms of sourcing, technology sharing and cross-selling.

Significant tailwind from up-cycle in North American CV PKC has a significant exposure to N.A. truck market (62% market- share in heavy trucks) with 54% of revenues coming from the region. PKC’s top line remained flattish in recent years due to sharp slowdown in the North American truck market. As highlighted earlier, truck net orders have been on an upswing since the beginning of CY17. This should drive PKC’s revenue growth in upcoming quarters.

Future growth opportunities – China, Rolling stock, Aerospace PKC’s existing addressable market is ~EUR4bn, which consists of American and European CV markets and global agricultural and construction equipment industry. Management has identified new market opportunities with an addressable market size of EUR5bn. These include: i) APAC truck wiring harness market (market size EUR1bn), with focus on China; ii) Global rolling stock control panels, power packs and wiring harnesses (market size EUR2bn); and iii) global aerospace wiring harnesses business (market size EUR2bn).

1. China CV market: PKC aims to grow its presence and market share in the region through JVs. PKC set up a first JV in 2015 with Jiangsu-Huakai; the JV supplies to Foton-Daimler and a few

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other OEMs. The second JV was announced in 2016 with JAC, with a sales opportunity of Eur140mn. As China is moving to higher emission norms (Euro VI), systems are turning increasingly complex and are driving content per vehicle. With increasing complexity, in-house development by OEMs is now shifting to specialists such as PKC. These emerging trends bode well for PKC.

2. Rolling stock: PKC has two plants in Poland, which are supplying to the likes of Bombardier and Alstom in Europe. It also has a global supply agreement with Bombardier to supply wiring harnesses to various global locations (confirmed contract of ~EUR80mn). Key growth markets for the rolling stock business would be North America and India. The major advantage of this business is that order book of customers is fairly large and long term in nature.

3. Aerospace: Customers in this segment are risk-averse and typically stick to trusted and known suppliers. This makes it difficult to win orders organically. PKC is looking out for a suitable acquisition target, which will provide access to this large market.

Low Ebitda margins of 7% Solid scope for turnaround, similar to previous acquisitions and net margin of 1.4% PKC operates at low margins (Ebitda margin 7%; Net margin 1.4%) leave sig nif icant scope for and return ratios. We believe margins and return ratios offer improvement significant scope for improvement.

Figure 46: PKC Financials (EUR mn) CY15 CY16 Revenues 852 852 Ebitda 52 59 Ebitda margin 6.1% 6.9% Ebit 20 27 Ebit margin 2.4% 3.1% PBT 17 21 PAT 6 12 PAT margin 0.7% 1.4%

Gross tangible fixed asset t/o 5.3 5.3 ROCE 7.1% 8.4% Working Capital % of revs 6.3% 4.7% Source: Company, IIFL Research

Low backward integration offers room for in-sourcing and higher value addition PKC has a low backward PKC has a low backward integration, evident from its high gross integration, evident from its asset turnover at 5.3x vs. Motherson’s 2.1x. We believe there is high gross asset turnover at significant scope for in-sourcing of sub-components. PKC would 5.3x vs. Motherson’s 2.1x. benefit from Motherson standalone as well as MWSI, in this respect. As explained in the previous sections, Motherson has high backward integration in its India operations, with in-sourcing of key inputs such as wires, connectors, terminals, fuse boxes, etc. PKC may end up manufacturing the sub-components by itself or it may source them from India. Either ways, it will be a positive from a Group perspective.

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Figure 47: Increase in backward integration to push up margins 25% Motherson 20% India

15%

margin Yazaki India 10% PKC 5%

Ebitda Minda Furukawa 0%

‐5% ‐ 1.0 2.0 3.0 4.0 5.0 6.0 Gross fixed asset turnover Source: IIFL Research

Cost controls, operating efficiencies to aid margins Motherson engineered a strong turnaround in MWSI post acquisition despite an adverse CV cycle in the US. We believe similar operational improvement can be achieved in PKC, especially given the learnings and support from MWSI.

We forecast sharp improvement in PKC over FY17-20 We forecast 12% revenue Cagr over the next three years, driven primarily by a sharp turnaround in the US CV cycle. In addition, the company would also derive growth from new segments (China CV and rolling stock). We forecast Ebitda margin to improve from around 7% in CY16 to 11.0% by FY20, driven by cost controls and backward integration.

Figure 48: PKC ‐ Summary of estimates (EUR mn) CY16 FY18ii FY19ii FY20ii Revenues 852 1,009 1,110 1,221 Ebitda 59 81 100 134 Ebitda % 6.9% 8.0% 9.0% 11.0% Ebit 27 26 51 91 Ebit % 3.1% 2.6% 4.6% 7.4% PAT 12 12 31 60 PAT margin 1.4% 1.2% 2.8% 4.9% EPS contribution to Motherson (Rs) NA 0.4 1.1 2.3 Source: IIFL estimates

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SMRP BV (Holding company of SMR, SMP)

Samvardhana Motherson Automotive System Group BV (SMRP BV) is a 51% subsidiary of Motherson and is the holding company of Samvardhana Motherson Reflectec Group (SMR) and Samvardhana Motherson Peguform Group (SMP). The remaining 49% in SMRP BV is held by Samvardhana Motherson International Limited (SMIL, promoter entity). SMRP BV is the vehicle for all existing and potential businesses/acquisitions in the mirrors/plastics space.

Figure 49: SMRP BV – Holding structure

Samvardhana Motherson Sumi Systems Motherson Ltd (MSSL) International Ltd (SMIL)

51% 49%

Samvardhana Motherson Automotive Systems Group BV (SMRP BV)

98.5% 100%

SMR SMP (Global Mirrors (Global Polymer Business) Business) Source: Company, IIFL Research

Figure 50: SMR vs. SMP SMR SMP Acquisition date March 2009 November 2011 Nature of business Leading supplier of rear Polymer‐based products view mirror systems (Bumpers, door panels, etc) Global position No. 2 player in global rear‐ Leading player in the view mirrors premium segment* Global Market share Exterior rear‐view: 24% Bumpers: 20%* Door panels: 28%* Instrument panels: 11%* FY17 revenue (EUR mn) 1,575 2,986 FY17 Ebitda (EUR mn) 167 188 FY15‐17 revenue Cagr 12.8% 15.3% FY15‐17 Ebitda Cagr 17.4% 16.6% Number of plants 21 27 Number of countries 16 9 Region‐wise revenue split: Europe 42% 84% Americas 30% 7% Asia Pacific 29% 9% Client concentration Low High Source: Company, IIFL Research

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SMRP BV – Growing faster than its customers SMRP BV has a high client concentration in Europe. More than half of SMRP BV’s revenues come from premium carmakers in Germany. Its exposure to the Volkswagen (VW) Group (VW, Audi, Porsche, Seat) stood at ~48%. Daimler’s contribution stands at 13% and that of BMW is at 7%.

More than half of SMRP BV’s Figure 51: SMRP BV – Customer‐wise revenue break‐up – FY17 revenues come from premium carmakers in Germany.

Source: Company

SMRP BV’s revenues from SMRP BV’s revenues grew at 15% Cagr over the past three years. most OEMs have grown Revenues from most OEMs have grown at a rate faster than the rate faster than the OEM’s of volume growth of the OEM. This obviously implies that SMRP BV is volume growth rate gaining market share with most of these OEMs. The biggest customer win has been Daimler, with its contribution to revenues increasing from 4% in FY14 to 13% in FY17. SMRP BV received an order of EUR2.2bn from Daimler in early 2015. With execution of this order set to commence from end of FY18, we expect Daimler’s revenue contribution to SMRPBV to increase further. This will also help SMRPBV reduce customer concentration away from VW group.

Daimler’s revenue Figure 52: SMRP BV has grown faster than its customers contribution to SMRP BV is FY14 Rev FY17 Rev FY14‐17 Rev OEM volume up from 4% in FY14 to 13% contribution contribution Cagr Cagr FY14‐17 in FY17. Audi 25% 25% 15% 6% VW 21% 10% ‐10% 0% Seat 8% 8% 15% 6% Porsche 4% 5% 24% 13% BMW 9% 7% 6% 6% Hyundai/Kia 8% 8% 15% 3% Renault‐Nissan 5% 5% 15% 5% Daimler 4% 13% 70% 12% Ford 4% 5% 24% 2% Others 12% 14% 21% Total 100% 100% 15% 3% Source: Company filings, IIFL Research

SMRP BV has seen strong flow of orders from existing/new customers. At end of 1HFY18, SMRP BV had orders worth EUR15bn, for which it is yet to start production. These do not include orders of EUR9-10bn for which it commenced deliveries in the past 3 years but would continue for another 4-5 years.

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Figure 53: SMRPBV – New Order wins (EUR bn) New order wins (€ bn) Outstanding order book (€ bn) 16 14 12 10 8 6 4 2 0 FY14 FY15 FY16 FY17 1HFY18 Source: Company

Increasing focus on North America; China to follow SMRPBV has predominantly been Europe-focused. However, it intends to increase its presence in the US and China. Revenue from North America has grown at 36% Cagr over the past two years and it now accounts for 13% of revenues. Share of North America would increase further with new plants in Mexico and the US.

Figure 54: Revenue share from North America has been increasing FY15 Rev contribution FY17 Rev contribution FY15‐17 Rev Cagr Europe 70% 69% 13% America (ex‐Brazil) 9% 13% 36% Brazil 3% 2% 0% APAC (ex‐China) 10% 9% 6% China 8% 8% 11% Total 100% 100% 14% Source: Company, IIFL Research

About 40% of aggregate About 40% of aggregate capex over the past three years has been in capex over the past three Mexico and US. Given SMRP BV’s existing high exposure to Europe, it years has been in Mexico incurs bulk of maintenance capex in Europe. As a proportion of pure and US. expansion capex, North America’s share is much higher.

Figure 55: SMRP BV – Region‐wise capex

Others, 12% USA, 19% China, 4%

Spain, 6%

Hungary, 14%

Mexico, 20%

Germany, 25%

Source: Company

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High focus on capital employed, return ratios Motherson’s focus on ROCE extends to SMRP BV as well. Over the past four years, working capital (WC) has been brought down from 28 to 10 days. On EUR4.6bn revenues, an 18-day reduction in WC implies EUR200mn+ of lower capital employed. ROCE has been around 25%. It has not improved in recent years, as 20% of capital employed is in plants under construction. As these plants start contributing to profits, we expect ROCE to improve over FY18-20.

Figure 56: SMRP BV – Working capital management Total Receivables (LHS) Inventory (LHS) Payables (LHS) WC days (RHS) 100 30 28 80 25 60 21 40 20 55 51 50 50 58 20 15 0 19 18 17 15 15 10 ‐20 813 10 ‐46 ‐48 ‐40 ‐52 ‐59 ‐63 5 ‐60 ‐80 0 FY13 FY14 FY15 FY16 FY17

Source: Company, , IIFL Research

Figure 57: SMRP BV – ROCE RoCE (ex‐cash) 40% 35% 30% 25% 20% 15% 10% 5% 0% *FY14 FY15 FY16 FY17 FY18ii FY19ii FY20ii Source: Company; IIFL estimates

Figure 58:SMRP BV – Debt position Gross debt (€ mn) Cash (€ mn) Net debt (€ mn) Net debt/Ebitda 1,200 2.0 1022 1.8 1,000 927 1.6 1.4 800 694 222 506 1.2 585 600 193 1.0 184 0.8 400 267 705 0.6 0.4 200 86 401 502 516 181 0.2 0 0.0 FY14 FY15 FY16 FY17 1HFY18

Source: Company, IIFL Research

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SMR: Global No. 2 in rear-view mirrors

SMR is the global No. 2 in rear-view mirrors with market share of 24% in exterior mirrors and 8% in interior mirrors of PVs. Motherson acquired SMR in March 2009 out of bankruptcy, when it had revenues of EUR600-700mn and low-to-mid-single-digit Ebitda margin. Over the years, SMR has scaled up to EUR1.6bn revenues and 10%+ Ebitda margin. We expect SMR to grow earnings at 19% Cagr over FY17-20, driven by continued market share gains and slight margin expansion.

Motherson engineered a Figure 59: SMR – Growth in revenues and margin since acquisition significant turnaround in SMR since its acquisition. Revenues (€ mn) (LHS) Ebitda margin (RHS) 1,600 12% 1,400 10% 1,200 8% 1,000 800 6% 600 4% 400 2% 200 0 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: Company, IIFL Research

Well-diversified across customers, geographies SMR is well diversified across customers and regions. We do not have FY17 break-up of SMR’s customer-wise revenues. However, a look at the last available break-up (FY13) reveals that the largest customer of SMR is Hyundai, contributing 17% to revenues. SMR’s exposure to the VW Group was relatively low at 14%, compared with more than 50% for SMP.

Figure 60: SMR – FY13 revenue break‐down reveals low customer concentration

Others, 13% Hyundai, 17% Daimler, 4%

Tata/JLR, 5% VW Group, Volvo/Geely, 14% 6% BMW, 7% Renault/Nissan , 9% Kia Motors, 7% Ford Group, GM Group, 9% 9%

Source: Company, IIFL Research

FY17 region-wise break-down reveals that revenues are fairly distributed across regions, with Europe at around 40% and Asia-Pac and Americas at about 30% each.

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Figure 61: SMR – Revenue fairly distributed across regions – FY17

Asia Pacific, 29%

Europe, 42%

Americas, 30%

Source: Company, IIFL Research

SMR has 38% market share in Europe and 22-27% share in the Americas and Asia-Pac (ex-China). Market share in China is relatively low at 11%.

Figure 62: SMR – Strong 20‐40% market share across regions, except China Exterior mirrors ‐ market share by regions 40%

30%

20% 38% 27% 26% 10% 22% 11% 0% North America South America Europe China APAC

Source: Company

Rear-view mirrors a fairly consolidated industry We estimate the global automotive rear-view mirror industry to be about USD10bn in size. Exterior mirrors form the largest piece with about 60% revenue contribution.

Figure 63: Automotive rear‐view mirrors ‐ USD10bn industry

Interior mirrors 18% Exterior mirrors 63% Auto‐dimming mirrors 19%

Source: IIFL estimates

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We estimate the top three players, namely Magna, SMR, and Gentex to account for about 60% of industry revenues. The 31% market share in “Others” is also fairly consolidated, with mid-single-digit market share for Ichikoh, Murakami, and Tokai Rika.

Mirrors is a consolidated Magna and SMR are the largest in exterior mirrors with a combined industry, with Magna, SMR, market share of 45-50%. Magna is the market leader in interior and Gentex accounting for mirrors. SMR’s presence in interior mirrors is relatively small with about 60% of revenues. about 8% share. Gentex is the leader by far in auto-dimming mirrors, with about 92% market share.

Figure 64: Rear‐view mirrors market value share – Fairly consolidated

Others SMR 31% 17%

Ficosa 7% Magna Gentex 28% 17%

Source: IIFL estimates

SMR gaining market share, growing faster than peers SMR has been gaining share in the exterior mirrors market, improving its global share from 22% in CY14 to 24% in CY16. As a result, SMR has been growing faster than peers. SMR’s revenues have grown at 13% Cagr over FY15-17, which is the highest among peers.

Figure 65: SMR – Gaining market share in exterior mirrors Exterior mirrors global market share 25% 24% 24% 22% 22% 20%

15%

10% CY13 CY14 CY15 CY16 Source: Company

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Figure 66: SMR – Growing faster than peers (%) 2‐year Revenue Cagr 14% 12% 10% 8% 6% 4% 2% 0% SMR Gentex Ichikoh Ficosa Magna Murakami Source: Company filings, IIFL Research

SMR’s growth has been supported by capacity expansion at many of its plants. In the past three years (FY16-18), SMR has set up brownfield plants or expanded capacities at eight of its 21 plants.

Figure 67: SMR – Plant openings/expansions Location Commissioning Type Marysville, USA Q4FY16 Brownfield plant Ningbo, China Q4FY16 Expansion Ochang, South Korea Q4FY16 Expansion Noida, India Q1FY17 Brownfield plant San Luis Potosi, Mexico Q4FY17 Expansion / Paint Shop Cheongju city, South Korea Q3FY18 Expansion / New building Yancheng, China Q3FY18 Brownfield Expansion Mosonszolnok, Hungary Q4FY18 Expansion / New Paint Shop Source: Company, IIFL Research

New technology to drive up ASPs At the turn of the century, rear-view mirrors were only a combination of plastic housing and glass. Current rear-view mirrors include several new functions such as power folding, blinkers, electro-chromatic glass, and camera systems.

SMR’s product portfolio covers a wide spectrum of vehicle and price segments, from low-cost mirrors to highly complex premium mirrors incorporating a variety of electronic features. The complex systems include Blind Spot Detection Systems (sophisticated camera-based system to recognize vehicles in drivers’ blind spots) and Telescopic Trailer Tow (mirrors with power-telescopic functions, designed to aid visibility when towing wide loads).

Digital Mirrors are a combination of high resolution cameras, displays inside the car and image processing electronics. These are likely to enter series production in 2018. These new generation rear vision systems may soon replace conventional mirrors. SMR is at the forefront of this significant disruptive change in rear vision systems. With numerous cooperation projects with carmakers in America, Europe, and Asia, SMR plans to soon introduce digital mirrors to the market as one of the first globally.

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Figure 68: Camera‐based digital mirrors are expected to enter into series production in 2018

Source: SMR

Margin has scope for further expansion SMR’s Ebitda margin has improved from mid-single in 2010 to more than 10% in FY17. We expect Ebitda margin to improve from 10.6% in FY17 to 11.7% by FY20. We expect this to be driven by shift to higher value mirrors/vision systems, continued backward integration, and margin improvement in low-margin operations such as China, the UK, and Hungary, which are pushing down overall company margins.

Backward integration bringing in cost advantage Key inputs for SMR are glass actuators, power folds, glass, electro- chromatic glass (“EC glass”), wiring harnesses, electronics, electrical parts, die casting, plastic parts and resins. SMR identified glass, die- cast products, wiring harnesses, and actuators as high potential items for backward integration, which would give it cost advantage and competitive edge over peers.

SMR has backward Figure 69: Backward integration by SMR integrated glass, wiring Date Input Vertical integration harnesses, and actuators FY11 Wiring Started sourcing wiring harness for mirrors from MSSL Mideast harness (FZE), Sharjah. FY12 Glass Set up a dedicated glass plant at Thailand for in‐house requirement. FY12 Glass Vertical integration of glass manufacturing at SMR’s Mexico plant FY12 Actuators Vertical integration for actuator manufacturing at Korea plant FY16 Actuators Expanded actuator manufacturing in France for in house requirement. Source: Company, IIFL Research

Scope for margin improvement in China, the UK, and Hungary Analysis of country-wise revenues and profitability reveals that the US, Mexico, Australia and India are operating at mid-to-high-teen Ebitda margin. However, subsidiaries in China, the UK and Hungary are sub-par from a margin perspective. Given Motherson’s focused approach on reducing costs and improving operating efficiencies, we are optimistic about improvement in profitability of these regions over time.

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Figure 70: Country‐wise revenues and profitability Country Revenues Ebitda PBT PBT PAT PAT (Eur mn) margin (Eur mn) margin (Eur mn) margin South Korea 411 8% 20 4.9% 19 4.6% Hungary 403 7% 13 3.3% 12 3.0% USA 381 19% 64 16.9% 43 11.2% UK 156 6% 5 3.1% 5 3.2% China 103 3% ‐1 ‐1.2% ‐2 ‐2.0% India 87 15% 10 11.7% 7 8.0% Australia 82 16% 10 12.8% 7 8.9% Mexico 77 16% 9 11.4% 6 7.8% Others 167 3 1.7% 0 0.0% China JV 183 14% 21 11.2% 18 9.6% Total 1575 10.6% 133 8.4% 93 5.9% Source: Company, IIFL Research; Note: The sum of the countries would not add up to Total due to inter‐company eliminations; Ebitda margin is IIFL est.

Figure 71: SMR vs. peers – Ebitda margin SMR Murakami Ichikoh 16% 14% 12% 10% 8% 6% 4% 2% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: Company filings; IIFL Research

We forecast 17% earnings Cagr over FY17-20 We forecast SMR’s revenues to grow at 10% Cagr over FY17-20. This would be driven by execution of new orders received in previous years, supported by upcoming plants expansions in Korea, China, and Hungary in 2HFY18. We expect Ebitda margin to improve from 10.6% in FY17 to 11.7% by FY20. While we expect SMR’s earnings in EUR to grow at 17%, its contribution to Motherson’s consolidated EPS would grow at 19% due to EUR appreciation vs. INR.

Figure 72: SMR ‐ Summary of estimates (in EUR mn) FY17 FY18ii FY19ii FY20ii Revenues 1,575 1,694 1,920 2,123 Growth % 12.8% 7.5% 13.3% 10.6% Ebitda 167 192 223 249 Ebitda margin % 10.6% 11.3% 11.6% 11.7% PAT 93 110 131 147 PAT margin 5.9% 6.5% 6.8% 6.9% Consol. EPS Contribution (in Rs) 1.7 2.0 2.5 2.8 Source: IIFL estimates

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SMP: Expect multi-fold growth in earnings

SMRP BV acquired SMP (former Peguform Group) in November 2011. SMP’s product portfolio is polymer-based and includes complete modules (door panels, instrument panels, bumpers) and other plastic components such as centre consoles, decorative interior trims, and plastic body parts. SMP focuses on the premium segment, with a global market share of 28%, 11% and 20%, in door panels, instrument panels and bumpers respectively. SMP’s facilities are located in close proximity to OEM plants, allowing minimal lead times and transport costs and efficient inventory management through “just-in-time” deliveries.

SMP has seen some From FY13 to FY17, SMP’s revenues grew from EUR1.8bn to almost turnaround, but there is a EUR3.0bn, whereas its margin has improved from 3.8% to 6.3%. lo ng w ay to go Yet, SMP operates at a thin net margin of 1.8%. SMP’s Ebitda margin is much lower than peers. We believe there is significant scope for margin expansion as start-up costs of upcoming plants diminish, non-profitable regions turn around, and cost rationalisation/operational efficiencies flow through. We expect SMP’s EUR earnings to grow at 71% Cagr over FY17-20, driven primarily by margin expansion, in addition to continued market share gains.

Figure 73: SMP – Growth and margin expansion since acquisition Revenues (€ mn) (LHS) Ebitda margin (RHS) 3,500 7% 3,000 6% 2,500 5% 2,000 4% 1,500 3% 1,000 2% 500 1% 0 0% FY13 FY14 FY15 FY16 FY17

Source: Company, IIFL Research

SMP’s customer and geographical concentration is high

Figure 74: SMP – Revenues split – 2010 Figure 75: SMP – Revenue split – FY17

Source: Company, IIFL Research Source: Company, IIFL Research

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Unlike SMR, SMP has high revenue concentration in customers as well geographies. In 2010, the top three customers (all part of VW Group) accounted for 66% of SMP’s revenues. The client concentration has not changed significantly over the years. In FY17, the top three clients accounted for 65% of revenues. The only change is the entry of Daimler into the list of Top 3 customers.

SMP is dependent on Geographically too, SMP is dependent on Europe, which contributes Europe, which contributes 84% to revenue. SMP recently set up a new plant in Mexico and is 84% to revenue also setting up a new plant in the US. With these initiatives, we expect Americas’ share of revenues to increase from current levels.

Figure 76: SMP revenues concentrated in Europe

Americas, 7% Europe, 84%

Asia Pacific, 9%

Source: Company, IIFL Research

Polymer components industry is fragmented Plastic auto components The automotive polymer/plastic components industry has a revenue industry has a revenue size size of more than USD100bn. Unlike mirrors, this industry is highly of more than USD100bn and fragmented. For example, in bumpers, the top three vendors account is highly fragmented for about 25% market share. The remaining vendors have less than 3% market share each. In front-end modules, the top four players have about 48% share. The remaining vendors have less than 5% market share each. A significant part of industry is in-house with the OEM. There is an increasing trend of these being outsourced, with OEMs focusing their resources on final assembly.

Figure 77: Market shares of bumpers’ and front‐end modules illustrate the fragmented nature of the industry Bumpers ‐ Global market share 2016 Front‐end modules ‐ market share 2016 In‐house Others In‐house Others by OEM (<3% each) by OEM (<5% each) 24% 41% 34% 27%

Magna HBPO 6% (Plastic JiQiang Omnium Plastic JV) SMP 7% Magna Omnium Mobis 18% 3% 15% 7% 18% Source: Plastic Omnium ppt

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SMP focuses primarily on the premium segment. Within the premium segment, SMP has a significant presence in product categories in Europe, China, and South America.

Figure 78: SMP’s market‐position in key segments (Mkt share) Ranking as Main Supplier Premium segment Market share 70% 1 60% 50% 40% 2 2 30% 3 58% 20% 3 33% 31% 10% 17% 23% 0% Instrument Bumpers ‐ Door Panels ‐ Bumpers ‐ Door Panels ‐ Panels ‐ Europe Europe South America China Europe Source: Company, IIFL Research

SMP is gaining market-share in the premium segment SMP has consistently gained market share in the premium segment. SMP’s market share in bumpers has increased from 18% in 2014 to 20% in 2016. Market shares in instrument panels and door panels increased from 8% to 11% and from 22% to 28%, respectively.

Figure 79: Market share in premium segment has been improving CY14 CY15 CY16 30% 27% 28% 25% 22% 20% 20% 18% 18% 15% 10% 11% 10% 8% 5%

0% Instrument panels Bumpers Door panels Source: Company

SMP has been growing SMP has been growing faster than its peers over the past two years. faster than peers but This has been partly helped by the acquisition of Scherer and Trier in operates at lower margins February 2015. However, SMP operates at lower margins compared with peers.

Figure 80: SMP vs. Peers Key segments Revenues 2 Year Rev Ebitda Ebit (EUR mn) Cagr margin margin SMP Interiors and exteriors 2,986 15.3% 6.3% 3.8% Plastic Omnium Exteriors 5,488 12.0% 14.0% 9.2% Faurecia Interiors 4,811 1.1% 8.2% 5.2% Magna Exteriors and Doors 6,940 ‐1.0% NA NA Source: Company, IIFL Research; Note: Revenues and margins are for CY16/FY17

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Deliveries for EUR2.2bn Daimler order to start in 4QFY18 SMP has four new plants/expansions coming up over the next 12 months. Of these, the ones in Kecskemet (Hungary) and Tuscaloosa (US) would cater to the EUR2.2bn order from Daimler. We estimate commencement of deliveries against this order to result in EUR350- 400mn of annual revenues for SMP. This is about 10% of SMP’s current revenues. SMP is constructing a green-field plant at Túrkeve in Hungary. This plant will manufacture plastic components for the Daimler and Audi business of MATE division.

Figure 81: SMP – New plant openings Deliveries for the EUR2.2bn Daimler order to commence Location Commissioning Type Products in 4QFY18; will accelerate Boetzingen, Germany Q3FY16 Brownfield Door Panels growth for SMP plant Polinya, Spain Q3FY16 New Painting Bumpers Facility Zitlaltepec, Mexico Q1FY17 Greenfield Bumpers, Rocker panels, Plant Wheel covers, Roof spoilers Beijing, China Q1FY17 Expansion Door Panels Kecskemet, Hungary Q4FY18 Greenfield Bumpers & Door Panels Plant Tuscaloosa, USA Q1FY19 Greenfield Bumpers, Door panels, other Plant exterior parts Túrkeve, Hungary Q1FY19 Greenfield Polymer products Plant Neustadt, Germany Q3FY19 Expansion Dashboards, Bumpers, Door panels Source: Company, IIFL Research

Margins have significant room for improvement SMP’s FY17 Ebitda margin at 6.3% is significantly lower than that of peers. We forecast Ebitda margin to improve to 8.5% by FY20. This would be driven by lower start-up costs at the upcoming plants, turnaround of non-profitable regions such as Brazil, and flow-through of cost rationalisation/operational efficiencies.

Figure 82: SMP is operating at lower margins compared to peers SMP Faurecia ‐ Interior Systems Plastic Omnium ‐ Exteriors 16% 14% 12% 10% 8% 6% 4% 2% 0% CY12 CY13 CY14 CY15 CY16 Source: Company filings, IIFL Research

Start-up costs to come down as plants become operational SMP incurred start-up costs of EUR28mn in FY17 for new plants and facilities under construction. For instance, SMP-US incurred a PBT loss of EUR17mn in FY17 (See Figure 83 below), without any

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revenues, as commissioning of the Tuscaloosa plant (Daimler order) is pending. These start-up costs impacted Ebitda margin by almost 100bp in FY17 and 150bp in 1HFY18. Start-up costs include project Lower start-up costs can management cost, new products trials, travelling, and training cost add 120-150bp margin in FY19 incurred for setting up of manufacturing processes as per customer requirements, which are expensed in the P&L following a conservative accounting practice. This will normalize once the matching revenues from the new plants will start.

Turnaround in Brazil and Mexico to aid margins Analysis of country-wise revenues/profits reveals that SMP is incurring losses in Brazil. SMP Brazil has seen PAT losses for 3-4 years due to weakness in the auto market in Brazil. Car sales in Brazil seem to have bottomed out. A turnaround in Brazil can boost SMP’s overall margins by 40-50bp. SMP Mexico made a loss in FY17 as the newly opened plant had not scaled up operations. As the plant ramps up, we expect Mexico to turn profitable.

Figure 83: Country‐wise revenues and profitability (EUR mn) Country Revenues Est. Ebitda PBT PBT PAT PAT margin margin margin Germany 1,664 6% 75 4.5% 71 4.2% Spain 847 7% 42 5.0% 26 3.1% China 237 16% 28 12.0% 23 9.9% Brazil 90 ‐10% ‐10 ‐11.2% ‐10 ‐11.2% Mexico 87 12% ‐2 ‐2.9% ‐1 ‐1.5% Portugal 72 3% 2 2.9% 2 2.6% Slovakia 25 ‐3% ‐1 ‐4.7% ‐1 ‐4.7% US 0 NM ‐17 ‐10 Total 2,986 6.3% 81 2.7% 55 1.8% Source: Company, IIFL Research; Note: The sum of the countries would not add up to total SMP due to inter‐company eliminations; Ebitda margin is IIFL est.

We forecast 71% earnings Cagr over FY17-20 We forecast SMP’s revenues to grow at 14-15% Cagr over FY17-20. SMP operates at a thin A key contributor to this growth would be the EUR2.2bn order from 1.8% net margin. A 220bp Ebitda margin expansion Daimler. We expect Ebitda margin to improve from 6.3% in FY17 to can push up earnings multi- 8.5% by FY20. Of this, 120-150bp of Ebitda margin would be derived fold. from lower start-up costs, once SMP’s new plants in US and Hungary become operational. As highlighted earlier, SMP operates at a thin net margin of 1.8%. Hence, a 220bp Ebitda margin expansion over the next three years would have a magnified impact on earnings.

Figure 84: SMP: Summary of estimates (in EUR mn) FY17 FY18ii FY19ii FY20ii Revenues 2,986 3,430 3,911 4,497 Growth % 14.1% 14.9% 14.0% 15.0% Ebitda 188 217 301 384 Ebitda margin % 6.3% 6.3% 7.7% 8.5% Ebitda (pre start‐up costs) 216 267 316 384 Ebitda margin % (pre start‐up costs) 7.2% 7.8% 8.1% 8.5% PAT 35 56 115 174 PAT margin 1.8% 2.3% 3.6% 4.5% Consol. EPS Contribution (in Rs) 0.6 1.0 2.2 3.4 Source: IIFL estimates

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Increasing content per car

Motherson has been gaining Motherson has focussed on increasing its content/revenue share per share with most OEMs; VW car in the global and domestic markets by constantly adding new is an exception products. Starting out as a wiring harnesses maker in India, it has become a leading player in CV wiring harnesses, automotive mirrors, and plastic components globally. The rise in content per car has not only been through acquisitions but also through increase in market share in existing components as well as through cross-selling.

Figure 85: Motherson’s revenue share in Maruti Figure 86: Motherson’s revenue share in Audi (in Rs) MSSL revs per car produced by Maruti (LHS) (in Rs) MSSL revs per car produced by Audi (LHS) MSSL's Maruti revs as % of Maruti's COGS MSSL's Audi revs as % of Audi's revenues 16,000 5.5% 50,000 3.0% 14,000 5.0% 40,000 12,000 4.5% 2.5% 10,000 4.0% 30,000 8,000 2.0% 3.5% 6,000 20,000 3.0% 1.5% 4,000 10,000 2,000 2.5% 0 2.0% 0 1.0% FY05 FY09 FY13 FY17 FY13 FY14 FY15 FY16 FY17

Source: Company filings, IIFL Research Source: Company filings, IIFL Research

Figure 87: Motherson’s revenue share in Daimler Figure 88: Motherson’s revenue share in Porsche (in Rs) MSSL revs per car produced by Daimler (LHS) (in Rs) MSSL revs per car produced by Porsche (LHS) MSSL's Daimler revs as % of Daimler's revenues MSSL's Porsche revs as % of Porsche's revenues 20,000 0.8% 100,000 1.2% 0.7% 1.0% 15,000 0.6% 80,000 0.8% 0.5% 60,000 10,000 0.4% 0.6% 0.3% 40,000 0.4% 5,000 0.2% 20,000 0.1% 0.2% 0 0.0% 0 0.0% FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source: Company filings, IIFL Research Source: Company filings, IIFL Research

Figure 89: Motherson’s revenue share in BMW Figure 90: Motherson’s revenue share in VW (in Rs) MSSL revs per car produced by BMW (LHS) (in Rs) MSSL revs per car produced by VW (LHS) MSSL's BMW revs as % of BMW's revenues MSSL's VW revs as % of VW's revenues 12,000 0.5% 12,000 1.0% 10,000 0.4% 10,000 0.8% 8,000 8,000 0.3% 0.6% 6,000 6,000 0.2% 0.4% 4,000 4,000 2,000 0.1% 2,000 0.2% 0 0.0% 0 0.0% FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source: Company filings, IIFL Research Source: Company filings, IIFL Research

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The global car market scenario

Global car sales have been in an up-cycle post the global financial crisis. This benefited most global auto components companies including Motherson. In 2017, car sales in US have seen a slight decline YTD while growth in China materially slowed down. Europe is chugging along at low single digit growth.

From Motherson’s perspective, exposure to the global car market comes from SMRP BV (mirrors and plastics). The PV wiring harness business in the standalone entity is largely restricted to India and the global wiring harness business is focused on CVs.

SMRP BV derives almost 70% of its revenues from Europe, where car sales are growing at low single digit. SMRP BV’s exposure to US and China is fairly small at this point. Growth in these geographies would be driven more by market-share gains, than by the underlying industry growth. Net-net, we would be worried for SMRP BV, if we see a material slowdown in European car sales.

Figure 91: SMRP BV – FY17 revenue split Figure 92: European car market has been stable Others, (mn) Europe car sales YoY growth (RHS) 15% 20 16% 18 12% China, 8% 16 8% 14 4% 12 0% 10 ‐4% Europe, 8 ‐8% 69% 6 ‐12% US, 9% 4 ‐16% 2 ‐20% 0 ‐24% CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17* Source: Company, IIFL Research Source: Bloomberg, IIFL Research; Note: CY17 is YTD

Figure 93: US car market seeing declines from cyclical peak Figure 94: China growth has been slow in 2017 (millions) US car sales (LHS) (mn) China car sales YoY growth (RHS) 20 16% 30 30% 18 12% 16 8% 25 25% 14 4% 20 20% 12 0% 10 ‐4% 15 15% 8 ‐8% 6 ‐12% 10 10% 4 ‐16% 5 5% 2 ‐20% 0 ‐24% 0 0% CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17* CY17* Source: Bloomberg, IIFL Research; Note: CY17 is YTD Source: Bloomberg, IIFL Research; Note: CY17 is YTD

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Will the advent of EVs impact Motherson?

Motherson would not be negatively impacted by the advent of electric vehicle (EVs). Motherson is not involved in the manufacture of engines or engine components; these would be most impacted by EVs. EVs deploy wiring harness, mirrors and plastic components such as dashboards, bumpers and door trims. In fact, Motherson’s FY17 annual report lists Tesla as a customer.

Our research tells that us that the current EVs and hybrids need more wiring harnesses than traditional ICU engines.

Figure 95: Wiring harness is higher in EVs than in ICUs (lbs) Avg. weight of wiring harness 200

150

100

50

0 Average ICU car Hybrid cars Electric cars Source: Visualcapitalist

SMR has developed and is supplying camera-based detection systems to almost all major OEMs. These may be become more relevant in the context of driver-less vehicles.

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FY20 targets imply upside to estimates

MSSL’s management has a strong history of setting medium-to-long term targets and achieving those targets. At the end of FY15, Motherson set a 2020 revenue target of USD18bn, when its FY15 revenue was USD5.7bn. By the end of FY17, Motherson has reached USD7.3bn revenues, including its recent acquisition PKC (on pro forma basis).

Figure 96: Motherson’s Five‐year Vision Statements – Targets and achievements Target set Actual performance Solid history of setting and meeting 5-year targets Vision set in 2000 for 2005 Achieved in FY05 Revenue Target of Rs10bn Achieved revenue of Rs10.3bn 30%+ revenues from global customers 29% of sales from outside India Revenues from single customers < 25% Largest customer was 27% of revenues ROCE of 40% ROCE of 39% Dividend payout of 40% Dividend payout of 43% Vision set in 2005 for 2010 Achieved in FY10 Revenue Target of USD1bn Achieved revenue of USD 1.5bn 60% sales from global customers 70% of sales from outside India Revenues from single customers < 20% Largest customer was 15% of revenues ROCE of 40% Standalone ROCE: 37%; Consol:22% Dividend payout of 40% of consol. Profits Dividend payout of 32% of consol. profits Vision set in 2010 for 2015 Achieved in FY15 Revenue Target of USD5bn Achieved revenue of USD 5.7bn Achieve 70% of sales from global customers 85% of sales from outside India Global presence in 26‐27 countries Global presence in 25 countries Standalone ROCE: 41%, Consol.: 26% and ROCE of 40% 36% (ex‐new acquisitions post FY10) Dividend payout of 40% of consol. Profit Dividend payout of 37% of consol. profits Vision set in 2015 for 2020 FY17 revenue USD7.3bn, incl. PKC Revenue Target of USD18bn FY20 rev USD11.8bn (IIFL est., organic) 3Cx15 (no country, customer or component to be more than 15% of revenues) FY17 ROCE of 25% ROCE of 40% FY20 ROCE 38% (IIFL est., organic) Dividend payout of 40% of consol. Profit Source: Company, IIFL Research

Acquisitions are becoming more expensive Motherson acquired PKC at Motherson acquired SMR out of bankruptcy in March 2009, in the 0.73x EV/Sales, higher than middle of the global financial crisis. SMR was acquired at EV/Sales of previous acquisitions at 0.04. Motherson acquired SMP in November 2011 at EV/Sales of sub-0.25x 0.25. Similarly, Motherson acquired the wiring harness business of Stoneridge in 2014 and the assets of Scherer & Trier in 2015 at EV/Sales of 0.24x and 0.15x respectively. However, Motherson’s most recent acquisition in early 2017 (PKC) came in at EV/Sales of 0.73x. This may be reflective of the general up-move in equity valuations and paucity of distressed auto components makers, given that global auto sales were in an up-cycle in recent years (unlike during 2009-2011).

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Figure 97: Motherson’s history of key acquisitions

Sr Acquired Year Purchase price/Acq. Revenues EV/Sales Ebitda EV/Ebitda Stake No company/entity Cost 1 SMR (Visiocorp Mar'2009 EUR 25.0mn cash + EUR 620mn 0.04 EUR 35mn 0.76 SMVSL ‐ 95% owned mirrors business) 5% consideration (FY10) (FY10) by SMG, a JV shares of EUR 1.5mn between Motherson face value. and SMIL, in the ratio of 51:49. 2 SMP (Peguform Nov'2011 Total share EUR 1,356mn 0.25 EUR 5.13 Acquired 80% stake GmnH) consideration of EUR (CY10) 66.9mn through JV, in which 141.5mn + Net debt (CY10) Motherson would of EUR166.5mn own 51% and SMIL 49%. 3 Stoneridge's wiring Aug'2014 Consideration of US$ ~US$ 300mn (at 0.24 appx. loss 100% owned by harness business 65.7mn on no cash no time of of US$ MSSL debt basis acquisition) 4.8mn (CY13) 4 Assets of Scherer & Jan'2015 Acquisition cost of ~EUR 240mn 0.15 100% owned by Trier (S&T) EUR 35.76mn (when deal was SMRP BV (check) announced) 5 PKC Mar'2017 Acquisition cost of EUR 851.8mn 0.73 EUR 10.46 100% owned by EUR 571mn + Net (CY16) 59.1mn MSSL debt of EUR 47mn (CY16) (Dec'16) Source: Company, IIFL Research

FY20 revenue target achievable but ROCE looks difficult We believe Motherson may potentially achieve its FY20 revenue of USD18bn through acquisitions, especially in the plastics space. However, achievement of 40% of consolidated ROCE on the expanded operations (incl. acquisitions) may be difficult for two reasons:  Valuations have become expensive. Hence, generating 40% ROCE on the acquisition price would be difficult.  Even if Motherson makes a cheap acquisition (on EV/Sales basis) of a distressed asset, there may not be enough time for significant turnaround benefits by FY20. Motherson’s existing business should reach We estimate Motherson’s existing business to reach revenues of revenues of USD11.8bn by USD11.8bn by FY20, implying that it needs to make acquisitions FY20, need for acquisitions worth USD6.2bn in revenues. worth USD6.2bn.

Our scenario analysis yields a potential 18% accretion to our current FY20 PAT estimate, if Motherson makes acquisitions to reach its FY20 revenue target. We assume a base case of 3% net margin in FY20 for the target and an acquisition price of 0.5x price/sales, translating to a FY20 P/E of 17x. For the purpose of this computation, we do not take the benefit of any post-acquisition turnaround/synergies, which may result in improvement in margins or release of capital employed.

The scenario analysis is based on acquisition of 100% stake by Motherson. If the acquisition is in the plastics or mirrors space, the acquisition may be made through SMRP BV. In this case, Motherson’s participation in the acquisition cost and the target’s PAT would be 51%. Hence, accretion to Motherson’s FY20 PAT would be lower to that extent.

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Figure 98: Acquisitions to reach USD18bn revenues can result in 18% EPS upside Organic business Potential Total FY17 FY20 acquisitions FY20 Revenues (USD bn) 7.3 11.8 6.2 18.0 Revenues (Rs bn) 488 769 401 1170 PAT, post minority 35 12 47 PAT margin 4.6% 3.0% 4.1%

Acquisition cost @ 0.5 Sales, 201 (17x PE at 3% net margin) Interest cost on acquisition, net 5.6 of tax

Total FY20 PAT, post interest 42 Accretion to current PAT est. 6 Accretion to EPS 3.0 Accretion to stock price @ 25x 76 Source: IIFL estimates; Note: FY17 is pro forma incl. PKC

Where can the next set of acquisitions be? Of the four segments that Of the four segments that Motherson operates in, we see the highest Motherson operates in, we probability of acquisitions in the plastics segment. The automotive see the highest probability plastic components industry is fairly large (>USD100bn) and is of acquisitions in the highly fragmented. Motherson’s presence in the segment is largely plastics segment. concentrated in the premium car segment.

The rear-view mirrors industry is highly consolidated and Motherson is already the global No. 2. Hence, in mirrors, the potential acquisition would be that of a major player, which may catapult Motherson close to the No.1. Size of the global rear-view mirror industry is not very large (~USD10bn). Hence, even if Motherson were to acquire a major player in mirrors, it may not push Motherson very close to its FY20 revenue target of USD18bn.

Other potential acquisitions may be in the global CV wiring harness space, with a view to strengthen its weak presence in Asia.

Figure 99: Potential acquisitions Segment Current position Potential acquisitions PV wiring harness Leader with ~60% share An overseas acquisition is ruled in India out due to Motherson’s policy of not competing with Sumitomo globally. Global CV wiring harness Leader in US/EU; weak in To strengthen presence in Asia Asia Mirrors (through SMRP Global No. 2 in a Will need to acquire a major BV) consolidated industry player, given the consolidated nature of the industry Plastics (through SMRP One of several leading Many potential targets, given BV) players in a highly the fragmented nature of the fragmented industry industry Source: IIFL Research

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Estimates and valuation

We forecast 28% EPS Cagr over FY17-20 SMP and PKC operate at We forecast Motherson’s consolidated EPS to grow at 28% Cagr over thin net margin of 1.8% the next three years. We expect standalone and SMR to grow and 1.4%, respectively. earnings in mid-to-high teens, given that both are operating at high Ebitda margin expansion margins and ROCE. Having said that, we believe SMR does have may have a magnified impact on their earnings. some more margin expansion potential. On the other hand, SMP and PKC are operating at low margins and return ratios and have significant improvement potential. SMP and PKC operate at thin net margin of 1.8% and 1.4% respectively. We forecast Ebitda margin expansion of 220bps for SMP and of 400bps for PKC over FY17-20. Given the low net margin to begin with, this would have a magnified impact on earnings.

Figure 100: Summary of estimates FY17 FY18ii FY19ii FY20ii Standalone (Rs mn) Revenues 63,478 73,586 85,776 100,103 Revenue growth 19.9% 15.9% 16.6% 16.7% Ebitda 12,760 14,349 17,155 20,021 Ebitda margin 20.1% 19.5% 20.0% 20.0% Pro‐forma PAT 8,273 9,286 11,008 13,008 EPS 4.0 4.4 5.2 6.2

SMR (EUR mn) Revenues 1,575 1,694 1,920 2,123 Revenue growth 12.8% 7.5% 13.3% 10.6% Ebitda 167 192 223 249 Ebitda margin 10.6% 11.3% 11.6% 11.7%

SMP (EUR mn) Revenues 2,986 3,430 3,911 4,497 Revenue growth 14.1% 14.9% 14.0% 15.0% Ebitda 188 217 301 384 Ebitda margin 6.3% 6.3% 7.7% 8.5%

PKC (EUR mn) Revenues 852 1,009 1,110 1,221 Revenue growth 12.9% 18.5% 10.0% 10.0% Ebitda 59 81 100 134 Ebitda margin 6.9% 8.0% 9.0% 11.0%

Consolidated (Rs mn) Revenues 424,934 564,744 663,081 768,746 Revenue growth 14.2% 32.9% 17.4% 15.9% Ebitda 42,847 55,058 70,723 87,200 Ebitda margin 10.1% 9.7% 10.7% 11.3% Pro‐forma PAT 16,517 19,259 26,920 35,388 EPS 8.1 9.1 12.8 16.8 Source: Company, IIFL estimates

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ROCE (ex-cash) to improve ROCE to close in on management’s 40% target by FY20 from 25% in FY17 to 38% In the past, reported ROCE has been negatively impacted by in FY20. acquisitions in the initial years, pending turnaround and synergy benefits. Motherson’s consolidated ROCE (ex-cash) came off optically in FY17 as the FY17 capital employed includes the cost of acquisition of PKC but not PKC’s operating profits. We expect ROCE (ex-cash) to improve from 25% in FY17 to 38% in FY20. This would be driven primarily by margin improvement in SMP and PKC. Our forecasts do not build in any acquisitions. In the event of sizeable acquisitions, we expect consolidated ROCE to end much lower than 40% in FY20.

Figure 101: ROCE to expand steadily from FY17 levels Figure 102: FCF to remain higher than PAT from FY18 (%) ROCE (ex‐cash) (%) FCFF (pre‐invst.) as % of PAT 40% 200% 35% 30% 150% 25% 100% 20% 15% 50% 10% 5% 0% 0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 ‐50% FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: IIFL Research Source: IIFL Research

Strong history of value creation through acquisitions Motherson has a strong history of creating value through cheap acquisitions and subsequent turnarounds. Motherson’s first major acquisition, SMR has seen a 162x jump in value since its acquisition and now accounts for 18% of Motherson’s market-cap. Even the most recent acquisition, PKC has seen a 1.6x jump in attributable value due to the street’s belief (and ours too) that Motherson would be able to improve its margins and return ratios.

Figure 103: Strong value creation through acquisitions Acquiree Purchase Acquiree's Value per Returns Contribution consideration contribution share @ 28x (x) of value (Rs per to FY19ii EPS accretion to Motherson Motherson's share) stock price SMR (95%) 0.4 2.35 65.7 161.9 18% SMP (80%) 2.4 1.74 48.8 20.6 13% MWSI (100%) 1.9 0.30 8.5 4.5 2% S&T (100%) 0.5 0.39 11.0 20.4 3% PKC (100%) 20.3 1.14 31.9 1.6 3% Source: Company, IIFL Research

Motherson is trading at a high P/E multiple (28x FY19 EPS). Any EPS accretion due to acquisitions would have a magnified impact on the stock price, as the market would reward EPS accretion with the same high P/E as Motherson.

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We value Motherson at 28x Dec’19 P/E, in line with forecast EPS Cagr Motherson’s EPS has grown at 27% Cagr over the past 10 years and at 36% Cagr over the past five years. This consistent earnings delivery has resulted in the stock re-rating significantly in recent years. The stock currently trades at 28x FY19 EPS. Our Dec’18 target price of Rs450 is based on 28x Dec’19 EPS.

Figure 104: Historical P/E Chart Figure 105: Historical EV/Attributable Ebitda chart P/E Average +1 S.D ‐1 S.D EV/EBITDA Average +1 S.D ‐1 S.D 50 25

40 20

30 15

20 10

10 5

0 0 07 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr

Source: Bloomberg, IIFL Research Source: Bloomberg, IIFL Research

Peer Valuation table

Figure 106: Motherson Sumi – Valuation Summary Table (Indian and Global peers) Company Mkt Cap 3‐year P/E EV/EBITDA P/B ROE EPS CAGR FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E (USD bn) (%) (x) (x) (x) (x) (x) (x) (x) (x) (x) % % % India Exide 2.6 13.3% 17.6 15.6 13.6 10.3 9.1 8.0 2.5 2.3 2.0 14.9 15.2 15.8 Amara Raja 2.1 16.2% 26.6 21.9 17.9 14.4 12.1 10.2 4.5 3.8 3.3 18.1 18.9 19.7 Motherson Sumi 11.3 27.7% 38.6 27.6 21.0 19.6 15.1 11.8 7.8 6.5 5.4 21.6 25.6 28.0 Bharat Forge 4.9 28.0% 41.3 33.5 27.2 21.7 18.5 15.8 7.3 6.7 6.0 18.2 20.8 23.2 Bosch 9.3 23.2% 38.8 32.5 27.1 26.4 22.4 18.7 6.1 5.4 4.7 15.8 16.9 18.2 Endurance Tech 2.4 16.7% 35.9 32.9 30.1 20.4 18.6 17.0 7.4 6.2 5.2 22.8 20.4 18.7 Wabco India 1.9 27.5% 46.2 37.3 30.3 30.8 25.2 20.7 8.3 6.8 5.7 19.1 20.0 19.9 Global Magna 19.1 11.5% 8.9 8.1 7.3 5.4 5.2 4.9 1.8 1.3 1.2 21.8 21.2 20.5 Continental AG 50.0 9.0% 13.6 12.2 11.3 7.0 6.4 6.0 2.6 2.3 2.0 20.2 19.5 18.6 Faurecia 9.8 12.5% 13.8 12.2 11.3 4.9 4.5 4.2 2.5 2.1 1.8 18.5 18.2 17.1 Lear Corp 11.8 10.3% 10.3 9.7 9.3 6.0 5.8 5.7 2.9 2.4 2.1 33.4 27.4 22.4 Valeo SA 16.3 11.4% 13.6 11.9 10.6 6.4 5.6 5.0 3.0 2.5 2.1 22.2 22.6 21.4 Delphi 25.2 7.7% 14.0 13.2 12.1 9.9 9.4 8.8 6.8 5.3 4.7 57.7 44.9 37.3 Autoliv Inc 10.6 6.8% 19.5 17.1 14.4 8.8 8.0 7.1 2.7 2.5 2.2 14.0 15.2 16.6 Plastic Omnium 6.0 11.2% 12.5 11.4 10.2 6.4 5.9 5.5 2.9 2.5 2.1 23.1 21.7 20.4 Gentex 5.3 8.2% 14.7 13.6 12.4 7.3 6.9 6.4 2.6 2.4 2.1 18.9 18.7 18.2 Johnson Controls 33.9 10.9% 12.6 11.4 10.2 9.6 9.1 8.7 1.5 1.4 1.1 11.7 12.5 10.8 Visteon Corp 3.9 16.7% 20.1 17.9 16.0 10.0 9.2 8.4 7.2 5.9 5.1 33.3 31.7 30.5 Leoni AG 2.1 39.6% 13.6 12.5 10.7 6.1 5.7 5.2 1.8 1.6 1.5 13.3 13.1 13.9 Adient 7.1 11.0% 7.6 6.6 5.8 6.6 6.0 5.6 1.5 1.2 20.4 18.3 19.3 BorgWarner 10.9 10.9% 13.6 12.5 11.6 8.0 7.5 7.0 2.8 2.4 2.1 22.2 20.1 17.6 Hella 6.6 10.0% 14.0 13.0 12.0 5.9 5.4 5.1 2.3 2.0 1.8 16.7 16.0 15.2

Source: Bloomberg, IIFL Research

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Annexure 1 – History & timeline

Motherson Sumi Systems Ltd (Motherson) is the flagship company of the 1975-founded Samvardhana Motherson Group (SMG). Motherson was established in 1986 as a joint venture with Japan-based Sumitomo Wiring Systems to manufacture wiring harnesses, with Maruti as its first customer. Over 1989-2008, Motherson and its subsidiaries/JVs entered other segments such as injection moulding, tool manufacturing, cockpit assemblies, mirrors, rubber injection moulding, and metal components.

In FY08, about 35% of Motherson’s revenues came from outside India. That changed with the acquisition of SMR (auto mirrors) in 2009 and SMP (plastic components) in 2011. The share of overseas revenues jumped to more than 80%. With these two acquisitions, Motherson became one of the leading global suppliers of rear-view mirrors (22% global market share) and exterior/interior modules to the automotive industry. The combined revenue of SMR/SMP was more than USD5bn in FY17. With the acquisition of the wiring harness business of Stoneridge in 2014 and PKC Group in 2017, Motherson has become the largest CV wiring harness manufacturer globally.

Figure 107: Motherson’s evolution over the years (revenue in Rs bn)

Source: Company, IIFL Research

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Annexure 2 – Key products

Wiring harness A wiring harness is a string of cables and wires, which transmits informational signals or electric current. These cables are bound by clamps, cable ties, cable lacing, sleeves, electrical tape, conduit, and a weave of extruded string or similar combination. In the automotive industry, wiring harnesses form the nervous system of the vehicle.

Figure 108: Wiring harness

Source: IIFL Research

Figure 109: Wiring harness network Bentley Bentayga

Source: Bentley

Rear-view mirrors Traditional rear-view mirrors are of two types - exterior and interior mirrors. Each light vehicle is typically equipped with three rear view mirrors – two exterior mirrors, and one interior mirror. SMR also provides high-value and advanced mirror types/systems like auto- dimming EC glass, electric power-folds, heated glass, integrated turn signals, blind spot detection systems, side-turn indicator lamps, assist system lighting systems and telescopic trailer tow mirrors.

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Figure 110: Exterior rear‐view mirror Figure 111: Interior rear‐view mirror

Source: IIFL Research Source: IIFL Research

Plastic / Polymer components Plastic products include components and modules for vehicle interiors such as door trims, dashboards, centre consoles, and exterior components such as bumpers and front-end modules.

Figure 112: Dashboard

Source: IIFL Research

Figure 113: Bumper

Source: IIFL Research

Figure 114: Door trims

Source: IIFL Research

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Annexure 3 –Group Holding company

Samvardhana Motherson International Limited (SMIL) SMIL is the principal holding company of Samvardhana Motherson Group (SMG). Motherson was formed in 1986 as a JV between SMIL, Sumitomo Wiring Systems and Sojitiz Corporation. Currently, SMIL holds 34.81% equity stake in Motherson.

SMIL does not have any operations at the standalone level. Most of its revenues are in the form of dividend and interest income from investments in subsidiaries and joint ventures.

Figure 115: Shareholding pattern as on Mar'2017 % Sehgal family and promoter entities 90.4 Sojitz Corporation 6.5 Samvardhana Employees Welfare Trust 0.3 Others 2.9 Total 100.0 Source: Company filings, IIFL Research

Figure 116: SMIL Financials ‐ Standalone (Rs mn) FY16 FY17 Revenue (mainly dividend, interest income) 2,655 372 Ebitda 65 ‐289 Ebit 62 ‐291 Interest cost 1,132 1,104 PBT ‐1,034 ‐1,222 PAT ‐1,034 ‐1,222

Abridged balance‐sheet Cash 610 299 Other current assets 849 210 Fixed assets 7 5 Investments 20,220 20,616 Other assets 1,567 1,975 Total 23,253 23,105 Current liabilities & provisions 903 367 Debt 10,289 11,070 Other liabilities 3,042 3,871 Equity 9,019 7,797 Total 23,253 23,105 Source: Company filings, IIFL Research

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Figure 117: SMIL Financials ‐ Consolidated (Rs bn) FY16 FY17 Revenue 338 378 Key segments Motherson Standalone (proportionate share) 20 22 SMR 107 123 SMP 192 219 Others 22 16 Ebitda 25 32 Ebit 15 22 Interest cost 4 5 PBT 13 20 PAT, before minority interest 9 13 Minority interest ‐4 ‐5 PAT 5 8

Abridged balance‐sheet Cash 18 41 Other current assets 77 92 Fixed assets 88 114 Investments 2 1 Other assets 11 15 Total 197 264 Current liabilities & provisions 77 96 Debt 73 98 Other liabilities 6 8 Minority interest 13 18 Equity 29 45 Total 197 264 Source: Company filings, IIFL Research

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Annexure 4 – Leading Global Auto Component Suppliers

Figure 118: Leading global auto component suppliers CY16 sales Company Name Key Products ($ bn) Fuel systems, electric systems, electrical drives, car multimedia, electronics & steering 1 Robert Bosch GmbH 46.5 systems, battery technology 2 ZF Friedrichshafen 38.5 Transmissions, chassis & systems, steering systems, clutches, dampers, safety systems 3 Magna International 36.4 Body, chassis, exterior, seating, powertrain, electronic, vision and closure systems 4 Denso Corp 36.2 Thermal, powertrain control, electronic & electric systems, small motors & telecom. ADAS, brakes, tyres, chassis, stability & injection systems, safety & powertrain 5 Continental AG 32.7 electronics, gasoline turbochargers, etc. 6 Aisin Seiki Co 31.4 Body, brake & chassis systems, electronics, drivetrain & engine components 7 Hyundai Mobis 27.2 Chassis, cockpit & front ends, brakes, steering, suspensions, airbags & lamps 8 Faurecia 20.7 Seating, emissions control technologies and interior systems 9 Lear Corp 18.6 Seating and electrical distribution systems Micro hybrid, thermal systems, electrical & electronic systems, transmissions, wiper 10 Valeo SA 17.4 systems, camera/sensor tech, etc 11 Adient 16.8 Seating systems & components Mobile electronics, powertrain, safety, thermal & security systems, electrical 12 Delphi Automotive 16.7 architecture & in‐car entertainment 13 Yazaki Corp. 15.6 Wiring harnesses, connectors, junction boxes, power distribution boxes, etc 14 Yanfeng Automotive 13.0 Interiors, exteriors, electronics, seating & safety 15 Sumitomo Electric 12.8 Electrical distribution systems, electronics and connection systems Piston, cylinder, valvetrain, air & liquid mgmt. systems, vehicle climatization, 16 Mahle GmbH 12.2 compressors, engine & powertrain cooling, etc. 17 Panasonic Automotive 12.0 Audio & navigation systems, compressors, batteries, motors, monitors, sensors, etc 18 Thyssenkrupp AG 11.0 Steering, dampers, springs & stabilizers, camshafts, bearings, axle assembly, etc 19 Schaeffler AG 10.9 Anti‐friction bearings, engine, chassis, clutch & transmission components, etc 20 JTEKT Corp 10.8 Bearings, steering systems, driveline systems & machine tools Climate control, engine cooling & exhaust systems, instrument clusters & panels, 21 Calsonic Kansei Corp 10.1 console boxes, cockpit modules, etc Airbags, seat belts, safety electronics, steering wheels, brake systems, radar, night 22 Autoliv Inc 10.1 vision & camera vision systems 23 Toyota Boshoku 9.7 Seats, door trim, carpet, headliners, oil & air filters, door panels, fabrics & substrates 24 BASF SE 9.7 Coatings, catalysts, polyurethanes, coolants, brake fluids, lubricants & battery material 25 Hitachi Automotive 9.1 Engine management, electric powertrain and drive control Samvardhana Rearview mirrors, exterior & interior polymer components (bumpers, door trims, 26 9.1 Motherson Group dashboards), wiring harnesses, etc 27 BorgWarner Inc 9.1 Turbochargers, engine valve‐timing, ignition, emissions, transmission, clutch, etc Lighting, powertrain, electronics, suspensions systems, active & passive shock 28 Magneti Marelli 8.2 absorbers, exhaust systems, etc 29 Plastic Omnium 8.0 Fascias, bumpers, front & rear‐end modules, fenders, body panels & fuel systems 30 Gestamp 7.9 Metal components & assemblies, body‐in‐white, chassis & mechanisms Source: Automotive News ‐ Top Suppliers 2017 (PWC sponsored), IIFL Research

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Financial summary - Standalone Income statement summary (Rs m) Y/e 31 Mar, Standalone FY16A FY17A FY18ii FY19ii FY20ii Revenues 52,930 63,478 73,586 85,776 100,103 Ebitda 10,306 12,760 14,349 17,155 20,021 Depreciation and amortisation (2,008) (1,977) (2,278) (2,471) (2,691) Ebit 8,298 10,783 12,072 14,684 17,329 Non‐operating income 1,708 1,069 883 1,029 1,201 Financial expense ‐474 ‐124 ‐234 ‐209 ‐209 PBT 9,532 11,728 12,721 15,504 18,322 Exceptionals 0 0 0 0 0 Reported PBT 9,532 11,728 12,721 15,504 18,322 Tax expense ‐2,346 ‐3,455 ‐3,435 ‐4,496 ‐5,313 PAT 7,186 8,273 9,286 11,008 13,008 Minorities, Associates etc. 0 0 0 0 0 Attributable PAT 7,186 8,273 9,286 11,008 13,008

Ratio analysis Y/e 31 Mar, Standalone FY16A FY17A FY18ii FY19ii FY20ii Per share data (Rs) Pre‐exceptional EPS 3.6 4.0 4.4 5.2 6.2 DPS 1.7 2.1 2.5 3.5 4.5 BVPS 12.4 28.4 29.6 31.8 33.8 Growth ratios (%) Revenues 5.6 19.9 15.9 16.6 16.7 Ebitda 14.3 23.8 12.5 19.6 16.7 EPS 39.6 11.7 9.0 18.5 18.2 Profitability ratios (%)

Ebitda margin to Ebitda margin 19.5 20.1 19.5 20.0 20.0 remain steady at around 20% Ebit margin 15.7 17.0 16.4 17.1 17.3 Tax rate 24.6 29.5 27.0 29.0 29.0 Net profit margin 13.6 13.0 12.6 12.8 13.0 Return ratios (%) ROE 31.5 20.0 15.4 17.0 18.8

FY17 ROCE (ex-cash ROCE 35.9 23.6 18.0 20.9 23.3 and investments) is 47%) Solvency ratios (x) Net debt‐equity 0.2 0.2 0.1 0.1 0.0 Net debt to Ebitda 0.5 0.9 0.6 0.3 0.1 Interest coverage 17.5 87.0 51.7 70.4 83.0 Source: Company data, IIFL Research

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Balance sheet summary (Rs m) Y/e 31 Mar, Standalone FY16A FY17A FY18ii FY19ii FY20ii Cash & cash equivalents 191 1,898 2,165 5,679 8,650 Inventories 6,418 6,917 8,120 9,518 11,107 Receivables 5,921 8,115 9,475 11,045 12,890 Other current assets 3,592 5,396 5,792 6,304 6,905 Creditors 5,921 8,115 9,332 10,732 12,342 Other current liabilities 3,628 3,703 4,201 5,131 6,170 Net current assets 6,573 10,508 12,019 16,683 21,041 Fixed assets 14,974 14,955 15,177 15,206 15,014 Other assets 389 528 528 528 528 Investments 7,455 44,971 44,971 44,971 44,971 Other long‐term assets 0 0 0 0 0 Total net assets 29,391 70,962 72,696 77,388 81,554 Borrowings 4,852 12,935 10,435 10,435 10,435 Other long‐term liabilities 0 0 0 0 0 Shareholders equity 24,539 58,027 62,261 66,953 71,119 Total liabilities 29,391 70,962 72,696 77,388 81,554

Cash flow summary (Rs m) Y/e 31 Mar, Standalone FY16A FY17A FY18ii FY19ii FY20ii Ebit 8,298 10,783 12,072 14,684 17,329 Tax paid ‐2,750 ‐3,526 ‐3,435 ‐4,496 ‐5,313 Depreciation and amortization 2,008 1,977 2,278 2,471 2,691 Net working capital change ‐785 ‐1,989 ‐1,244 ‐1,150 ‐1,387 Other operating items 12 ‐177 649 821 993 Op. cash flow before interest 6,783 7,068 10,320 12,330 14,313 Financial expense ‐235 ‐108 0 0 0 Non‐operating income 1,416 534 0 0 0 Operating cash flow after interest 7,964 7,494 10,320 12,330 14,313 Capital expenditure ‐1,609 ‐2,491 ‐2,500 ‐2,500 ‐2,500 Long‐term investments 6 ‐36,670 0 0 0 Others 30 ‐3 0 0 0 Free cash flow 6,391 ‐31,670 7,820 9,830 11,813 FCF before acquisitions/ Equity raising 0 25,277 0 0 0 investments at 80-90% of PAT in FY18-20 Borrowings ‐727 8,116 ‐2,500 0 0 Dividend ‐6,934 ‐16 ‐5,053 ‐6,316 ‐8,842 Net chg in cash and equivalents ‐1,270 1,707 267 3,514 2,971 Source: Company data, IIFL Research

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SMR Financials Y/e 31 Mar (Rs mn) FY16A FY17A FY18ii FY19ii FY20ii Revenue 100,872 115,950 127,030 149,731 169,876 EBITDA 10,510 12,292 14,364 17,427 19,941 Depreciation 2,637 3,144 3,364 3,673 3,956 EBIT 7,873 9,148 11,000 13,754 15,985 Other income/(expense) 452 987 1,125 1,170 1,200 Interest expense 517 357 364 378 388 PBT 7,807 9,778 11,761 14,546 16,797 Tax 1,900 2,965 3,528 4,364 5,039 Reported PAT 5,907 6,813 8,233 10,182 11,758

Profitability ratios (%) Ebitda margin 10.4% 10.6% 11.3% 11.6% 11.7% Ebit margin 7.8% 7.9% 8.7% 9.2% 9.4% PBT margin 7.7% 8.4% 9.3% 9.7% 9.9% Net profit margin 5.9% 5.9% 6.5% 6.8% 6.9%

Growth ratios (%) Revenue growth driven Revenues 2.8% 14.9% 9.6% 17.9% 13.5% by new plants and Ebitda 9.5% 17.0% 16.8% 21.3% 14.4% market-share gains PAT 12.7% 15.3% 20.8% 23.7% 15.5% Source: Company data, IIFL Research

SMP Financials Y/e 31 Mar (Rs mn) FY16A FY17A FY18ii FY19ii FY20ii Revenue 189,159 219,813 257,242 305,054 359,763 EBITDA 10,579 13,854 16,310 23,455 30,684 Depreciation 6,174 5,534 5,576 6,905 7,584 EBIT 4,405 8,320 10,734 16,550 23,100 Net interest cost 1,874 2,858 2,150 834 56 PBT 2,531 5,462 8,585 15,716 23,044 Exceptional income/(loss) ‐ 464 ‐ ‐ ‐ PBT after Exceptional 2,531 5,926 8,585 15,716 23,044 Tax 205 1,904 2,575 4,715 6,913 Reported PAT 2,326 4,022 6,009 11,001 16,131 Minority Interest (1,203) (1,482) (1,825) (2,012) (2,231) PAT after minority interest 1,123 2,540 4,184 8,989 13,900

Profitability ratios (%) Ebitda margin 5.6% 6.3% 6.3% 7.7% 8.5% Ebit margin 2.3% 3.8% 4.2% 5.4% 6.4% PBT margin 1.3% 2.5% 3.3% 5.2% 6.4% Net profit margin 1.2% 1.8% 2.3% 3.6% 4.5%

Low net margin results Growth ratios (%) in high earnings Revenues 8.4% 16.2% 17.0% 18.6% 17.9% growth as margins improve Ebitda ‐1.6% 31.0% 17.7% 43.8% 30.8% PAT ‐49.8% 126.1% 64.8% 114.8% 54.6% Source: Company data, IIFL Research

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PKC Financials

Y/e 31 Mar (Rs mn) FY16A FY17A FY18ii FY19ii FY20ii Revenue 61,554 63,359 75,705 86,606 97,709 EBITDA 3,724 4,396 6,056 7,795 10,748 Depreciation 2,262 2,422 4,118 3,778 3,491 EBIT 1,462 1,974 1,938 4,017 7,257 Foreign currency fluctuations 66 (114) ‐ ‐ ‐ Interest expense/(income) 310 329 662 591 407 PBT 1,218 1,531 1,276 3,425 6,850 Tax 794 621 383 1,028 2,055 PAT (continued operations) 424 910 893 2,398 4,795

Profitability ratios (%) Ebitda margin 6.1% 6.9% 8.0% 9.0% 11.0% Ebit margin 2.4% 3.1% 2.6% 4.6% 7.4% PBT margin 2.0% 2.4% 1.7% 4.0% 7.0% Low net margin results Net profit margin 0.7% 1.4% 1.2% 2.8% 4.9% in high earnings growth as margins Growth ratios (%) improve Revenues ‐6.9% 2.9% 19.5% 14.4% 12.8% Ebitda 77.3% 18.0% 37.8% 28.7% 37.9% PAT ‐118.4% 114.4% ‐1.9% 168.5% 100.0% Source: Company data, IIFL Research’ *Note: FY16/17 corresponds to CY15/16 financials

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Financial summary - Consolidated Income statement summary (Rs m) Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii Revenues 372,163 424,934 564,744 663,081 768,746 Ebitda 35,482 42,847 55,058 70,723 87,200 Depreciation and amortisation (10,872) (10,591) (15,785) (17,277) (18,172) Ebit 24,610 32,256 39,273 53,446 69,028 Non‐operating income 392 1,463 683 1,029 1,201 Financial expense (3,450) (3,749) (3,399) (2,227) (1,673) PBT 21,552 29,970 36,557 52,249 68,556 Exceptionals 0 (974) 0 0 0 Reported PBT 21,552 28,996 36,557 52,249 68,556 Tax expense (5,192) (9,103) (11,059) (15,871) (20,864) PAT 16,360 19,893 25,498 36,378 47,693 Minorities, Associates etc. (3,437) (4,350) (6,240) (9,458) (12,305) Attributable PAT 12,923 15,543 19,259 26,920 35,388

Ratio analysis Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii Per share data (Rs) Pre‐exceptional EPS 6.2 8.1 9.1 12.8 16.8 DPS 1.7 2.1 2.5 3.5 4.5 BVPS 22.2 40.5 45.5 54.2 65.8 Growth ratios (%) Revenues 6.3 14.2 32.9 17.4 15.9 Ebitda 11.1 20.8 28.5 28.5 23.3 EPS 22.5 30.6 13.2 39.8 31.5 Profitability ratios (%) Ebitda margin 9.5 10.1 9.7 10.7 11.3 Ebit margin 6.6 7.6 7.0 8.1 9.0 Tax rate 24.1 31.4 30.3 30.4 30.4 Net profit margin 4.4 4.7 4.5 5.5 6.2 Return ratios (%) ROE 31.8 26.1 21.6 25.6 28.0

ROCE (ex-cash) to ROCE 23.0 20.2 18.8 24.7 29.6 improve from 25% in Solvency ratios (x) FY17 to 38% in FY20 Net debt‐equity 1.0 0.7 0.4 0.2 (0.1) Net debt to Ebitda 1.2 1.3 0.7 0.3 (0.1) Interest coverage 7.1 8.6 11.6 24.0 41.3 Source: Company data, IIFL Research

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Balance sheet summary (Rs m)

Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii

Cash & cash equivalents 17,723 48,874 43,130 46,561 56,146

Inventories 22,850 30,716 36,969 43,467 50,563

Receivables 50,876 72,597 87,114 98,784 111,820

Other current assets 12,657 20,483 18,242 21,138 24,365

Creditors 46,537 66,065 75,975 87,371 100,477

Other current liabilities 30,878 45,073 55,898 64,547 72,607

Net current assets 26,691 61,532 53,583 58,033 69,810

Fixed assets 86,020 141,274 148,489 154,992 161,120

Intangibles 3,604 5,024 5,024 5,024 5,024

Investments 5,310 4,729 6,529 8,707 11,436

Other long‐term assets 0 0 0 0 0

Total net assets 121,625 212,559 213,625 226,756 247,390

Borrowings 60,137 103,250 83,176 66,371 47,668

Other long‐term liabilities 17,517 26,582 34,622 46,258 61,291

Shareholders equity 43,971 82,727 95,828 114,127 138,431

Total liabilities 121,625 212,559 213,625 226,756 247,390

Cash flow summary (Rs m)

Y/e 31 Mar, Consolidated FY16A FY17A FY18ii FY19ii FY20ii

Ebit 24,610 32,256 39,273 53,446 69,028

Tax paid (6,899) (8,433) (11,059) (15,871) (20,864)

Depreciation and amortization 10,872 10,591 15,785 17,277 18,172

Net working capital change (8,991) 6,644 2,205 (1,018) (2,193)

Other operating items 2,292 (3,061) 0 0 0

Operating cash flow before 21,884 37,997 46,204 53,834 64,144

interest

Financial expense (3,227) (3,471) (3,399) (2,227) (1,673)

Non ‐operating income 0 0 683 1,029 1,201

Operating cash flow after interest 18,657 34,526 43,488 52,637 63,672

Capital expenditure (19,306) (27,789) (23,000) (23,780) (24,300)

Long ‐term investments (145) (34,543) 0 0 0

Others (997) (507) 0 0 0

Free cash flow (1,791) (28,313) 20,488 28,857 39,372 FCF before

acquisitions/ Equity raising 102 25,381 0 0 0 investments > PAT in

FY18-20 Borrowings 7,168 34,092 (20,074) (16,804) (18,703)

Dividend (6,675) (9) (6,158) (8,621) (11,084)

Net chg in cash and equivalents (1,196) 31,151 (5,744) 3,431 9,585

Source: Company data, IIFL Research

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NOTES

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon. Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 204 stocks rated in the IIFL coverage universe, 106 have BUY ratings, 6 have SELL ratings, 67 have ADD ratings and 25 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combinat ion of the two methods. The result of this fundamental valuat ion is adjusted to reflect the analyst’s views on the likely course of investor sentiment. W hichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic act ivity or, in some cases, in fashion. Valu ations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is availab le upon request.

Motherson Sumi: 3 year price and rating history Date Close Target Rating Date Close Target Rating price price price price (Rs) Price TP/Reco changed date (Rs) (Rs) (Rs) (Rs) 22 May 2017 283 300 BUY 400 11 Nov 2014 182 189 BUY 350 07 Sep 2017 326 350 BUY 300 11 Feb 2015 204 222 BUY 250 13 May 2015 216 236 BUY 200 14 Jul 2015 235 244 BUY 150 07 Aug 2015 247 253 BUY 100 28 Sep 2015 167 213 BUY 50 09 Nov 2015 177 217 BUY 0 10 Feb 2016 161 227 BUY 18 May 2016 193 240 BUY 17 16 17 17 17 17 17 17 16 16 16 16 16 15 16 16 16 16 16 16 15 15 15 15 15 14 15 15 15 15 15 15 14 17 17 17 17 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 11 Aug 2016 220 267 BUY Jul Jul Jul Jan Jan Jan Jun Jun Jun Feb Apr Sep Oct Feb Apr Sep Oct Feb Apr Sep Oct Dec Dec Dec Aug Aug Aug 11 Nov 2016 217 253 BUY Mar Nov Mar Nov Mar Nov Nov May May May 14 Feb 2017 234 260 BUY

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Detailed Detailed Detailed report report report

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 CMPRs272 Growth, re-ignited Scaleofoperations ‘Banking’ on Mumbai Market CMPRs6489 Product launches may not launch growth Target12mRs350(29%)  mnsqft Target12mRs6300(Ͳ3%) We expect growth to revive for ITC (FY17-19 EPS Cagr of Lodha Developers (LDPL), the largest real estate developer in Marketcap(US$m) 50,821 OngoingProjects 41 Marketcap(US$m) 9,337 Nestlé’s stock price has moved up 30% in the past six months 13% vs. 5% for FY14-17) as tax regime turns more rational, UpcomingProjects 51 India by sales value, is primarily focused on residential Enterprisevalue(US$m) 49,466 Enterprisevalue(US$m) 9,265 spurred by a flurry of new launches. We believe that the huge non-tax issues are in the base and consumption revives. India LandBank 390 development. More than 90% of its sales, projects, and land benefit of doubt Nestle enjoys is unjustified, given its track Bloomberg ITCIN has one of the most favourable industry structures (virtual bank are located in the Mumbai Metropolitan region (MMR). Bloomberg NESTIN record. Moreover, we estimate that these new launches will monopoly, FDI ban), which reduces volatility in earnings Source:Company,IIFLResearch. LDPL has set an aggressive target of more than doubling Sector FMCG  Sector FMCG increase CY20 sales by just 6% and the larger debate should    delivery. Moreover, ITC’s capital allocation has improved, turnover over the next five years. Despite the challenging  be what the company is doing to strengthen the core, i.e. the  with FCF conversion of ~80%. In light of these factors ITC’s  demand environment in the near term, we believe LDPL is  09May2017 LargestmarketshareinMumbai 01September2016 remaining 90%+ of its business. We believe that Nestlé’s  35% discount to HUL currently (vs. 12% prior to FY13) is set well placed given the strong growth drivers in the long term.  pricing policy, under-investment in brands, and narrow 52WkHigh/Low(Rs) 293/209 to contract, driving 29% upside to our price target of Rs.350. FY16Salesvalue(Rsbn) 52WkHigh/Low(Rs) 7390/4981 Strong project pipeline and land bank to support long-term definition of target market will prevent it from realising its Shareso/s(m) 12147 A change in incidence or structure of tax under GST regime is Shareso/s(m) 96 growth: LDPL has more than 90mn sq. ft. of projects planned. Out full potential. Maintain REDUCE. Dailyvolume(US$m) 48 the main risk to our BUY rating. Dailyvolume(US$m) 4 of this, an ongoing 41mn sq. ft. are at various stages of completion DividendyieldFY17ii(%) 1.7 LDPL, DividendyieldFY16ii(%) 1.5 Growth is set to revive: In the past two budgets, average increase 65 and LDPL will execute an upcoming 51mn sq. ft. over the next 5-10 Poor track record of launches: At a time when the company is Freefloat(%) 100.0 Mumbai Freefloat(%) 37.2 struggling to grow (H1CY16 LFL sales growth approximately flat) it in excise duty has been 8% vs. 18% for the four years prior to that, Rs636bn years (largely in MMR). Beyond this, it has more than 390mn sq. ft.   could do well to focus its energies on fixing its core business. Shareholdingpattern(%) possibly as the government realizes that a higher tax rate does not of high-quality contiguous developable area in the extended suburbs Shareholdingpattern(%) Nestlé’s launch track record is poor; we estimate products launched Promoter 0.0 increase tax collections but encourages illegal trade. Non tax of Mumbai. LDPL’s strong brand, aggressive sales strategy, and Promoter 62.8 regulations such as pictorial warnings and ban on public smoking are over the past 10 years have increased CY15 sales by ~5%. Our dip- FII 20.0 Other, robust execution capability should ensure strong cash flow and FII 14.4 already in place and others such as banning loose cigarettes are hard stick survey of 75 respondents in our office revealed that 25 of them DII 35.7 571 earnings. DII 5.7 to implement. Moreover, revival in consumption would benefit ITC  had not consumed even one of Nestlé's seven major innovations of Others 44.2 Source:Bloomberg,LiasesForas, Balance sheet health to improve as execution gathers pace: Others 17.2 the past few years.  just as it would benefit other FMCG companies.  Priceperformance(%) Company,IIFLResearch. LDPL’s operations have been cash-neutral-to-positive over the past Priceperformance(%) Best industry structure: ITC is a virtual monopoly accounting for   1M 3M 1Y five years, underpinned by robust growth in customer collections.  1M 3M 1Y Factors holding Nestle back: Nestlé is over-earning in India with 86% of cigarette industry sales and 96% of profits. Moreover, FDI in LargestplayerinIndiabySales Despite this, its debt levels have tripled over the last past five years ITC (0.4) (2.2) 26.1 NestleIndia (6.7) 1.5 8.1 Ebitda margins higher than those of its parent. India needs to be cigarette manufacture is banned. Due to these factors ITC has high FY16SalesValue* Rsbn due to aggressive land buying across the premium markets of treated as an “invest to grow” market. Launches should serve the Absolute(US$) (1.0) 1.9 35.1 Absolute(US$) (6.9) 2.4 7.8 Ebit margins of 66% in the cigarette division vs. global average of LodhaDevelopers 65 Mumbai and London. LDPL plans to deleverage by: 1) increasing dual objectives of premiumisation and penetration – the latter is Rel.toSensex (1.2) (7.9) 9.6 Rel.toSensex (8.2) (4.9) (2.5) 33%. Absence of competition gives ITC pricing power and reduces GodrejProperties 50 focus on execution to accelerate collections; 2) monetizing missing due to the narrow definition of target audience which CAGR(%) 3yrs 5yrs the risk of market share loss or margin erosion. Moreover, DLF 32 completed or near-complete inventory of Rs60bn; 3) moderating its CAGR(%) 3yrs 5yrs excludes 75% of the population. Investment in A&P needs to go up EPS 8.7 13.8 government officials have stated that GST is likely to be tax neutral PrestigeEstates 31 capex in land; and 4) reducing its borrowing costs. In the near term, EPS (5.6) 1.9 dramatically and price premium to competition needs to reduce.  – thus GST is unlikely to materially alter the industry structure. however, demonetisation could delay deleveraging until sales  Stockmovement Source:Company,IIFLResearch.*Gross Stockmovement SalesreportedbyCompany. momentum recovers. Reasonable valuation in the light of improved capital Volume(LHS) Analysis of new launches: We analyse products launched by Vol('000,LHS) Price(Rs.,RHS) Shares(000') (Rs) allocation: ITC generates 75-80% of its net profit as FCF, vs. an  Price(RHS) Nestle in the past few months and estimate that they will account for 100,000 400 Brighter days ahead for organized players; Mumbai remains average of 55% over FY03-15. Moreover, ITC trades at a discount of  1,000 8,000 8% of CY20 sales and add 6% to the top line (the difference being 80,000 the best bet: Reforms initiated by Government of India (GoI) in the 800 300 35% to HUL (with similar expected growth for FY17-19) vs. an  6,000 cannibalisation). Hot heads would be the biggest contributor and 60,000 real estate sector will help organized players to gain market share in 600 200 average of 12% prior to FY13 when ITC’s EPS growth faltered due to  4,000 then a long tail of products contributing small amounts. Insta-filter 40,000 the medium-to-long term and reduce competition from small 400 100 an adverse tax regime. With growth reviving, we believe that this  2,000 could be successful, but will cannibalise existing products. Nestlé is 20,000 unorganized players due to increased cost of compliance and 200 0 0 discount would shrink, resulting in an attractive 29% return to our  0 0 spreading itself too thin by clubbing so many launches in a short financing. Mumbai, the largest real estate market in India, enjoys 14 15 15 16 14 15 15 15 16 16 16 15 16 15 16 15 16 16 17 15 16 17 15 16 16 17 Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ  Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ TP. Our extended DCF (terminal FY39) suggests an even higher period, which could result in sub-optimal outcomes. Jul the highest pricing premium, given strong demand for housing amid Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Nov Nov Mar Mar Sep Sep  May May Nov Nov Mar Mar May May May upside of 46%.  supply constraints. LDPL is well positioned to benefit from the region,    Financialsummary(Rsbn) given its dominant market share in MMR and its diversified 360  Financialsummary(Rsm)   Y/e31Mar,Consolidated FY15A FY16A FY17ii FY18ii FY19ii degree offering from affordable to luxury housing.  Y/e31Dec,Parent CY14A CY15A CY16ii CY17ii CY18ii   Revenues(Rsbn) 384 391 413 463 519  Revenues(Rsm) 98,063 81,233 95,413 110,785 126,062  Financialsummary(Rsm)   ďŝƚĚĂŵĂƌŐŝŶƐ;йͿ Ϯϭ͘ϰ ϮϬ͘ϯ Ϯϭ͘ϭ Ϯϭ͘ϳ ϮϮ͘Ϭ  ďŝƚĚĂŵĂƌŐŝŶƐ;йͿ ϯϳ͘Ϭ ϯϴ͘ϱ ϯϳ͘ϳ ϯϴ͘Ϯ ϯϴ͘ϲ    Y/e31Mar,Consolidated FY12A FY13A FY14A FY15A FY16A  PreͲexceptionalPAT(Rsbn) 97 99 104 118 134  PreͲexceptionalPAT(Rsm) 11,800 8,988 11,476 13,925 16,293 PercyPanthaki Revenues(Rsm) 29,626 35,102 47,127 62,699 83,198 PercyPanthaki ReportedPAT(Rsbn) 97 99 104 118 134  ReportedPAT(Rsm) 11,847 5,633 11,476 13,925 16,293 [email protected] Ebitda(Rsmn) 7,232 7,373 8,990 14,212 20,112 [email protected] 912246464662 PreͲexceptionalEPS(Rs) 8.0 8.2 8.6 9.8 11.1  912246464662 PreͲexceptionalEPS(Rs) 122.4 93.2 119.0 144.4 169.0  Ebitdamargins(%) Ϯϰ͘ϰ Ϯϭ͘Ϭ ϭϵ͘ϭ ϮϮ͘ϳ Ϯϰ͘Ϯ  'ƌŽǁƚŚ;йͿ ϴ͘Ϯ Ϯ͘ϯ ϱ͘Ϯ ϭϯ͘ϰ ϭϯ͘Ϯ  'ƌŽǁƚŚ;йͿ ϲ͘ϱ ;Ϯϯ͘ϴͿ Ϯϳ͘ϳ Ϯϭ͘ϯ ϭϳ͘Ϭ  PreͲexceptionalPAT(Rsm) 3,771 3,728 4,206 7,249 6,313 AviMehta //&>ǀƐĐŽŶƐĞŶƐƵƐ;йͿ ;ϭ͘ϲͿ ;Ϯ͘ϭͿ ;ϭ͘ϱͿ AviMehta //&>ǀƐĐŽŶƐĞŶƐƵƐ;йͿ  ;ϯ͘ϯͿ ;ϰ͘ϭͿ ;Ϭ͘ϴͿ [email protected]  ReportedPAT(Rsm) 3,819 3,948 4,205 7,249 6,318 [email protected] PER(x) 33.9 33.2 31.5 27.8 24.6 PER(x) 53.0 69.6 54.5 44.9 38.4 912246464650 PreͲexceptionalEPS(Rs) 17.5 17.3 19.5 33.6 29.2 912246464650 ZK;йͿ ϯϮ͘ϴ ϯϬ͘Ϯ Ϯϵ͘Ϭ Ϯϵ͘ϱ Ϯϵ͘ϵ  ZK;йͿ ϰϱ͘ϯ ϯϭ͘ϴ ϰϬ͘ϳ ϰϵ͘ϰ ϱϳ͘ϴ   Growth(%) ϰϰ͘ϰ ;ϭ͘ϭͿ ϭϮ͘ϴ ϳϮ͘ϰ ;ϭϮ͘ϵͿ  Netdebt/equity(x) (0.2) (0.2) (0.1) (0.1) 0.0  Netdebt/equity(x) (0.2) (0.2) (0.3) (0.5) (0.7) SameerGupta MohitAgrawal ROE(%) 40.8 25.3 19.0 26.0 18.1 SameerGupta [email protected] EV/Ebitda(x) 22.3 21.3 20.6 18.3 16.2 [email protected] EV/Ebitda(x) 29.6 37.7 30.6 25.4 21.9 [email protected] ROCE(%) 12.8 7.7 6.3 8.3 9.0 912246464672 Price/book(x) 10.2 9.6 8.6 7.7 6.9 912246464672 Price/book(x) 22.1 22.2 22.2 22.2 22.2 The 2016 JIO Olympics begins 3Q2016  912246464675   Netdebt/equity(x) 4.5 6.4 5.1 4.9 4.0 www.iiflcap.com Source:Company,IIFLResearch.Priceasatcloseofbusinesson09May2017. www.iiflcap.com Source:Company,IIFLResearch.Priceasatcloseofbusinesson01September2016. www.iiflcap.com Source:Company,IIFLResearch.

1 1 1 Shake off the Heebie GBs

Detailed report Godrej Consumer BUY India - FMCG India - Insurance Rural India India - Internet Institutional Equities Institutional Equities Institutional Equities Institutional Equities

CMPRs1571 Growth trotter Target12mRs1800(15%) GCPL’s presence in Asia, Latin America and Africa across hair Marketcap(US$m) 7,544 care, home care and personal care provides sufficient Enterprisevalue(US$m) 8,213 headroom for high growth to sustain over a long period. Our Bloomberg GCPLIN in-depth research leads us to believe that GCPL has the Sector FMCG necessary tools to capitalize on this growth opportunity. With   an addressable market of ~2.5bn consumers in low income,  fast growing emerging economies, GCPL’s is a highly scalable 21June2016  business model that combines robust organic growth with 52WkHigh/Low(Rs) 1584/1109 value accretive acquisitions. We forecast 19% EPS Cagr FY16- Shareso/s(m) 341 19 spurred by innovation, cross-pollination of products, and Dailyvolume(US$m) 6 synergies of integration. BUY. DividendyieldFY17ii(%) 0.5 Attractive opportunity: *&3/¶V SUHVHQFH DFURVV $VLD /DWLQ Freefloat(%) 36.7 $PHULFDDQG$IULFDSURYLGHH[SRVXUHWRDSRSXODWLRQRIaEQZLWK  Shareholdingpattern(%) DQDYHUDJHSHUFDSLWD*'3RI86DQGDQRPLQDO*'3JURZWK Promoter 63.3 IRUHFDVWRI:HEHOLHYHWKDWWKHUHLVVLJQLILFDQWSHQHWUDWLRQOHG JURZWK RSSRUWXQLW\ HJ SHU FDSLWD FRQVXPSWLRQ LQ KDLU FRORXUVLQ FII 28.6 ,QGLD  ,QGRQHVLD LV [ ORZHU WKDQ 7KDLODQG  0RUHRYHU WKHUHLV DII 1.9 HQRXJK KHDGURRP WR JURZ LQ WKH FXUUHQW PDUNHW HJ *&3/¶V Others 6.3  UHYHQXHVDUHOHVVWKDQRIJOREDO$IULFDQKDLUFDUHPDUNHWVL]H  Priceperformance(%) Solid innovation track record: *&3/ KDV EHHQ DKHDG RI  1M 3M 1Y FRPSHWLWLRQLQLQQRYDWLRQZKLFKKDVKHOSHGLWWRJDLQPDUNHWVKDUH Godrej 14.7 17.4 40.1 3URGXFWV VXFK DV ³+LW 0DJLF 3DSHU´ ³([SHUW &UqPH +DLU FRORXU´ LQ Consumer VDFKHW DQG ³*RRG NQLJKW ORZ VPRNH FRLO´ KDYH PDGH WKH UHVSHFWLYH Absolute(US$) 14.6 15.9 32.5 FDWHJRULHV PRUH DFFHVVLEOH RU DWWUDFWLYH WR FRQVXPHUV ZKLOH EHLQJ Rel.toSensex 8.7 11.3 41.9 PDUJLQ DFFUHWLYH IRU WKH FRPSDQ\ *&3/ ZLOO FRQWLQXH WR KDYH WKLV CAGR(%) 3yrs 5yrs HGJHGXHWRLWVGHVLJQOHGWKLQNLQJ5 'FDSDELOLWLHVDQGPXOWLFRXQWU\ EPS 20.1 17.4 SUHVHQFH  Stockmovement Successful acquisition strategy: *&3/ DFTXLUHV FRPSDQLHV LQ Volume(LHS) IRFXVHG JHRJUDSKLHV DQG FDWHJRULHV DW UHDVRQDEOH YDOXDWLRQV 7KH Shares(000') Price(RHS) (Rs) DFTXLUHG FRPSDQLHV DUH JLYHQ VLJQLILFDQW DXWRQRP\ WR PDLQWDLQ WKHLU 1,400 2,000 1,200 GLVWLQFWFXOWXUHZKLOHHQVXULQJWKDWWKHEHVWSUDFWLFHVRIWKHJURXSDUH 1,000 1,500 IROORZHG ([FKDQJH RI OHDUQLQJV DFURVV JHRJUDSKLHV DFFHOHUDWHV 800 1,000 600 JURZWKDQGPLWLJDWHVULVN0RUHRYHU*&3/XVHVLWVWHFKQRORJLFDODQG 400 500 PDUNHWLQJ H[SHUWLVH LQ RQH UHJLRQ WR JURZ RUJDQLFDOO\ LQ DQRWKHU +, 200 0 0 +RXVHKROG,QVHFWLFLGHV LQ$IULFDDQGWKHXSFRPLQJKDLUFDUHODXQFK 15 16 14 15 14 15 16 14 15 14 15 15 16 Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ LQ,QGRQHVLDDUHH[DPSOHVRIWKLVJURZWKYLDFURVVSROOLQDWLRQ Jun Jun Jun Oct Oct Apr Apr Feb Feb Aug Aug Dec Dec  Financialsummary(Rsm)  Y/e31Mar,Consolidated FY15A FY16A FY17ii FY18ii FY19ii  Revenues(Rsm) 82,422 89,572 103,752 118,077 135,314   ďŝƚĚĂŵĂƌŐŝŶƐ;йͿ ϭϲ͘ϲ ϭϴ͘ϯ ϭϴ͘ϯ ϭϵ͘Ϭ ϭϵ͘ϲ  PreͲexceptionalPAT(Rsm) 8,944 11,437 13,287 16,041 19,055 PercyPanthaki [email protected] ReportedPAT(Rsm) 9,071 11,227 13,287 16,041 19,055 912246464662 PreͲexceptionalEPS(Rs) 26.3 33.6 39.0 47.1 56.0  'ƌŽǁƚŚ;йͿ ϭϴ͘ϲ Ϯϳ͘ϵ ϭϲ͘Ϯ ϮϬ͘ϳ ϭϴ͘ϴ AviMehta //&>ǀƐĐŽŶƐĞŶƐƵƐ;йͿ ;Ϯ͘ϯͿ ϭ͘ϱ ϲ͘ϵ [email protected] PER(x) 59.8 46.8 40.3 33.3 28.1 912246464650 ZK;йͿ ϮϮ͘ϭ Ϯϰ͘ϯ Ϯϯ͘ϳ Ϯϰ͘Ϯ Ϯϱ͘Ϭ  Netdebt/equity(x) 0.4 0.4 0.3 0.1 0.0 SameerGupta 1Q2016 [email protected] EV/Ebitda(x) 40.4 33.8 29.3 24.2 20.3 Patanjali Unlocking value 4Q2015 Simba go to the city 4Q2015 Click Moved My Cheese 3Q2015 912246464672 Price/book(x) 12.4 10.5 8.8 7.5 6.6  Source:Company,IIFLResearch.Priceasatcloseofbusinesson21June2016. www.iiflcap.com Injurious to listed FMCG health  New choices, more ideas Migration – only solution for agri distress A deep dive into Indian Internet

Detailed Detailed report report

India - Pharma %DMDM)LQDQFH %8< &RQWDLQHU&RUSRI,QGLD %8< India - Cement ,QVWLWXWLRQDO(TXLWLHV ,QVWLWXWLRQDO(TXLWLHV

CMPRs2576 Indulge yourself CMPRs1262 W ho moved my container? Target12mRs3100(20%) Target12mRs1550(23%) Container Corporation of India (Concor) is transforming from Bajaj Finance (BAF) is the only diversified NBFC in India that Marketcap(US$m) 4,072 a vanilla transportation company into an integrated logistics Marketcap(US$m) 1,741 has scaled up its business successfully over FY09-14 to Enterprisevalue(US$m) 3,648 player by setting up 15 logistics parks along the dedicated emerge as the third largest in terms of assets under freight corridor (DFC). Phased completion of DFC from FY17 Bloomberg BAFIN Bloomberg CCRIIN management (AUM). The opportunity landscape for BAF to should eliminate railway network congestion and improve Sector Banks scale up businesses in consumer and small business finance Sector Logistics competitiveness of container movement on rails vs. road.      and consolidate its leadership position in its chosen segments Concor’s virtual monopoly (79% share) in this market should   16September2014 is immense. Hiving off home loans into a separate housing accelerate earnings from FY17. Through FY14-17ii, earnings 5September2014  finance subsidiary is a step in that direction. We believe Bajaj  should grow at 15% pa vs. 5% during FY09-14, led by 52WkHigh/Low(Rs) 2648/1130 Finance (BAF) is well poised to deliver 25% earnings Cagr, 52WkHigh/Low(Rs) 1410/675 gradual pickup in the economy and entry into logistics parks. Shareso/s(m) 50 3% ROA and 20%+ ROE over FY14-17ii, superior to its peers. Shareso/s(m) 195 Dailyvolume(US$m) 1 We maintain BUY and raise 12-m TP to Rs3100 on visibility of Strong business franchise; set to become stronger: Armed with Dailyvolume(US$m) 2 DividendyieldFY15ii(%) 0.7 high growth and profitability. a vast network of 63 terminals across India, Concor enjoys a virtual DividendyieldFY15ii(%) 1.4 Freefloat(%) 38.4 monopoly (market share of 79%) in moving container cargo on rail.  A unique franchise with sustainability: BAF has emerged as a Freefloat(%) 38.2 It plans to invest Rs30bn to set up 15 logistics parks (MMLPs) across Shareholdingpattern(%)  the proposed DFCs. The MMLPs are well equipped to handle third- diversified financial services company with well-established Shareholdingpattern(%) Promoters 61.6 party cargos and offer warehousing facilities. We believe that timely franchises in consumer and small business financing. A large market Govt.ofIndia 61.8 FII 12.2 opportunity landscape and niche positioning of BAF in its key diversification would only strengthen Concor’s business franchise. FII 26.5 DII 7.1 business segments make its high growth sustainable over the DII 6.4 Structural growth drivers falling in place: Structural headwinds Others 19.1 medium term. Growth is a continuum in BAF, driven by constant Others 5.3 such as capacity constraints in rail infra, idle capacity in surface  extensions to the existing product offerings and launch of new Priceperformance(%)  transport, and gaps in EXIM trade adversely affected container product designs. These drivers would anchor growth outlook for BAF movement by rail. The government’s plans to set up two DFCs  1M 3M 1Y Priceperformance(%) over the long term too. connecting the northern region to key ports of western and eastern BajajFinance 14.0 27.2 124.8  1M 3M 1Y India should go a long way in addressing network congestion in Absolute(US$) 13.3 25.3 135.3 Strong earnings growth sustainable over FY14-17ii too: We CCRI (1.4) 6.1 79.1 phases from FY17. Seamless completion of DFC, gradual revival in Rel.toSensex 11.2 20.9 88.9 forecast 25% earnings Cagr for BAF driven by 30% AUM Cagr, stable Absolute(US$) (0.3) 4.6 98.6 the economy, and possible initiatives such as GST should help rail asset quality, and improvement in operating efficiency. BAF would be CAGR(%) 3yrs 5yrs Rel.toSensex (5.7) (1.9) 36.7 container movement to gain market share from road. We model rail incorporating a wholly owned subsidiary and will hive off its home EPS 29.0 73.2 CAGR(%) 3yrs 5yrs container volumes to grow at 22-25% pa through FY17-25ii vs. 8-  loan business into the subsidiary. This organisational restructuring is EPS 4.1 4.6 9% pa seen through FY08-14. Stockmovement likely to enhance profitability of the housing finance business, as well  Volume(LHS) Shares(000') as the value accruing from this business to BAF. Stockmovement LT play on strong macro themes: Concor is well placed to benefit Price(RHS) (Rs) Volume(LHS) from structural growth drivers likely to play out in phases from FY17. 2,000 3,000 Shares(000') Price(RHS) (Rs) 2,500 Strong earnings, capital augmentation to sustain re-rating: We model its volumes to grow at 20-22% pa through FY17-25ii, with 1,500 1,500 1,500 2,000 BAF’s stock price has significantly re-rated, aided by successful commensurate growth in EPS. Our DCF-based TP is predicated on 1,000 1,500 scaling up of the business, increased confidence on execution 1,000 1,000 1,000 this. Through FY14-17ii, gradual pickup in the domestic economy 500 500 capabilities of the management, and demonstration of efficient use should help Concor’s volume to grow at 12-13% pa, leading to 15% 500 500 0 0 of capital. The company is likely to augment capital over the next 9- pa EPS growth through FY14-17ii, vs. 5% pa in FY09-14. In the 12 13 13 14 12 13 14 13 14 13 14 13 14 Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ 12 months. Growth is likely to be self-sustaining over the next five 0 0 meanwhile, a runaway increase in haulage charges (10-15%) Jul Jul Jan Jan Sep Sep Sep 13 12 14 13 14 13 12 14 14 13 13 Nov Nov Mar Mar 14 13 May May Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ Ͳ  years despite rapid growth in AUM, due to strong internal accruals. Ͳ remains a key risk. Jul Jul Jan Jan Sep Sep Sep Nov Nov Mar Mar May  May  Financial summary(Rsm) Financialsummary(Rsm)   Y/e31Mar,Parent FY13A FY14A FY15ii FY16ii FY17ii  Y/e31Mar,Parent FY13A FY14A FY15ii FY16ii FY17ii  Revenues(Rsm) 44,060 49,844 59,435 72,065 86,133  Preprov.operatinginc.(Rsm) 10,534 13,490 15,649 19,790 25,457 

 Pre ͲexceptionalPAT(Rsm) 5,913 7,190 8,570 11,001 14,155  ďŝƚĚĂŵĂƌŐŝŶƐ;йͿ Ϯϯ͘ϴ ϮϮ͘ϭ ϮϮ͘ϭ ϮϮ͘ϳ ϮϮ͘ϭ   Reported PAT(Rsm) 5,913 7,190 8,570 11,001 14,155 PreͲexceptionalPAT(Rsm) 9,390 9,900 11,046 13,296 15,173   ReportedPAT(Rsm) 9,400 9,847 11,046 13,296 15,173 PreͲexceptionalEPS(Rs) 118.8 144.5 170.9 219.4 282.3    PreͲexceptionalEPS(Rs) 48.2 50.8 56.7 68.2 77.8  Growth(%) 20.8 21.7 18.3 28.4 28.7       'ƌŽǁƚŚ;йͿ ϭ͘Ϭ ϱ͘ϰ ϭϭ͘ϲ ϮϬ͘ϰ ϭϰ͘ϭ  IIFLvsconsensus(%)  (1.3) 3.7 10.7 HarshvardhanDole //&>ǀƐĐŽŶƐĞŶƐƵƐ;йͿ Ϯ͘ϲ ϱ͘ϳ ;ϭ͘ϭͿ SampathKumar PER(x) 21.7 17.8 15.1 11.7 9.1 [email protected] [email protected] PER(x) 26.2 24.9 22.3 18.5 16.2 Book value(Rs) 676 802 952 1145 1398 912246464660 +912246464665 ZK;йͿ ϭϱ͘ϴ ϭϰ͘ϵ ϭϱ͘Ϭ ϭϲ͘ϯ ϭϲ͘ϳ PB (x) 3.8 3.2 2.7 2.2 1.8   Netdebt/equity(x) (0.5) (0.4) (0.4) (0.4) (0.4) AbhishekMurarka CAR(%) 22.0 22.0 20.3 19.3 18.7 DeveshAgarwal,CFA EV/Ebitda(x) 20.6 19.6 16.4 13.0 11.1 Striking roots 2Q2015 [email protected] ROA(%) 3.8 3.4 3.0 2.9 3.0 [email protected] Cement Stars of India 3Q2014 912246464647 Price/book(x) 3.9 3.5 3.2 2.9 2.6 912246464661 ROE (%) 22.0 19.5 19.6 20.9 22.2  SIZING UP INDIA & CHINA 2Q2015  www.iiflcap.com Source:Company,IIFL Research.Priceasatcloseofbusinesson5September2014. www.iiflcap.com Source:Company,IIFLResearch.Priceasatcloseofbusinesson15September2014.

US opportunity remains the best growth bet 1 1 The Indian Cement walk of fame

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