Motherson Sumi Systems

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Equity Research INDIA October 11, 2020 BSE Sensex: 40509 Motherson Sumi Systems BUY Maintained ICICI Securities Limited is the author and A closer look at SAMIL’s businesses Rs121 distributor of this report Motherson Sumi Systems (MSS) management hosted investors for an interaction

on the top-10 businesses incubated under Samvardhana Motherson International Company update and (SAMIL), which is to be merged into MSS. earnings revision Key takeaways from the call Automobiles  SAMIL has a total portfolio of 17-18 companies with 15 JV partners from six countries generating overall revenue of Rs28bn and 13.3% EBITDA in FY20 spread Target price: Rs158 across 50 facilities. The total capital invested in SAMIL (ex-of SMRPBV/MSSL) is ~Rs28bn. Earnings revision  Top 10 businesses have witnessed a CAGR growth of 25% in the past five years, (%) FY21E FY22E clocked ~Rs24bn in revenue in FY20 (refer Table 1). Top 10 businesses generated Sales ↑ 4.6 ↑ 5.9 EBITDA ↑ 6.9 ↑ 7.0 RoCE of 23% and 17% in FY19/20, respectively. Interestingly, all business segments

PAT ↑ 33.3 ↑ 5.6 have vastly experienced management teams with >10years association with Motherson group. Target price revision  Management indicated 8 of the top 10 businesses are consistent dividend paying Rs158 from Rs126 companies, only metal solutions company (weak RoCE), which was recently Shareholding pattern established at the behest of the customer, is in growth phase. Dec Mar Jun  SAMIL shared services provide centralised umbrella entity for M&A support, ‘19 ‘20 ‘20 Promoters 61.7 61.7 61.7 procurement support, compliance, audit and legal support, travel and facility Institutional construction management services to all businesses under MSSL and SAMIL. investors 29.0 29.1 29.0 MFs and others 10.7 10.2 11.0  SAMIL is currently ~5% of the overall MSSL business and the combined entity would FIs/Banks 1.7 2.2 2.2 FIIs 16.6 15.7 15.8 be able to increase content per OEM as it leverages existing relationships. OEMs

Others 9.3 9.2 9.3 may gain via better value propositions as MSSL will continue to strongly integrate Source: BSE backwards.

Price chart Table 1: Financial performance of top-10 subsidiaries and JVs 300 Name of Product/ Service Revenue (Rs mn) EBITDA (Rs mn) ROCE 250 Company FY19 FY20 FY19 FY20 FY19 FY20 200 MMLI Lighting 7,120 8,680 1,250 1,700 32% 39% MIND Services & IT soln. 3,960 4,200 380 270 26% 9% 150

(Rs) MSGI Metal solution 4,670 3430 420 150 8% -4% 100 MMAS Metal solution 1,730 1,490 190 120 7% -2% 50 MTTL Metal solution 1,710 1,390 460 240 21% 5% 0 Engineering & CTMIL 1,020 1,220 370 360 46% 32% Tooling

Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 VMTI Metal solution 1,010 1,110 80 90 35% 36% AIM Metal solution 860 930 170 150 32% 27% FMCEL Metal solution 970 770 140 70 16% 5% MTIL Services & IT soln. 660 710 120 160 92% 84% Total (Top 10) 23,720 23,930 3,580 3,310 23% 17% Share of SAMIL on aggregate 87% 85% 94% 89% basis Source: Company data, I-Sec Research

Market Cap Rs382bn/US$5.2bn Year to Mar (Std) FY20 FY21 FY22E FY23E Reuters/Bloomberg MOSS.BO / MSS IN Revenue (Rs bn) 635.4 581.1 776.5 899.1 Shares Outstanding (mn) 3,157.7 Rec. Net Income (Rs bn) 12.1 4.8 26.0 35.3 52-week Range (Rs) 173/95 Rec. EPS (Rs) 3.8 1.5 8.2 11.2 Free Float (%) 38.3 % Chg YoY (24.7) (60.5) 442.2 35.7 Research Analysts: FII (%) 16.6 P/E (x) 31.2 78.9 14.6 10.7 Nishant Vass Daily Volume (US$/'000) 28,359 CEPS (Rs) 12.3 11.3 19.9 24.0 [email protected] Absolute Return 3m (%) 24.0 EV/E (x) 8.7 10.6 5.1 3.6 +91 22 6637 7260 Absolute Return 12m (%) 24.5 Dividend Yield (%) 1.3 1.0 2.9 3.8 Pratit Vajani [email protected] Sensex Return 3m (%) 10.5 RoCE (%) 9.3 4.1 17.6 20.8 +91 22 6637 7161 Sensex Return 12m (%) 7.3 RoE (%) 10.4 4.6 24.0 25.7 Please refer to important disclosures at the end of this report

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Table 2: Overview of Top-10 subsidiaries and JVs MMLI MMAS MTTL MSGI CTMIL & MMDL

Marelli Motherson Motherson Techno MS Global India Marelli Motherson Entity Name Auto Suspension Tools Ltd Automotive Lighting parts 50:50 JV b/w Marelli 75:25 JV b/w 100% ownership 100% ownership 50:50 JV b/w Marelli and SAMIL Motherson and Entity structure and SAMIL Sumitomo Electric Industries, Japan Shock absorber and Production and Body in White & Tooling parts Business Segment Automotive lighting suspension sales of cutting tools Frames for Chassis  Shock absorber  Solid carbide  Cold stampings  Cowl  Strut assembly drills  Hot stampings  Cladding  Gas lifter  Polycrystalline  Dashboard  Steering damper diamond tools  Console  Head lamps  Inserts  Backdoor Key Products  Rear and small  Work holding  Bumper lamps tools  Tail lamp  Advanced hole  Int. trims deburring  Door solutions  Fender  Reamers  Grile  Pune  Pune  Noida  Chennai  Chennai Manufacturing locations  Sanand  Sanand  Bawal  Manesar  India  India  India  Poland  GCC  Germany  Italy  Spain  USA  USA Sales Footprint India  Australia  Australia  Indonesia  South Africa  Morocco  Brazil  Employee Strength 1800 320 250 700 Domestic Auto  Daimler India  Daimler  Ashok Leyland  Bajaj Auto Commercial  Fiat  Dacia  Ford vehicles  Ford  Datsun  Hero Moto Corp  Myoung Shin  Honda Cars  Eicher  Honda Cars India (MSI)  Hyundai  FCA  FCA  Hyundai Motors  Renault Nissan  Kia  Ford  Isuzu  M&M  Kia  Mahindra  GM  Jai  Maruti Suzuki  Hyundai  Maruti Suzuki  Honda  Maruti Suzuki  Tata Motors  Motherson  Mahindra Export  TVS Motors  Renault Nissan  Maruti Suzuki  Datsun Non-Auto  PSA Customer Base  PSA  FCA  BHEL  Skoda  Renault Nissan  GM  Escorts Railway  Tata Motors  Skoda  Meritor  JCB India  Toyota Volkswagen  Paccar  Kirloskar  Volkswagen  Suzuki  PSA Pneumatic  Tata Motors  Renault  L&T Heavy Engg.  Toyota  Siemens  TAL Manufacturing  ThyssenKrupp- Rothe Erde  ZF Wind Power Revenue CAGR FY15-20: 33% FY15-20: 10% FY15-20: 9% FY18-20: 10% FY15-20: 10% EBITDA CAGR FY15-20: 51% FY15-20: 17% FY18-20: 62% ROCE (FY19/20) 39% 7% 21% 8% Source: Company data

Motherson Sumi Systems, October 11, 2020 ICICI Securities

FMCEL VMTI MBSL MTIL AIM MIND Fritzmeier Valeo Motherson Motherson Matsui Anest Iwata Motherson Motherson Cabin Thermal Bergstrom HVAC Technologies India Motherson INfotech and Entity Name Engineering pvt. Commercial Solutions pct. Ltd. Limited Designs Ltd. vehicles India Ltd. 50:50 JV b/w 75:25 JV b/w 70.4% stake 50:50 JV b/w 51:49 JV b/w Entity SAMIL and 51:49 JV b/w Motherson and held by Matsui Japan and Anest Iwata and structure Fritzmeier, Valeo and SAMIL Sumitomo Electric Motherson, rest SAMIL SAMIL Germany Industries, Japan by SWS Air Compressors & Business Operator safety Hi-Tech global HVAC systems HVAC systems Plastics Paint coating Segment cabin solution IT services solutions  Thermal Heater  Truck HVAC Plastic processing  Air Compressor  ADM services  Bus aircon  Compact HVAC in  Vacuum pump  DEX  Dash Controller  Floor Mount  Automotive  E-Bus  Infrastructure  Fall over  E-battery cooler HVAC  Packaging compressor Services protection  Truck  Electric AC  Extrusion  Medical air unit  ERP structure refrigeration  Integrated Roof  Healthcare  Industry 4.0 Key Products  Rollover  Roof hatch mount HVAC  Colling  Global protection  Ceiling Mount solutions Business structure HVAC  Food Services processing  Cloud  Pharma  Consulting Services  Noida Manufacturing  Kancheepuram, locations Chennai  India  India  India  SAARC  GCC  USA  Middle East  Germany Sales India  Africa  Japan Footprint  Singapore  UK  Middle East Employee 300 150 300 1600 Strength  John Deere  Ashok Leyland  Ashok Leyland  ASB  Indian railways  Asahi Glass  Preet tractors  Daimler  Caterpillara International  Instruments  Amtek  Escorts  GTVS  CNH Pvt. Ltd. Research  Ashok construction  JCBL  Escorts  Ashirvad Pipes Associates Leyland  Escorts Agri  Mahindra  JCB Pct. Ltd.  KYB Conmat  Bosch  JCB  MG  Mahindra  Hamilton India Pvt. Ltd.  DuPont  ACE  Tata Marcopolo  Sonalika Pvt. Ltd.  Linde India Ltd.  Eicher  New Holland  Volvo Eicher  Tata Hitachi  Nipro India  Reliance  Fiat CNH Corporation pvt. Industries Ltd.  Honda  Manitou Ltd.  Schwing Stetter  Isuzu Customer  Terex Ventra  Samvardhana Pvt. Ltd.  JCB Base  Mahindra Motherson  Tata Motors  L&T   Tata Hitachi Suzuki Motors  Maruti Suzuki  Wirtgen  Mahindra  Liebherr  Mitsubhishi  Hyundai  3M  BEMl  Sumitomo  Volvo  Tata  TAFE  Yokohama  Caterpillar  Komatsu Revenue FY15-19: 19% FY15-20: 15% FY15-20: 24% FY15-20: 16% FY15-20: 19% CAGR EBITDA FY15-19: 23% FY15-20: 20% FY15-20: 62% FY15-20: 32% FY15-20: 12% CAGR ROCE 16% 36% 84% 27% 9% (FY19/20) Source: Company data

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Key highlights of top 10 subsidiaries and JVs

 MMLI: MMLI is no.3 external lighting player in the country, has the second largest global exterior lighting maker as JV partner (Marelli’s lighting division). MMLI is the leader in LED exterior lighting systems in India and is present in all major PV players (largest customer: MSIL). MMLI is also entering exports opportunities in regions like Brazil, Russia, Indonesia and Morocco. Currently, it derives ~57% revenues from front lighting and 24% from rear lamps. Domestic PV market may witness accelerated LED penetration, current ~30% share is expected to follow suit of global markets (e.g. Europe is ~85% LED). This shift is also marked with strong value increase (2.5-3.0x) vis-à-vis existing technologies (e.g. Halogen); MMLI, thus, would be well poised to capture growth in this segment.  MMAS: The business got established in FY15 at the behest of the customer, Marelli’s ride division which was struggling to manage operations profitably. The entity since has witnessed strong improvements in EBITDA margins (-6% in FY15 to 11% in FY19). Market share of products like gas balancer has expanded from 3% in FY15 to 7% and is set to rise to 25% by FY22. The company plans to target exports and aftermarket to improve profitability. It has Maruti Suzuki, Tata Motors and PSA as its key customers in gas springs segment.  MTTL: MTTL is present in high-value segment of inserts with high entry barriers (e.g. Tungsten carbide and Cubic Boron Nitrite inserts) which involve high R&D and are capital-intensive products. MTTL is currently present in India and GCC regions. The market opportunity currently is ~Rs25bn with average industry EBITDA margin at ~15% (while MTTL delivered ~27% in FY19). The revenue is inclined towards automotive (~75% share) and non-automotive (~25%), with strong customer diversification (no single customer >4% of revenue). Non-automotive segment would be the key future growth driver.  MSGI: MSGI was acquired by SAMIL in 2017 at the behest of its customer request. It focusses on light-weighting for body and chassis parts involving hot and cold stamping and expects to increase contribution to 25% of the overall business (globally 15% of structural body parts are hot stamped). MSGI is a major supplier to Daimler (~43% of sales) and Renault (~46% of sales). The company has also started supply to Kia/Hyundai/MG in its new models and refreshes. Japanese OEMs have been slow in adopting hot stamped parts and may adopt the same going ahead, which may benefit MSGI.  CTMIL, MMDL: The tooling business is the leading manufacturer of tool making and is capable of performing 500+ injection tools ranging from 350T to 3500T. The company is currently undergoing high level backward integration to localise majority of products and develop mould base in India.  FMCEL: FMCEL is a technology specialist providing cabin customisations to its customers. The company is currently focused on construction equipment and is in discussion with OEMs for supply as currently cabins are not mandatory by regulation. It has a huge opportunity for backward integration and support from Fritzmeier in exports. Tractors for exports require cabins and FMCEL has 100% share in key customers like M&M and John Deere.

Motherson Sumi Systems, October 11, 2020 ICICI Securities

 VMTI & MBSL: In HVAC business, the company has a strong presence in bus, truck and off-highway segment. VMTI has developed the TTR technology in India and localisation of the same is expected to gain market share in the future. The company has 97% share of business in Tata Motors and 70% in Ashok Leyland for buses, while for off-highway and trucks, it enjoys 100% share in JCB, Caterpillar and Sonalika. VMTI also supplies HVAC to the Delhi Metro as well as defence products from L&T, Ashok Leyland and Bharat Forge. MBSL has 55% share of OEMs and 45% from aftermarket and supplies 150+ products.  MTIL: MTIL is a major plastic processing supplier to automotive, packaging, healthcare, food processing and pharma industries. The company currently has 108 models and caters to 635+ customers operating in 32+ countries. The revenues are well diversified with ~50% contribution from automotive segment while balance is non-automotive (e.g. packaging, healthcare being the key segment).  AIM: AIM is a two-decade old JV. It is the leading manufacturer of air compressors with 25% market share in small reciprocating compressor and market leader in oil free scroll compressors. The domestic revenue opportunity currently is ~Rs51bn, AIM has strong technological competence due to its 95-year old Japanese JV partner (Anest Iwata). The JV manufactures in Noida cater to export requirement in India and GCC regions. The company has strong presence across automotive, medical and railway segments. The revenue mix remains largely non-automotive (~90% share), while automotive is only ~10%.  MIND: MIND is an end-to-end enterprise IT services and solutions provider with ISO 9001,20000, 27001 quality certification. MIND was established due to group growing internal needs of IT integration. The company currently caters to ~35% of IT wallet share for the group. It expects to increase the same to 60%. The company has developed key expertise in providing plant automation, connected machines, GBS services, Industry 4.0 and digital engineering services. It has now migrated from being only a project-based organisation to adding meaningful product layers (e.g. HRIS1, VMS, iDACS). MIND is already working with more than 64 key non-Motherson group customers (overall 250+ customers - e.g. Ashok Leyland, Maruti Suzuki, Soft Bank etc.). Over the next five years, MIND plans to expand its external customer footprint, which is expected to contribute ~53% to revenues from 27% currently.

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Chart 1: Technology adoption in India from conventional to LED lighting

Source: Company presentation

Chart 2: MMLI – Future product roadmap

Source: Company presentation

Chart 3: MTTL – New product launches Chart 4: CTMIL – Tooling expertise

Source: Company presentation Source: Company presentation

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Chart 5: CTMIL – Domestic tooling projects

Source: Company presentation

Chart 6: CTMIL – Exports tooling projects

Source: Company presentation

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Table 3: Earnings revision (Rs mn, year ending March 31) FY21E FY22E FY23E Previous New Chg (%) Previous New Chg (%) Introduced Sales 5,55,634 5,81,122 4.6 7,33,555 7,76,486 5.9 8,99,126 EBITDA 38,650 41,325 6.9 76,226 81,525 7.0 98,805 PAT 3,602 4,803 33.3 24,667 26,041 5.6 35,338 EPS (Rs) 1.1 1.5 33.3 7.8 8.2 5.6 11.2 Source: Company data, I-Sec research

Valuations

We revise our earnings growth estimates to ~33%/5.6% for FY21E/FY22E, respectively, accounting for strong FCF yield (FY23E: 18%). We continue to like the stock at attractive valuations with rising free cashflows. We rollover into Sep’22E and value it on SoTP basis with the India business and international subsidiaries at 4.1x / 5.6x Sep’22E EPS. We maintain our BUY rating on the stock with a revised target price of Rs158/share (earlier: Rs126).

Table 4: SoTP valuation Entity Sep’22E EPS (Rs) 2-year forward P/E (x) Target value (Rs/sh) India Business (including JV's) 4.1 22 90 International Subsidiaries 5.6 12 68 PKC and Others 20 SMRPBV (51% Share) 47 Target Price 158 Source: I-Sec research

Motherson Sumi Systems, October 11, 2020 ICICI Securities

Financial summary (consolidated) Table 5: Profit and loss statement Table 8: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E Total Op. Income (Sales) 6,35,369 5,81,122 7,76,486 8,99,126 Cashflow before working 44,730 40,633 67,703 80,510 Operating Expenses 5,83,355 5,39,797 6,94,961 8,00,321 capital changes EBITDA 52,014 41,325 81,525 98,805 Working Capital Changes 11,314 3,101 257 8,818 % margins 8.2% 7.1% 10.5% 11.0% Operating Cashflow 56,044 43,734 67,959 89,328 Depreciation & Amortisation 27,043 30,880 36,684 40,310 Capital Commitments (22,491) (20,000) (18,000) (21,000) EBIT 24,971 10,445 44,841 58,494 Free Cashflow 33,553 23,734 49,959 68,328 Other Income 2,307 2,273 3,214 3,718 Cashflow from Investing (39,036) (13,503) (20,238) (14,297) Gross Interest 5,986 4,950 4,978 4,861 Activities PBT 21,291 7,768 43,077 57,351 Issue of Share Capital - - - - Less: Exceptionals 737 - - - Inc/(Dec) in securities premium - - - - PBT after Exceptionals 20,554 7,768 43,077 57,351 Buyback of shares - - - - Less: Taxes 8,184 4,887 12,086 16,209 Inc/(Dec) in Borrowings 10,630 (5,000) (10,000) (10,000) Less: Minority Interest 1,244 -1,207 6,502 7,993 Dividend paid (5,701) (3,790) (11,053) (14,211) Add: Profit from Associates 575 714 1,551 2,189 Others (8,996) (14,950) (14,978) 3,034 Net Income (Reported) 11,700 4,803 26,041 35,338 Cashflow from Financing (4,067) (23,739) (36,031) (21,177) Net Income (Adjusted) 12,144 4,803 26,041 35,338 Activities Source: Company data, I-Sec research Net Cashflow 12,940 6,492 11,691 53,853 Closing Cash & Bank balance 48,606 55,097 66,788 1,20,641 Table 6: Balance sheet Source: Company data, I-Sec research (Rs mn, year ending March 31) FY20 FY21E FY22E FY23E Table 9: Key ratios ASSETS Current Assets 1,94,322 1,88,558 2,47,298 3,10,600 (Year ending March 31) Cash & cash eqv. 48,606 55,097 66,788 1,20,641 FY20 FY21E FY22E FY23E Current Liabilities & Per Share Data (in Rs.) Provisions 1,53,485 1,44,331 1,91,637 2,09,904 EPS (Basic) 3.7 1.5 8.2 11.2 Net Current Assets 40,837 44,227 55,661 1,00,697 EPS (Adjusted) 3.8 1.5 8.2 11.2 Investments 7,954 10,954 14,954 18,954 Cash EPS 12.3 11.3 19.9 24.0 Goodwill 24,068 22,068 20,068 18,068 Dividend per share (DPS) 1.5 1.2 3.5 4.5 Net Fixed Assets 1,91,969 1,81,089 1,62,404 1,43,094 BVPS (Adjusted) 36 33 34 44 Capital Work-in-Progress 8,154 8,154 8,154 8,154 Long term loans & advances 0 0 0 0 Growth Ratios (%) Deferred Tax Assets 5,023 5,323 5,623 5,923 Total Op. Income (Sales) 0.0 -8.5 33.6 15.8 Other non-current asset 26,844 19,839 27,279 27,269 EBITDA -2.7 -20.5 97.3 21.2 Total Assets 2,96,695 2,83,500 2,85,990 3,14,005 Net Income (Adjusted) -24.7 -60.5 442.2 35.7 EPS (Adjusted) -24.7 -60.5 442.2 35.7

LIABILITIES Cash EPS 5.5 -7.9 75.8 20.6 Borrowings 1,20,058 1,15,058 1,05,058 95,058 BVPS (Adjusted) 2.7 -8.0 4.8 26.7 long-term borrowings 82,615 77,615 67,615 57,615 short-term borrowings 37,443 37,443 37,443 37,443 Valuation Ratios (x) Long-term provisions 0 0 0 0 P/E (Adjusted) 31.2 78.9 14.6 10.7 Deferred Tax Liability 4,622 4,622 4,622 4,622 P/BV (Adjusted) 3.4 3.7 3.5 2.8 Other Non-current Liabilities 23,756 25,756 26,756 27,756 EV/EBITDA 8.7 10.6 5.1 3.6 Minority Interest 35,651 34,444 40,945 48,938 EV/Sales 0.7 0.8 0.5 0.4 Equity Share Capital 3,158 3,158 3,158 3,158 Reserves & Surplus 1,09,450 1,00,463 1,05,450 1,34,473 Return/Profitability Ratios (%) Net Worth 1,12,608 1,03,621 1,08,608 1,37,631 EBITDA Margin 8.2 7.1 10.5 11.0 Total Liabilities 2,96,695 2,83,500 2,85,990 3,14,005 Net Income Margin (Adjusted) 1.8 0.8 3.4 3.9 Source: Company data, I-Sec research RoCE 9.3 4.1 17.6 20.8 RoNW 10.4 4.6 24.0 25.7 Table 7: 5-stage DuPont Dividend Payout Ratio 39.0 78.9 42.4 40.2 Dividend Yield 1.3 1.0 2.9 3.8 (year ending March 31)

All figures in % FY20 FY21E FY22E FY23E Solvency/Wkg. Cap. Ratios (x) Tax Burden Net D/E 0.6 0.6 0.4 - (Adjusted PAT/PBT) 56.9 61.8 60.5 61.6 Debt/EBITDA 2.3 2.8 1.3 1.0 Interest Burden EBIT/Interest 4.2 2.1 9.0 12.0 (PBT/EBIT) 82.3 74.4 96.1 98.0 Current Ratio 1.3 1.3 1.3 1.5 EBIT Margin Quick Ratio 1.0 1.3 1.3 1.5 (EBIT/Sales) 4.0 1.8 5.9 6.6 Inventory (days) 29 30 26 28 Asset Turnover Receivables (days) 30 30 29 29 (Sales/Total Assets) 210.9 201.7 267.3 281.8 Payables (days) 60 60 63 62 Financial Leverage Source: Company data, I-Sec research (Total Assets/Equity) 263.5 273.6 263.3 228.2 ROE 10.4 4.6 24.0 25.7 Source: Company data, I-Sec research

Motherson Sumi Systems, October 11, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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