Motherson Sumi:Buy,Zooming ahead
Chairman of Motherson Sumi, Mr Vivek Chaand Sehgal, attended our two-dayinvestor meet. Mr Sehgal remains optimistic about achieving the company’s target ofUSD18bn revenue with 40% pre-tax ROCE, reiterating that there are multiple acquisitionopportunities that the company is evaluating seriously at the behest of customers. Thecompany is quite excited about its recent acquisition of PKC, as it sees multipleopportunities for ROCE expansion within the business. The acquisition also offers crosssellingopportunities with truck OEMs. Motherson believes, in the long term, this will alsoopen up significant possibilities with non-auto customers; PKC is already supplying wiringharness products to railways.
Organic growth on track. Motherson believes the domestic wiring harness business willsignificantly benefit from the change in emission norms in India by 2020 as engines willinvolve more electrical and electronic parts, increasing wiring harness contents. Thecompany’s two new large plants in Tuscaloosa (US) and Hungary are on schedule tocommence operations over the next one year. They are among its largest plants and willsignificantly drive organic growth with strong profitability. Motherson was recentlyawarded the top supplier award for Volkswagen globally in the category of ‘Innovation andTechnology,’ which we believe reinforces the company’s progress in the value chain.
While the company is of the view that the launch of mass-scale electric vehicles is still inthe distant future, this will allow Motherson to offer increased content value across allproduct categories.
Our investment view. We remain positive on Motherson Sumi in the long term as it iswell placed to benefit from the increasing role of auto component suppliers, increasingcomplexity of parts and electronic content helping the wiring harness business, innovationin camera-based technologies and use of modern interior architecture. In addition, webelieve with the recent fund raising, Motherson is ready for multiple acquisitions which willhelp achieve its 2020 goal.
Valuation and risks. We keep our earnings estimate unchanged, but adjust our pershareestimates and TP to account for bonus share issuance effective, which leads toadjustment in TP from INR500 to INR333. We value the company on a Gordon growthbasedPE of 24x June 2019e. We discount it back by a year to arrive at a fair value ofINR333. We have a Buy rating. Key downside risks to our view: Slowdown in theglobal car market, INR appreciation and potential border tax in the US.