Motherson Sumi (MOTSUM) CMP: | 105 Target: | 100 (-5%) Target Period: 12 months HOLD August 13, 2019 Muted growth prospects to weigh on rich valuations... Motherson Sumi Systems (MSSL) reported a steady Q1FY20 performance. Reported consolidated revenues came in at | 16,793 crore (up 13.7% YoY). Among subsidiaries, SMR posted flattish constant currency revenue at € 403 Particulars million while SMP revenue increased 35% YoY to € 1071 million, backed by Particular | crore greenfield capacity commissioning. Consolidated EBITDA margins Market Capitalization 33,158.3 expanded 24 bps QoQ to 7.5%, aided by recent lease accounting changes Total Debt (FY19) 11,522.8 (AS-116). Adjusting for this, EBITDA margins were at 6.9%. Consequent PAT Cash & Investments (FY19) 3,547.0 (after minority interest) declined 25.2% YoY to | 332 crore. EV (| Crore) 41,134.2 Result Update Result 52 week H/L (|) 212 / 91 Global auto-ancillary, marred by decline in auto volumes! Equity capital | 315.8 Crore Face value | 1 MSSL is truly a global auto ancillary player with outside India constituting ~88% of its consolidates sales and India comprising the rest at 12% of sales. It has high exposure to Europe with Germany accounting for the large chunk Key Highlights and constituting ~23% of sales. US contribution is also at a healthy 15% of sales. Its major clients include Audi (13% of sales), Mercedes Benz (9%), Ramp up of greenfield facility at Volkswagen (9%), Ford (5%), etc. Globally, there has been a downtick in SMP led to sales growth of 14% auto sales volume tracking muted economic prospects amid uncertainty YoY in Q1FY20 surrounding the tariff barriers as well as Brexit. Domestically, increase in Margins came in muted at 6.9% cost of ownership is still weighing on demand with bloated channel (adjusted for change in accounting) inventory. Thus, muted auto growth prospects will limit growth at its key Muted growth prospects prevail in domestic as well as global markets ancillary supplier i.e. MSSL leading to sub-par growth prospects, going tracking muted auto sales volume forward. We build in 7.2% sales CAGR at MSSL over FY19-21E. Maintain HOLD rating on stock with revised target price of | 100 valuing Muted sale growth to limit margin increase! company at 18x P/E on consolidated FY21E EPS of | 5.6 MSSL has been a capital efficient player with a history of a sharp turnaround RoE profile of ~14%, FCF yield of at its key inorganic acquisitions leading to a stable margin profile (8-10%). ~6% provide some comfort Margins, however, are currently depressed tracking the initial ramp up costs at its key facility at SMP. With utilisation set to increase amid single digit Research Analyst topline growth as well as stable commodity prices, we expect EBITDA Research Equity Retail Shashank Kanodia, CFA margins to improve, going forward. The quantum may, however, be limited – [email protected] to just 20 bps on an aggregate basis in FY19-21E. We expect MSSL to clock EBITDA margins of 7.8% in FY20E and thereafter 8.6% in FY21E. Jaimin Desai [email protected] Valuation & Outlook Going forward, for MSSL we estimate sales, EBITDA, PAT CAGR of 7.2%, 8.6% & 4.6%, respectively, in FY19-21E. PAT growth lags EBITDA growth Securities ICICI tracking an increase in depreciation and interest charge as new facilities get commissioned and also due to a change in accounting methodology involving long term leases. The company’s strategy of diversification across geographies and products would remain key to navigating the current challenging phase in global auto industry. We value MSSL at | 100 i.e. 18x P/E on FY21 EPS of | 5.6 with a HOLD rating on the stock. Key Financial Summary Key Financials FY17 FY18 FY19 FY20E FY21E CAGR (FY19-21E) Net Sales 42,493.4 56,293.3 63,522.9 69,220.6 73,012.7 7.2% EBITDA 4,284.7 5,122.6 5,348.4 5,373.3 6,304.3 8.6% EBITDA Margins (%) 10.1 9.1 8.4 7.8 8.6 Net Profit 1,554.3 1,597.0 1,613.2 1,468.0 1,765.2 4.6% EPS (|) 4.9 5.1 5.1 4.6 5.6 P/E 21.3 20.8 20.6 22.6 18.8 RoNW (%) 19.6 17.4 14.7 12.4 13.7 RoCE (%) 16.0 15.7 13.2 11.7 14.6 Source: ICICI Direct Research, Company Result Update | Motherson Sumi ICICI Direct Research Exhibit 1: Variance Analysis Q1FY20 Q1FY20E Q1FY19 YoY (%) Q4FY19 QoQ (%) Comments Topline came in ahead of our estimates tracking beat on Total Operating Income 16,792.5 16,024.7 14,775 13.7 17,169 -2.2 growth rate at company's SMP division Savings was realised on raw material cots with RM costs Raw Material Expenses 9,658.6 9,338.5 8,509.1 13.5 9,974.0 -3.2 as a percentage of sales coming in at 57.5%, down 60 bps QoQ Employee Expenses 3,917 3,631 3,230 21.3 3,955 -1.0 Employee costs came in higher at 23.3% of sales Other expenses 1,961.9 1,941.9 1,624.0 20.8 1,997.5 -1.8 Operating Profit (EBITDA) 1,255.0 1,113.0 1,412 -11.1 1,243 1.0 EBITDA margins came in higher tracking savings realised in EBITDA margin (%) 7.5 6.9 9.6 -208 bps 7.2 24 bps RM costs and is also supported by change in accounting standard methodology (Ind-AS 116) Other Income 54.7 53.8 44.7 22.5 68.2 -19.7 Depreciation came in higher due to reclassification of long Depreciation 637 544 447 42.4 552 15.4 time operating lease as non current liability Interest 156 107 100 55.2 103 51.4 PAT came in higher tracking beat on EBITDA margin partly PAT 331.6 299.8 443 -25.2 410 -19.1 limited by increase in interest as well as depreciation EPS 1.0 0.9 1.4 -25.2 1.3 -19.1 Key Metrics (as reported in Q1FY20 results) Standalone revenue (| crore) 1843 1761 2004 -8.0 1851 -0.5 Standalone margin (%) 17.0 12.7 17.1 -16 bps 18.1 -117 bps Standalone margins came in higher at 17% of sales SMR revenue ( € million) 402 413 403 -0.2 422 -4.7 SMR margin (%) 10.9 11.8 11.2 -22 bps 11.6 -66 bps SMP revenue ( € million) 1071 1006 792 35.2 1053 1.7 SMP revenue came in higher 37% YoY at €1071 million SMP margin (%) 2.6 2.2 6.2 -359 bps 1.9 70 bps Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY20E FY21E (| Crore) Old New % Change Old Introduced % Change Comments Broadly maintain topline estimate tracking ramp up of Revenue 68,687 69,221 0.8 72,577 73,013 0.6 production at SMP and robust demand in domestic wiring harness business due to BS-VI transition EBITDA 5,285 5,373 1.7 6,355 6,304 -0.8 EBITDA Margin (%) 7.7 7.8 7 bps 8.8 8.6 -12 bps Increase in depreciation and interest outgo leads to sharp PAT 1,623 1,468 -9.6 2,063 1,765 -14.4 revision in PAT estimates for FY20E & FY21E EPS (|) 5.1 4.6 -9.6 6.5 5.6 -14.4 Source: Company, ICICI Direct Research Exhibit 3: Assumptions Current Earlier Comments FY18 FY19 FY20E FY21E FY20E FY21E Standalone revenues (| crore) 7,478 7,581 7,847 9,235 8,316 9,529 Standalone margins (%) 18.5 16.8 17.2 16.9 16.5 17.1 Revise topline, margin estimates tracking muted demand SMR revenues ( € million) 1,576.0 1,603.0 1,610.1 1,642.3 1,643.1 1,684.2 prospects both domestically as well as globally SMR margins (%) 11.5 11.4 11.4 12.0 11.8 12.0 SMP revenues ( € million) 3,451.0 3,678.0 4,330.7 4,547.2 4,191.9 4,401.5 SMP margins (%) 7.2 4.3 3.3 5.0 3.3 5.0 Source: Company, ICICI Direct Research ICICI Securities | Retail Research 2 Result Update | Motherson Sumi ICICI Direct Research Annual Report FY19 – Key takeaways Total order book at SMRPBV level was at | 1.47 lakh crore (| 45,312 crore worth orders won in FY19). Exhibit 4: MSSL group structure Source: Company Business developments during the year A. Wiring harness Acquired rolling stock business of Bombardier Transportation, UK Order wins in new segments (recreational vehicles, construction equipment) and new customers in existing segments (engines, military vehicles, agriculture) increased CV and agriculture contribution in North America mix MSSL collaborated in new truck launch by a client and supplied new electrical architecture for the same Became key supplier to leading South American truck OEM Capacity expansion under way in South America Won order for wiring harness (electric trucks) supply to a leading global customer in Japan Pithampur facility production ramped up; new wire facility inaugurated B. Vision systems Added new customers in Europe, India & China Manufacturing facility capacity expansion under way in India & China, with localisation focus in glass actuators to drive efficiencies C. Modules & polymers MATE (polymer business) ventured into manufacturing parts for consumer goods companies Venturing towards vertical integration with PKC for wiring harness and with other polymer companies ICICI Securities | Retail Research 3 Result Update | Motherson Sumi ICICI Direct Research SMRC (erstwhile Reydel Group) Acquired in August 2018 for US$105 million (net of cash acquired US$96 million) The company has a strong footprint in France, Spain, South America and Asia, with the acquisition helping MSSL expand into Croatia, Argentina, Indonesia, Morocco & the Philippines Incurred | 2,685.3 crore capex at consolidated level Its product portfolio spanning cockpit modules, instrument panels, door during FY19 panels, floor consoles, decorative parts, interior products, etc FY19 revenue amounted to €5,278 million, up 5% YoY SMRPBV incurred capex of €255 million during FY19, of which ~40% i.e.