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UBS Investment Research
Motherson Sumi Systems
E volving into major global auto supplier
Product portfolio to boost content per car; targets US$5bn sales in FY15F
Motherson Sumi Systems (MSSL) is a leading Indian auto parts maker that is
rapidly evolving into a major global supplier. Its 2009 acquisition of the distressed
Visiocorp, the reviving global and India auto markets, market share gain and its
presence in 21 countries are driving this evolution. The company’s advantageous
product portfolio of mirrors (55.5% of FY11 sales), wiring harnesses (30.4% of
FY11 sales), and polymer components provides potential to expand content per
car. MSSL targets US$5bn in sales in FY15F, implying a CAGR of 29%. We
estimate US$3.7bn in revenue in FY15 as we assume fewer new products.
Good track record with JVs, and ability to turn around acquisitions
MSSL has good execution ability and a strong track record in earnings (FY02-11
PAT CAGR of 42%) and JV partnerships. It has also turned around acquisitions
such as Visiocorp, renamed Samvardhana Motherson Reflectec (SMR), which
have provided access to key clients and markets.
Forecast strong earnings growth, rising EBITDA margin and high returns
We forecast an FY11-13 consolidated PAT CAGR of 26%, a 2.5ppt increase in
EBITDA margin from FY11 to FY14 with the SMR scale-up. Strong operations
are reflected in forecast FY12 ROE/ROIC of 28.5%/24.2%, capital discipline (no
capital raising in past 10 years except foreign currency convertible bonds in FY06),
FY12E debt-to-equity ratio of 0.5x, and company’s dividend payout target of 40%.
Valuation: initiate coverage with Buy rating and a price target of Rs280.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We expect valuations to
remain high, and our price target implies 17.7x FY13E PE. We think earnings
momentum rather than multiples re-rating will drive the share price.
Investment Thesis
We initiate coverage of MSSL with a Buy rating and Rs280.00 price target. We
forecast strong earnings momentum (FY11-13 PAT CAGR of 26%), EBITDA
margin improvement from 8.5% in FY11 to 11% in FY14 and high FY12
ROE/ROIC of 28.5%/24.2%. These will be driven by further improvements at
SMR, market share gains (in wiring harnesses, mirrors, polymer components),
recovering domestic and global auto sales, and significant potential to grow
content per car. We attribute the company’s higher than peer group returns to its
capital discipline (over the past 10 years it has only raised equity capital through
foreign currency convertible bonds (FCCB), has grown earnings through internal
accruals and debt, and dilutions have been largely through bonus issues),
manufacturing efficiency and targeted 40% dividend payout. We are positive on
management’s target of US$5bn in sales in FY15F, from US$1.8bn in FY11
(implied CAGR of 29%), given its strong track record of delivering on five year
targets. However, we forecast PAT of US$3.7bn in 2015 as we assume fewer
new products.
Given the above positives, we believe MSSL’s valuations at 18.9x FY12E PE
and 14.6x FY13E PE (although premium compared to its historical PE band and
the Indian auto supplier universe FY12E PE mean of 16.4x and 15.5x FY13E)
are reasonable, and we expect them to remain at elevated levels. Our price target
implies 17.7 FY13E PE. On EV/EBITDA valuations, MSSL is trading at 10.6x
FY12E and 8.3x FY13E, in line with the Indian peer medians of 10.8x FY12E
and 8.3x FY13E and near its own historical mean. We believe the share price
will be driven by earnings momentum and operational improvements, and not rerating
of current valuation multiples. Financial performance will be critical to
keeping valuations at elevated levels, in our view.
We like MSSL’s strong execution capability (checks with OEMs by UBS’s auto
team indicate significant confidence), dynamic and entrepreneurial management,
good earnings track record (FY02-11 PAT CAGR of 42%), success in JV
partnerships and ability to buy and turnaround distressed assets and companies.
Our plant visits indicate a Japanese style of manufacturing, cost control and
employee ownership of operations. MSSL also has an advantageous portfolio of
wiring harnesses (30.4% of FY11 revenue, OEMs prefer not to change suppliers,
high content per car), mirrors (55.5% of FY11 revenue, good potential for
innovation and expanding product content per car) and polymer components
(10.9% of FY11 revenue, potential to leverage on existing capabilities, global
presence near OEMs give it an edge).
Key catalysts
Turnaround of SMR, margin improvement and new order flow: MSSL
acquired SMR in March 2009 and the company turned PAT positive in FY10.
We believe the scale-up of SMR operations (MSSL indicates it has
approximately €800m of orders over the medium to long term), gradual
EBITDA margin improvement (driven by cost rationalisation, in-house
sourcing and leveraging strong R&D pipeline), and strong expansion of the
mirror business in India will be the most important catalysts. MSSL plans to
leverage its large global presence (90 locations in 21 countries) and supplier
relationship with most global OEMs to expand existing segments and
develop new products. We expect all this to add to earnings growth
momentum and overall margin improvement.
Strong earnings momentum and EBITDA margin improvement: We
forecast strong earnings growth momentum (FY11-13 PAT CAGR of 26%)
and consolidated EBITDA margin to improve from 8.5% in FY11 to 11% in
FY14 on SMR synergies and operational improvements. We expect
improving fundamentals to remain a strong catalyst.
Expanding content per car, new JVs and potential acquisitions: MSSL’s
strong execution ability, advantageous product portfolio, global
manufacturing presence and good relationships with OEM, have enabled it to
expand the cost content per car. We expect new JVs and potential prudent
acquisitions to support this strategy, adding to investor sentiment on the stock.
Global and India auto market outlook: After a 30% increase in combined
global passenger vehicle (PV) and light commercial vehicle (LCV)
production in 2010, UBS’s global auto team forecasts 1.4% growth in global
auto production in 2011 and 8.0% growth in 2012 on US and emerging
market growth. In India, while the long-term auto sales outlook is positive,
UBS’s auto team expects headwinds from monetary tightening and inflation
to keep sales growth moderate in FY12. We believe auto sales/production
growth rates will improve in FY13 and expect MSSL’s share price to start
factoring in FY13 estimates by H2 FY12.
Risks
SMR turnaround, earnings momentum critical to retaining elevated
valuations: We believe the elevated valuations for the stock are factoring in
strong earnings forecasts, margin improvement and the ongoing turnaround
at SMR. We consider these factors critical for future share price
performance. If these do not materialise, the potential downside from
current valuations could be steep. Note that SMR is continuing to improve
its operations and MSSL’s FY11 results indicated good margin
improvement at the subsidiary level.
Volatility in raw material prices and exchange rates: We expect volatility
in raw material prices and exchange rates (appreciating INR negative for
consolidation of international operations) to impact MSSL’s EBITDA
margins over the medium term. MSSL does not hedge raw material costs and
foreign currency exposure. Management has indicated that OEMs adjust
pricing over time to reflect changes in raw material prices. We expect a
quarter or two of lag in incorporating price hikes.
Weaker-than-expected global auto outlook: Any deterioration in the
global or India auto outlook would impact MSSL’s growth potential, margin
improvement trajectory and the SMR turnaround.
Significant capital reinvestment, deterioration in working capital,
expensive M&A: Large capital reinvestment (to grow MSSL sales),
deterioration in working capital (currently at reasonable levels) and any
expensive M&A would stretch the balance sheet (FY12E debt-to-equity at
0.5x) and push FCF breakeven forward.
Valuation and basis for our price target
We derive our price target of Rs280.00 from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
believe DCF captures: 1) MSSL’s forecast sales growth trajectory (strong
growth in mirrors in India, wiring harnesses, polymer products) due to market
share gains and higher content per car; and 2) improvement in EBITDA margin
largely due to cost rationalisations at SMR; 3) the company’s forecast of
approximately €800m of orders over the medium to long term. Except for fast
growth in the polymer segment (where we think SMR could expand given its
moulding capability), we do not assume any new products. We forecast PAT of
US$3.7bn in 2015 (below management guidance of US$5bn, which assumes
more new products). We assume a WACC of 12.0% taking into account the
expected scale-up at SMR (margin improvement is critical to earnings growth).
Our price target implies 17.7x FY13E PE, a premium to most Indian and global
peers. We believe this is justified by the positive factors outlined above.
Motherson Sumi Systems
Motherson Sumi Systems Limited (MSSL) is the flagship listed company of the
Samvardhana Motherson Group (SMG). It was established in 1986 as a joint
venture between SMG and Sumitomo Wiring Systems (Japan). MSSL is one of
the largest auto component companies in India by revenue and is evolving into a
leading global OEM supplier following the 2009 acquisition of Visiocorp
(renamed Samvardhana Motherson Reflectec). The company's key products are
mirrors, wire harnesses and polymer components.
Statement of Risk
We believe the turnaround at SMR and earnings momentum are critical to
Motherson Sumi Systems. We consider volatile raw material prices and foreign
exchange rates and any weakening in the global auto outlook as key risks to the
company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Motherson Sumi Systems
E volving into major global auto supplier
Product portfolio to boost content per car; targets US$5bn sales in FY15F
Motherson Sumi Systems (MSSL) is a leading Indian auto parts maker that is
rapidly evolving into a major global supplier. Its 2009 acquisition of the distressed
Visiocorp, the reviving global and India auto markets, market share gain and its
presence in 21 countries are driving this evolution. The company’s advantageous
product portfolio of mirrors (55.5% of FY11 sales), wiring harnesses (30.4% of
FY11 sales), and polymer components provides potential to expand content per
car. MSSL targets US$5bn in sales in FY15F, implying a CAGR of 29%. We
estimate US$3.7bn in revenue in FY15 as we assume fewer new products.
Good track record with JVs, and ability to turn around acquisitions
MSSL has good execution ability and a strong track record in earnings (FY02-11
PAT CAGR of 42%) and JV partnerships. It has also turned around acquisitions
such as Visiocorp, renamed Samvardhana Motherson Reflectec (SMR), which
have provided access to key clients and markets.
Forecast strong earnings growth, rising EBITDA margin and high returns
We forecast an FY11-13 consolidated PAT CAGR of 26%, a 2.5ppt increase in
EBITDA margin from FY11 to FY14 with the SMR scale-up. Strong operations
are reflected in forecast FY12 ROE/ROIC of 28.5%/24.2%, capital discipline (no
capital raising in past 10 years except foreign currency convertible bonds in FY06),
FY12E debt-to-equity ratio of 0.5x, and company’s dividend payout target of 40%.
Valuation: initiate coverage with Buy rating and a price target of Rs280.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We expect valuations to
remain high, and our price target implies 17.7x FY13E PE. We think earnings
momentum rather than multiples re-rating will drive the share price.
Investment Thesis
We initiate coverage of MSSL with a Buy rating and Rs280.00 price target. We
forecast strong earnings momentum (FY11-13 PAT CAGR of 26%), EBITDA
margin improvement from 8.5% in FY11 to 11% in FY14 and high FY12
ROE/ROIC of 28.5%/24.2%. These will be driven by further improvements at
SMR, market share gains (in wiring harnesses, mirrors, polymer components),
recovering domestic and global auto sales, and significant potential to grow
content per car. We attribute the company’s higher than peer group returns to its
capital discipline (over the past 10 years it has only raised equity capital through
foreign currency convertible bonds (FCCB), has grown earnings through internal
accruals and debt, and dilutions have been largely through bonus issues),
manufacturing efficiency and targeted 40% dividend payout. We are positive on
management’s target of US$5bn in sales in FY15F, from US$1.8bn in FY11
(implied CAGR of 29%), given its strong track record of delivering on five year
targets. However, we forecast PAT of US$3.7bn in 2015 as we assume fewer
new products.
Given the above positives, we believe MSSL’s valuations at 18.9x FY12E PE
and 14.6x FY13E PE (although premium compared to its historical PE band and
the Indian auto supplier universe FY12E PE mean of 16.4x and 15.5x FY13E)
are reasonable, and we expect them to remain at elevated levels. Our price target
implies 17.7 FY13E PE. On EV/EBITDA valuations, MSSL is trading at 10.6x
FY12E and 8.3x FY13E, in line with the Indian peer medians of 10.8x FY12E
and 8.3x FY13E and near its own historical mean. We believe the share price
will be driven by earnings momentum and operational improvements, and not rerating
of current valuation multiples. Financial performance will be critical to
keeping valuations at elevated levels, in our view.
We like MSSL’s strong execution capability (checks with OEMs by UBS’s auto
team indicate significant confidence), dynamic and entrepreneurial management,
good earnings track record (FY02-11 PAT CAGR of 42%), success in JV
partnerships and ability to buy and turnaround distressed assets and companies.
Our plant visits indicate a Japanese style of manufacturing, cost control and
employee ownership of operations. MSSL also has an advantageous portfolio of
wiring harnesses (30.4% of FY11 revenue, OEMs prefer not to change suppliers,
high content per car), mirrors (55.5% of FY11 revenue, good potential for
innovation and expanding product content per car) and polymer components
(10.9% of FY11 revenue, potential to leverage on existing capabilities, global
presence near OEMs give it an edge).
Key catalysts
Turnaround of SMR, margin improvement and new order flow: MSSL
acquired SMR in March 2009 and the company turned PAT positive in FY10.
We believe the scale-up of SMR operations (MSSL indicates it has
approximately €800m of orders over the medium to long term), gradual
EBITDA margin improvement (driven by cost rationalisation, in-house
sourcing and leveraging strong R&D pipeline), and strong expansion of the
mirror business in India will be the most important catalysts. MSSL plans to
leverage its large global presence (90 locations in 21 countries) and supplier
relationship with most global OEMs to expand existing segments and
develop new products. We expect all this to add to earnings growth
momentum and overall margin improvement.
Strong earnings momentum and EBITDA margin improvement: We
forecast strong earnings growth momentum (FY11-13 PAT CAGR of 26%)
and consolidated EBITDA margin to improve from 8.5% in FY11 to 11% in
FY14 on SMR synergies and operational improvements. We expect
improving fundamentals to remain a strong catalyst.
Expanding content per car, new JVs and potential acquisitions: MSSL’s
strong execution ability, advantageous product portfolio, global
manufacturing presence and good relationships with OEM, have enabled it to
expand the cost content per car. We expect new JVs and potential prudent
acquisitions to support this strategy, adding to investor sentiment on the stock.
Global and India auto market outlook: After a 30% increase in combined
global passenger vehicle (PV) and light commercial vehicle (LCV)
production in 2010, UBS’s global auto team forecasts 1.4% growth in global
auto production in 2011 and 8.0% growth in 2012 on US and emerging
market growth. In India, while the long-term auto sales outlook is positive,
UBS’s auto team expects headwinds from monetary tightening and inflation
to keep sales growth moderate in FY12. We believe auto sales/production
growth rates will improve in FY13 and expect MSSL’s share price to start
factoring in FY13 estimates by H2 FY12.
Risks
SMR turnaround, earnings momentum critical to retaining elevated
valuations: We believe the elevated valuations for the stock are factoring in
strong earnings forecasts, margin improvement and the ongoing turnaround
at SMR. We consider these factors critical for future share price
performance. If these do not materialise, the potential downside from
current valuations could be steep. Note that SMR is continuing to improve
its operations and MSSL’s FY11 results indicated good margin
improvement at the subsidiary level.
Volatility in raw material prices and exchange rates: We expect volatility
in raw material prices and exchange rates (appreciating INR negative for
consolidation of international operations) to impact MSSL’s EBITDA
margins over the medium term. MSSL does not hedge raw material costs and
foreign currency exposure. Management has indicated that OEMs adjust
pricing over time to reflect changes in raw material prices. We expect a
quarter or two of lag in incorporating price hikes.
Weaker-than-expected global auto outlook: Any deterioration in the
global or India auto outlook would impact MSSL’s growth potential, margin
improvement trajectory and the SMR turnaround.
Significant capital reinvestment, deterioration in working capital,
expensive M&A: Large capital reinvestment (to grow MSSL sales),
deterioration in working capital (currently at reasonable levels) and any
expensive M&A would stretch the balance sheet (FY12E debt-to-equity at
0.5x) and push FCF breakeven forward.
Valuation and basis for our price target
We derive our price target of Rs280.00 from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
believe DCF captures: 1) MSSL’s forecast sales growth trajectory (strong
growth in mirrors in India, wiring harnesses, polymer products) due to market
share gains and higher content per car; and 2) improvement in EBITDA margin
largely due to cost rationalisations at SMR; 3) the company’s forecast of
approximately €800m of orders over the medium to long term. Except for fast
growth in the polymer segment (where we think SMR could expand given its
moulding capability), we do not assume any new products. We forecast PAT of
US$3.7bn in 2015 (below management guidance of US$5bn, which assumes
more new products). We assume a WACC of 12.0% taking into account the
expected scale-up at SMR (margin improvement is critical to earnings growth).
Our price target implies 17.7x FY13E PE, a premium to most Indian and global
peers. We believe this is justified by the positive factors outlined above.
Motherson Sumi Systems
Motherson Sumi Systems Limited (MSSL) is the flagship listed company of the
Samvardhana Motherson Group (SMG). It was established in 1986 as a joint
venture between SMG and Sumitomo Wiring Systems (Japan). MSSL is one of
the largest auto component companies in India by revenue and is evolving into a
leading global OEM supplier following the 2009 acquisition of Visiocorp
(renamed Samvardhana Motherson Reflectec). The company's key products are
mirrors, wire harnesses and polymer components.
Statement of Risk
We believe the turnaround at SMR and earnings momentum are critical to
Motherson Sumi Systems. We consider volatile raw material prices and foreign
exchange rates and any weakening in the global auto outlook as key risks to the
company.
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