Motherson Sumi - IC - HDFC Sec

8/12/2019 Motherson Sumi - IC - HDFC Sec

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INITIATING COVERAGE 23 JUN 2014

Motherson Sumi Ltd. BUY

HDFC Securities Institutional Research is also available on Bloomberg HSLB <GO>

Expanding expertiseMotherson Sumi (MSSL) is a highly capable and

focussed auto ancillary catering to Indian as well as

global OEMs. Starting with wiring harness systems,

MSSL has acquired and mastered businesses in

several new domains globally. With steadily

increasing content per car (with new

products/assemblies), deal wins in local/global

markets and strategic acquisitions, we think MSSL

can drive 50+% earnings growth (consolidated) over

FY14-16E with rising return ratios and profit margins.While standalone business will be a steady

contributor to consol earnings, we expect the share

of subsidiaries (SMP/SMR) to significantly increase

with (1) expansion in China/US/Europe, especially in

the premium segment (2) turnaround of loss making

plants driven by cost cutting, order wins and rising

capacity utilization (3) synergies with group

companies (5) new client acquisitions and deal wins

across markets.

At CMP, MSSL trades at 22.7/15x FY15/16E consolEPS. Initiate with a BUY; our SOTP is Rs 373/sh.

Ancillary turnaround specialist : MSSL commands a

strong reputation for acquiring and turning around

troubled ancillaries on the request of OEMs. The

company has often contributed in making vendor

chains more efficient for OEMs by acquiring weaker

ancillary units and turning them around.

Two key global subs to drive earnings growth : With

its proven track record Motherson hopes to further

drive the now visible turnaround at SMR and SMP

(both subs have reported higher margins in 4QFY14 ).

We model 16/14/14% revenue CAGR over FY14-16E for

standalone/SMP/SMR businesses and a progressively

disproportionate share of profits kicking in from

SMR/SMP (see inside).

Growth in premium vehicles to benefit MSSL : Order

intake for MSSL/SMR/SMP has increased led by growth

in the premium segment. Favorable product mix

(higher realization, higher margins) adds value to the

company’s operations. Increasing content/car will be akey earnings driver.

China/US/Europe demand key to growth : We expect

improving macros to drive global auto sales. MSSL gets

~54% of consolidated revenues from Europe, while

India contributes ~15%, China ~9% and RoW ~22%. We

expect MSSL’s growing focus in China & US, especially

in the premium segment to drive earnings in the near

future. We also highlight MSSL’s endeavor to reduce its

dependence to not more than 15% of revenues from a

single customer, single country or a single commodity,

a step towards de-risking revenues.

CONSOLIDATED FINANCIAL SUMMARY

(Rs mn) FY12 FY13 FY14 FY15E FY16E

Net Sales 147,022 252,253 303,580 344,658 401,001

EBITDA 10,744 19,440 28,781 37,616 48,166

APAT 3,406 4,445 7,650 12,256 18,545

Diluted EPS (Rs) 3.9 5.0 8.7 13.9 21.0

P/E (x) 107.0 62.5 36.3 22.7 15.0

EV / EBITDA (x) 29.3 16.1 10.7 8.1 6.1

RoE (%) 14.9 21.4 29.2 34.0 35.8

Source: Company, HDFC sec Inst Research

INDUSTRY AUTOS

CMP (as on 20 Jun 2014) Rs 315

Target Price Rs 373

Nifty 7,511

Sensex 25,106

KEY STOCK DATA

Bloomberg MSS IN

No. of Shares (mn) 882

MCap (Rs bn) / ($ mn) 275/4,5696m avg traded value (Rs mn) 350

STOCK PERFORMANCE (%)

52 Week high / low Rs 327/123

3M 6M 12M

Absolute (%) 41.8 55.6 128.6

Relative (%) 26.3 36.5 94.5

SHAREHOLDING PATTERN (%)

Promoters 65.59

FIs & Local MFs 7.43

FIIs 16.91

Public & Others 10.07

Source : BSE

Sorabh [email protected]

+91-22-6171 7321



MOTHERSON SUMI : INITIATING COVERAGE

Page | 2

Performance at a glance

Source : Company

0.2 0.3 0.6 1.0 1.1 1.1 1.2 1.5 2.3 3.0 4 6 8 1015 20

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Consol Rev (in Rs bn)

Consolidate India presenceConsolidate &

enhance Global

Capabilities

Global expansion

& product

diversification

Gain firm

foothold as a

Global supplier

FY2010 Target

of USD 1bn

Achieved

USD 1.5bn

Motherson Sumi Systems Ltd.

has delivered consistent

growth with a CAGR of ~40%since 1993

Till 2005, company recorded

revenue CAGR of ~35%, while

consolidating its presence in

the domestic as well as

global markets

FY06-10 saw the sharpest

revenue CAGR for the

company at ~60% led by

global expansion and

diversification

MSSL has grown faster thanthe market by consistently

increasing its customer base

and the content per car




Page | 3

Exceeding market performance

Source : Company, HDFC sec Inst Research

Corporate actions

1993-94 Public Issue

1995-96 Rights Issue

1997-98 Bonus Issue (1:2)


2002-03 Share split : Face value changed to Rs 5 (2:1)

2003-04 Share split : Face value changed to Rs 1 (5:1)


2005-06 Convertible Bonds (FCCB)


2011-12 Shares issued to shareholders of erstwhile SMIEL



70

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Motherson Sumi Sensex




Page | 4

Samvardhana Motherson Group (SMG)

A diversified group: Samvardhana Motherson Group

(SMG) is a focused, dynamic and progressive global

group with presence in 25+ countries and a

consolidated turnover of USD 5.02bn in FY14.

A globally preferred solution provider: As a full system

solutions provider, SMG offers comprehensive product

range and technical solutions spanning applications

across diverse verticals and industries.

Key entity: Motherson Sumi Systems Ltd. (MSSL), the

flagship company of the Samvardhana Motherson

Group (SMG) is a joint venture between Samvardhana

Motherson International Ltd. (SMIL) and Sumitomo

Wiring Systems, Japan (SWS).

Higher wallet share: The group has been continuously

expanding verticals and product portfolio to capture

higher wallet-share of auto manufacturers.

Synergies within group: Strong synergies across

companies within the group, leveraged with a capable

management at the top, helps turning around newer

acquisitions quicker : a key advantage for the company.

Quick expansion: The group has expanded organically

as well as inorganically in recent years. Access to new

products & technology and expansion in newer

markets/clients remain the underlying driving factor in

company’s growth trajectory.

Wide customer base: Leveraging on strong technical

infrastructure and manufacturing capabilities, company

positions itself as a full system solution provider to its

customers across geographies building a strong

competitive edge and making it the supplier of choice.

Diverse geographies: MSSL’s geographic spread (125

plants across 25 locations) allows it the flexibility of

supplying to customers using best suited logistic

models. Company’s manufacturing facilities are

present across Asia, Europe, North America, South

America, Australia and Africa.

Range of products: MSSL boasts of a wide range ofproducts which includes rearview mirrors, wiring

harnesses, moulded plastic parts, complete modules

including bumpers, dashboards, door trims, air fiIter

systems, HVAC systems, rubber components for

automotive and industrial applications, high precision

machined metal parts and injection moulding hubs.

Managing Relationships: The Company has evolved on

the strength of its relationship with all its stakeholders,

a relationship of mutual trust & respect, growing

steadily across the product range and markets.

Consolidated revenue of USD

5.02bn in FY14, a year ahead

of target (Vision 2015)

Geographic spread allows

flexibility of catering to

customer’s requirement

using best suited logistics

model

Strong synergies acrosscompanies within the group

a key positive for margins

expansion

Rising content per vehicle led

by organic as well as

inorganic expansion earningsaccretive for the company




Page | 5

Industry position Benefiting with increased OEM sourcing

Source : Company Source : Company

Business portfolio Customer wise sales

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

Rearview

Mirrors

28%

Interior

modules

22%

Wiring

harness

18%

Exterior

modules

17%

Polymer &

tooling

11%

Metal

working1%

IT & Design

1%

Others

2%Audi

20%

VW

19%

BMW

7%Seat

6%

Hyundai

6%

Renault

Nissan

6%

Maruti

Suzuki

5%

Ford

5%

Others26%

MSSL boasts of significance

presence in the wiring

harness, mirrors and IP

modules across all global

markets

Rearview mirrors (~28%) is

the largest contributor to the

consol. revenues followed by

Interior modules (22%) and

wiring harnesses (18%)

MSSL is working towards

reducing dependence to not

more than 15% of revenues

from a single customer,

single country or a single

commodity – a step towards

de-risking revenues




Page | 6

Group structure

Source : Company




Page | 7

Motherson Sumi Systems Ltd : A One-stop Solution

Motherson Sumi Systems Ltd. (MSSL) is the flagship

company of the Samvardhana Motherson Group.

MSSL, incorporated in 1986 (listed on exchanges in

1993), is a JV between Samvardhana Motherson

International Ltd. (SMIL) and Sumitomo Wiring SystemsLtd., Japan (SWS). MSSL has grown into a diversified

manufacturer of automotive components with market

leading position in its major product verticals.

Currently MSSL is (1) one of the largest manufacturer

of rearview mirrors for passenger cars in the world (2)

India’s largest manufacturer of automotive wiring

harness and mirrors for passenger cars (3) one of the

largest manufacturers of IP modules, door trims and

bumpers for mainly European OEMs, and (4) a leading

supplier of plastic components and modules to the

global automotive industry.

Product range: Rearview mirrors, wiring harnesses,

moulded plastic parts, complete modules including

bumpers, dashboards, door trims, air filter systems,

HVAC systems, rubber components for automotive and

industrial applications, high precision machined metal

parts and injection moulding tools.

Manufacturing: The Company boasts of a vast

geographical spread with manufacturing presence

across Asia, Europe, North America, South America,

Australia and Africa. This allows MSSL the flexibility to

supply to its customers from various manufacturing

locations using the best suited logistics model.

A Joint venture specialist: MSSL’s strength in

partnering growth has evolved with a number of JVs

for diversified product range. The JVs of MSSL has

helped it to enhance capabilities ranging from adding

new products to bringing new and customizedtechnologies to customers. Vertical integration and in-

house sourcing has further helped in enhancing the

product range and delivering the quality while reducing

costs for the company.

Key business highlights :

- one of the largest

manufacturer of rearview

mirrors for passenger cars in

the world

- India’s largest

manufacturer of automotive

wiring harness and mirrors

for passenger cars

- one of the largest

manufacturers of IP modules,

door trims and bumpers formainly European OEMs

- a leading supplier of plastic

components and modules to

the global automotive

industry




Page | 8

Standalone revenues grew at 28% CAGR over FY09-14 Standalone business has shown strong traction in the

India as well as outside India revenues


Within India (Standalone) revenues grew at 29.4% CAGR

over FY09-14…

…while outside India (Standalone) revenues grew at

22.3% CAGR


13.2

17.6

28.6

35.9

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Within India Outside India

in Rs bn

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Outside India % growth

in Rs bn

~86% of the standalone

revenues come from India

sales while rest is fromoutside India

Standalone revenues have

grown led by (1) growth in

the domestic auto industry

(2) rising content/vehicle

with new products (3) better

realizations given growing

sales of mid-higher range

models

Standalone APAT has

registered a 50.4% CAGR

over FY09-14, while EBITDA

registered a 35.1% CAGR




Page | 9

Wiring harness (standalone) Polymer components (standalone)


Rubber/metal machined & other products (Standalone) EBITDA margins maintained at ~20%


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within India Outside India % growth

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S tandalone EB ITDA EB ITDA m argin (%)

in Rs bn

Wiring harness (~75% of

standalone revenues) posted

a ~30% CAGR over FY09-14, primarily in the India

business

Polymer components (the

second largest revenue

contributor) grew at ~28%

CAGR over FY09-14

Rubber/metal machined &

other products grew at 20%

CAGR

The company has managed

to deliver steady margins at

~20% over the years




Page | 10

Samvardhana Motherson Reflectec (SMR)

Background : Samvardhana Motherson Reflectec

(SMR), acquired by MSSL in 2009, is a Germany

headquartered rearview mirror specialist and develops

& produces exterior mirrors for passenger cars and

commercial vehicles (including heavy trucks). SMR is

also an expert for camera based sensing system in the

automotive industry.

Global customer base : SMR’s global base includes all

major car makers in North America, South America,

Europe, Asia and Australia. The company boasts of a

global market share of ~22% in passenger cars and

commercial vehicles rear view mirrors.

Vast product range : Exterior mirrors are the

Company’s largest product segment. SMR’s plants,

spread across the globe, are specialized in polymer

processing, manufacturing of electronic and electro-

mechanical systems, glass processing, automated

painting and the assembly of complete systems. SMR is

also specialized in process to build sub-assemblies

integrated in exterior mirrors.

Global manufacturing base : SMR has been expanding

manufacturing base worldwide (through green-field as

well as brown-field expansion) to meet the growingrequirements of its global consumers. After expanding

footprint in Thailand & Brazil with new green-field

plants, and capacity expansion in Hungary, Spain and

Mexico over FY11-13, the company is focusing on

China & USA, two of the largest and strongest

growing automotive markets.

History : Visiocorp group (originally named

Schefenacker) had a turnover of EUR ~660mn in 2008

supplying to all major OEMs worldwide. MSSL acquired

Visiocorp for a cash consideration of EUR 25mn andallotment of 5% shares having face value of EUR 1.5mn

with no additional debt in 2009. MSSL has a 47.7%

controlling stake in SMR (93.6% along with SMIL).

Synergies post acquisition : Post becoming a part of

Samvardhana Motherson Group in 2009, SMR hasbenefited immensely with the inherent synergies of

the group (1) in-Sourcing from the group companies

(2) sharing of worldwide network of marketing and

project management centres.

SMR has delivered a revenue growth of 26% CAGR

over FY11-14, while the margins have improved

~300bps to 9.7% in FY14 (10.6% in 4QFY14,

substantial improvement from 4.6% in 3QFY12).

Margin improvement is driven by (1) strong order flowfrom the European OEMs (especially in the premium

segment from the likes of Audi, BMW & Mercedes)

(2) cost cutting initiatives (3) synergy benefits with

group companies. We expect SMR to deliver EBITDA

margins of 11/11.8% in FY15/16E. New orders worth

EUR 4+bn, since its acquisition by MSSL, have helped

SMR grow stronger and faster than peers.

Balanced global presence : With its broadened

positioning in both mature and emerging markets, SMR

has a more balanced global presence, making the

company more independent from the economic

development in individual markets and a global partner

for the automobile companies. This has enabled the

company to outperform the market.

USA : SMR has expanded capacity to ~2x with the new

plant in Michigan, commercial production is expected

to commence by FY15. New orders in USA are expected

to increase utilization of additional capacities in

Michigan and lift market shares in the North Americasignificantly within next 3-4 years.

New orders worth Euro 1.56bn

in FY14

SMR commands ~22% global

market share in the passenger

cars and commercial vehicles

rear view mirrors

Presently SMR is focusing on

China & USA, two of the

largest and strongest growing

automotive markets, to

expand revenues

MSSL acquired SMR in 2009

on recommendation from its

clients and has a 47.7%

controlling stake in SMR

SMR has improved margins

~300bps to 9.7% in FY14. We

expect SMR to deliver EBITDA

margins of 11/11.8% in




Page | 11

China : China currently contributes ~10% of SMR’s

revenue. SMR has a 50:50 JV with Ningbo Huaxang

group (formed in 2007) in China. We expect

contribution from China (higher growth, higher

margins) to improve with the commencement of two

new plants. SMR targets ~25% market share in China

by FY17 (~10% currently). New plants in Chongquing

(Central China), Langfong (Beijing) and Yancheng will

provide excess capacities and higher vertical

integration, leading to better margins and higher

market share for the company.

Europe : Europe currently contributes ~46% of SMR’s

revenue. We expect higher growth in Europe given

better macros and demand revival. Better utilization at

plants and in-sourcing within group will lead to margin

expansion for the company going forward.

Key plans : SMR is strongly positioning itself as a

preferred partner for automakers world-wide and

increasing scope of business. It is among the leadingsuppliers of exterior mirrors in regions where it has a

long presence, while further targeting to reach similar

high market share levels in those markets in which it

has entered within the last decade.

We expect SMR revenues to grow at 14% CAGR over

FY14-16E, while margins to expand from 9.7% in FY14

to 11/11.8% in FY15/16E.

SMR is strongly positioning

itself as a preferred partner

for all automakers world-wide

Growth in China and higher

utilization across are key to

margins expansion for SMR




Page | 12

SMP : revenues grew at ~30% YoY in recent quarters… …with EBITDA margins steadily expanding


Strong revenue growth trend expected to continue EBITDA margins to inch towards ~12% by FY16E


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Page | 13

Samvardhana Motherson Peguform (SMP)

Peguform GmbH (Germany), a global Tier-1 supplier of

polymer based automotive modules (like bumpers,

instrument panel, door trims, etc.), was acquired by

MSSL (along with SMIL, 83.7% stake) in Nov-2011 and

renamed as SMP (Samvardhana MothersonPeguform). MSSL (directly) has a 51% stake in SMP.

SMP supplies primarily to the European OEMs (likes of

VW, Audi, BMW, Porsche, Daimler and Renault-Nissan)

with manufacturing plants in Europe, China, Mexico &

Brazil. Peguform was acquired for EUR 141.5mn

(turnover of EUR 1.67bn in 2011), attractively priced.

SMP is MSSL’s largest subsidiary and one of the largest

manufacturers of bumpers, rocker panels, instrument

panels, interior door panels and other related productsfor the European automotive industry. With numerous

patented technologies and industry first innovations in

all product lines, it is one of the most preferred

suppliers for car makers in Europe as well as to their

facilities in China, Brazil and Mexico.

SMP’s major customers include Audi, BMW, Daimler,

GM, Porsche, Renault/Nissan, Seat, Volkswagen, etc.

Geographical expansion : SMP was established in

Germany where most of its products are still produced

and assembled. SMP has continuously expandedglobally, setting up new operations across Europe,

Mexico, Brazil and China to support its customers

across the globe. Spain and Portugal were the first

markets outside Germany followed by Eastern Europe.

SMP with an objective to be located near its customers

established its high volume factories in Mexico and

Brazil in 1996. In early 2013 SMP opened a Greenfield

factory in Pubela, Mexico which replaced the two

existing smaller plants in the region. China is the

strongest growing region in the automotive industryand the youngest market for SMP.

The key to SMP’s earnings growth will be turn around

in the current loss making plants led by (1) better

order inflow (2) synergies in sourcing with the group

companies, and (3) cost cutting initiatives. SMP’s Brazil

plant turned profitable last year (from a EUR70m lossin FY13) led by better prices and improved utilisation.

China : China currently contributes ~12% of SMP’s

revenue. SMP is present in China via a 51:49 JV with

Changshu Automotive Trim Co. (CAIP). We expect

contribution from China (higher growth, higher

margins market) to improve with the commencement

of new plants. Due to strong increase in demands for

high quality products from SMP across China, the

company is currently investing in the establishment of

two new factories in Foshan (South China) & Beijing,scheduled to commence production in 2014. VW

(including Audi) currently contributes ~95% of SMP’s

revenues in China. With supplies commencing to BMW

and Daimler, we expect revenue/margins to improve.

Europe : Europe currently contributes ~80% of SMP’s

revenue. We expect improved macros, better

utilization at plants and in-sourcing within group to

drive earnings for the company going forward.

Synergy with Group : SMP’s capabilities of production

and assembly of highly complex and large modules as

well as its extraordinary technological expertise in

multiple polymers and surface shining enhances the

Group’s positioning as a global full system solutions

provider. SMP has an established international

customer base and manufacturing locations around the

world. Further SMP gives the Group access to

advanced production technologies. MSSL is leveraging

on the horizontal and vertical integration of SMP’s

operations and products. The objective is to expand

the group’s business based on the combined customerbase and geographical footprint significantly and to

New orders worth Euro

2.44bn in FY14

MSSL acquired 83.7% stake

(along with SMIL) in

Peguform GmbH (Germany)

for EUR 141.5mn in 2011

SMP is MSSL’s largest

subsidiary and one of thelargest manufacturers of

bumpers, focussed on the

European manufacturers

The key to SMP’s earnings

growth will be turn around in

the loss making plants




Page | 14

benefit from best skilled and most cost competitive

production and development resources within the

group.

We expect SMP revenues to grow at 14% CAGR over

FY14-16E, while margins to expand from 4.6% in FY14

to 6.5/7.3% in FY15/16E.

SMP : strong growth visible in recent quarters Margins improved substantially post acquisition


Revenue growth of ~14% expected going forward Margins inching towards ~7% by FY16E


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3 Q F Y 1 4

4 Q F Y 1 4

Revenues Rs bn YoY Growth

in Rs bn

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

EBITDA Rs bn Margin %

in Rs bn




Page | 15

New Acquisition : Wiring Harness business of Stoneridge Inc.

Business History : Stoneridge Inc. has a history of 48+

years of wiring harness manufacturing. The Company

also manufactures instrument panels for CVs.

Key clients for the company includes commercial

vehicle manufacturers, agricultural equipment,

material handling equipment and off-highway vehicle

manufacturers. This gels well with MSSL’s key

customer profile. As per agreement with SWS, MSSL

refrains from catering to passenger cars globally

(except in India) while focus on other segments.

We believe the acquisition offers strong synergies in

terms of customer segments, products and global

operations with MSSL’s core business.

Manufacturing facilities include 6 plants located in

Portland, Indiana (USA) and five locations in Mexico

Chihuahua, Saltillo & Monclova. Engineering and

administrative center is located in Warren, Ohio (USA).

Revenue approx USD 300mn, as per company.

Consideration to be paid : USD 65.7mn (fairly

attractive), Structure : Asset purchase. The acquisition

is expected to be completed by 3QFY14.

We believe this acquisition will help MSSL expand its

wiring harness global business in North America

immensely, catering to the commercial vehicles,

agricultural and material handling equipments

markets. Business presence and existing client

relations can further be leveraged to enhance group’s

business in North America. Strong synergies acrossbusinesses at MSSL will drive earnings upwards.




Page | 16

Valuations and views A global play : MSSL is a strong play on the emerging

markets global auto demand, especially passenger

vehicles at the premium end. Outside India revenue

(consolidated) has grown at ~86% CAGR over FY09-14,

increasing the contribution to ~84% in FY14 (from~44% in FY09). We expect the India/Outside India

revenues to grow at ~15% over FY14-16E. SMP/SMR

revenue growth of ~14% CAGR expected.

Diversified revenue base acts as an efficient hedge

against cyclicality of auto industry (Europe

contributing ~54% of consolidated revenues, India

~15%, China ~9% and other geographies ~22%). The

company boasts of presence in 25+ countries with 125

manufacturing plants across globe.

Reducing dependency on single customer : The

company targets reducing dependency on a single

customer: target <15% of revenues from a single

customer, single country or single commodity.

Widening product portfolio and increasing content

per car, are key earnings positive for the company.

Turnaround in the global subsidiaries to drive

earnings growth : MSSL has a successful track record of

turning around distressed acquisitions by improving

operational efficiencies, reducing costs, building strongorder books and leveraging synergies within the group.

Post acquisition, both SMR and SMP have reported

sharp improvement in profitability. While SMR margins

have improved from 4.6% in 3QFY12 to 10.6% in

4QFY14, SMP margins have improved from -1.4% to

5.8%. Margin expansion has been driven by (1) bettercapacity utilization (2) cost cutting initiatives (3)

restructuring (4) growing synergies among businesses.

SMR margins expanded on better utilization levels in

the new plants. While at SMP margins were led by the

restructuring initiatives

We expect the consolidated margins to improve by

250+bps (from FY14) to 11.9% by FY16E.

China/US/Europe demand key to growth : Initial signs

of demand revival in Europe for cars a key positive

trigger for the company. China luxury sales continue to

outperform. MSSL is aggressively targeting expansion

in China to tap the growing demand.

Valuation

At CMP, MSSL trades for 22.7/15x FY15/16E consol EPS

of Rs 13.9/21. We initiate on Motherson Sumi with a

BUY recommendation and a TP of Rs 373/sh.

Key risks to our investment thesis are: delay in Europe

recovery, acquisition stretching the balance sheet,slowdown in China and commodity prices.

SOTP VALUATION

FY16E EBITDA Multiple MSSL's Stake Value Value/sh

Standalone 13,646 12.5 100% 170,571 193

SMP 15,418 9 51% 70,767 80

SMR 13,969 9 48% 59,968 68

Others 4,922 9 - 44,296 50

Sub total - - - 345,602 392

Less: Consol Debt - - - 16,443 19

Target Price - - - - 373Source: HDFC sec Inst Research




Page | 17

KEY ASSUMPTIONS Year ending March FY12 FY13 FY14 FY15E FY16E

Standalone MSSL

Revenue 35,289 42,413 44,738 50,665 62,909

% growth YoY 27.0% 20.2% 5.5% 13.2% 24.2%EBITDA 5,771 7,943 9,096 10,457 13,646

EBITDA % 16.4% 18.7% 20.3% 20.6% 21.7%

SMR

Revenue 56,652 69,538 90,690 102,939 118,380

% growth YoY 24.6% 22.7% 30.4% 13.5% 15.0%

EBITDA 2,669 4,414 8,815 11,529 13,969

EBITDA % 4.7% 6.3% 9.7% 11.2% 11.8%

SMP

Revenue 45,279 127,848 155,411 176,403 202,863

% growth YoY - 182.4% 21.6% 13.5% 15.0%

EBITDA 891 3,913 7,149 11,466 15,418

EBITDA % 2.0% 3.1% 4.6% 6.5% 7.6%

Others

Revenue 9,802 12,454 12,741 14,652 16,849

% growth YoY 15.2% 27.1% 2.3% 15.0% 15.0%

EBITDA 1,413 3,170 3,722 4,280 4,922





Page | 18

Consol revenues grew at 63.5% CAGR over FY09-14,

expect it to maintain growth trajectory going forward

EBITDA grew at 54.4% CAGR over FY09-14, sharp growth

expected going forward on SMP/SMR margin expansion


Consol APAT grew at 52.8% CAGR over FY09-14, expect

50+% earnings CAGR over FY14-16E

Consol RoCEs at ~20%, expect to expand going forward

with improving earnings


26

6782

147

252

304

345

401

0

50

100

150

200

250

300

350

400

450

FY09 FY10 FY11 FY12 FY13 FY14 FY15E F Y16E

in Rs bn

36

911

19

29

38

48

0

10

20

30

40

50

60

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

in Rs bn

11

18

4

8

17

20

2325

0

5

10

15

20

25

30


%

1 2

4

1

5

11

16

22

0

5

10

15

20

25


in Rs bnin Rs bn

The company achieved USD

5.02bn of consol revenue in

FY14, a year before the

target as per vision 2015

The company boasts of

presence in 25+ countries

with ~84% of consolidated

FY14 sales generated outside

India (target of ~70%)

Strong RoCEs of ~20%,

though management plans

to raise it to 40% by 2015

Dividend Payout Ratio of 48%

(Standalone) and 34%

(Consolidated)

On higher tax rate and

exchange diff on the long

term loans




Page | 19

Consol rev/APAT has grown at faster CAGR over FY09-

14 than the standalone, driven by inorganic growth

Next leg of revenue growth for the consolidated will be

driven by subs, esp. SMP and SMR


Also EBITDA will grow with margin expansion in SMP

and SMR driven by management initiatives

We expect net Debt Equity to improve for MSSL


0.4x0.5x

2.0x

1.5x

1.0x

0.6x

0.3x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

0

5

10

15

20

25

30

35

40

45

50


Standalone SMP SMR Others

in Rs bn

63.5

54.4 52.8

28.0

35.1

50.4

0%

10%

20%

30%

40%

50%

60%

70%

Revenues EBITDA APAT

Consolidated Standalone

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0


Standalone SMP SMR Others

in Rs bn

MSSL’s consolidated

revenues have grown faster

than the standalone led by

acquisitions across product

range (esp. SMP and SMR)

However weaker margin

structure of the acquisitions

led to comparatively lower

growth in earnings

We expect growth going

forward to be driven by

outperformance of subs. led

by (1) improvement in

margins driven by cost

cutting initiatives (2) increase

in revenues with new

clients/markets (3) moresynergies and in-house

sourcing

Given better cash flows, we

expect consol net

debt/equity to come down in

the near future




Page | 20

Key earnings trigger


Key triggers

Revenue growth

SMP/SMR entry in newmarkets

Growth inChina/USA/Europe

Standalone growth inIndian markets

Improving margins

Premium vehiclegrowth

Product mix

Capacity utilisation

Debt reduction Better cash flows

We anticipate three key

earnings trigger for MSSL:

(1) strong revenue growth of16/14/14% CAGR for

standalone/SMP/SMR

businesses over FY14-16E

(2) higher margins in the

SMP/SMR businesses led by

favorable product mix, better

capacity utilization and cost

cutting initiatives. We expect

synergies among group firmsto support margin expansion

(3) better cash flows will lead

to improvement in gearing

ratio for the Company




Page | 21

INCOME STATEMENT


Net Sales 147,022 252,253 303,580 344,658 401,001

Growth (%) 79.8% 71.6% 20.3% 13.5% 16.3%

Material Expenses 95,434 164,838 193,615 218,605 252,561

Employee Expenses 23,170 42,827 51,065 56,171 62,912

Other Operating Expenses 19,727 29,064 33,749 36,260 41,756

Operating Profits 8,691 15,523 25,151 33,623 43,773

Operating Profit Margin (%) 5.9% 6.2% 8.3% 9.8% 10.9%

Other Operating Income 2,054 3,917 3,631 3,994 4,393

EBIDTA 10,744 19,440 28,781 37,616 48,166

EBIDTA (%) 7.3% 7.7% 9.5% 10.9% 12.0%

EBIDTA Growth (%) -32.8% 5.5% 23.0% 15.1% 10.1%

Other Income 135 170 176 211 254

Depreciation 3,796 7,145 8,172 10,081 11,431EBIT 7,083 12,464 20,786 27,747 36,989

Interest 1,649 2,495 2,944 2,843 2,679

Exchange diff on long term loans 509 1,628 1,880 2,000 2,000

PBT 4,926 8,342 15,961 22,904 32,311

Tax 2,153 3,835 4,995 7,167 10,111

PAT before minority interest 2,773 4,507 10,967 15,737 22,200

Minority Interest (631) 70 3,316 3,481 3,655

Share of profit/(loss) of associates 2 9 (2) - -

EO items (net of tax) 809 - - - -

PAT (reported) 2,596 4,445 7,650 12,256 18,545

APAT 3,406 4,445 7,650 12,256 18,545

APAT Growth (%) -12.9% 30.5% 72.1% 60.2% 51.3%

EPS 3.9 5.0 8.7 13.9 21.0

EPS Growth (%) -12.9% 30.5% 72.1% 60.2% 51.3%

Source: Company, HDFC Sec Inst Research

BALANCE SHEET


SOURCES OF FUNDS

Share Capital 388 588 882 882 882

Reserves 18,325 22,302 28,711 41,709 60,223

Total Shareholders Funds 18,713 22,890 29,592 42,591 61,105

Share capital suspense account 4 - - - -

Minority Interest 5,027 4,025 7,896 8,686 9,554

Long Term Debt 29,611 27,159 29,834 28,834 27,334

Short Term Debt 11,678 13,553 10,111 9,111 8,111

Total Debt 41,289 40,712 39,946 37,946 35,446

Deferred Taxes 602 559 496 496 496

Long Term Provisions & Others 2,740 4,067 4,126 4,539 4,992

TOTAL SOURCES OF FUNDS 68,375 72,253 82,057 94,258 111,593

APPLICATION OF FUNDSNet Block 46,936 52,774 65,660 70,579 74,148

CWIP 4,444 3,855 - - -

Goodwill - - - - -

Investments, LT Loans & Advs 3,888 3,577 6,224 11,271 16,977

Inventories 22,496 26,036 32,822 37,250 43,312

Debtors 30,127 29,400 32,384 36,752 42,734

Cash & Equivalents 4,557 5,944 9,062 11,147 19,002

ST Loans & Advances, Others 7,210 5,807 6,288 7,136 8,298

Total Current Assets 64,390 67,187 80,555 92,285 113,346

Creditors 30,981 31,808 40,917 46,436 53,993

Other Current Liabilities & Provns 20,302 23,332 29,466 33,441 38,883

Total Current Liabilities 51,283 55,140 70,383 79,877 92,877

Net Current Assets 13,107 12,047 10,173 12,408 20,469

Misc Expenses & Others - - - - -

TOTAL APPLICATION OF FUNDS 68,375 72,253 82,057 94,258 111,593





Page | 22

CASH FLOW


Reported PAT 1,963 4,507 10,967 15,737 22,200

Non-operating & EO items 208 (788) (1,171) (1,229) (1,200)

PAT from Operations 1,756 5,295 12,138 16,966 23,400

Interest expenses 1,649 2,495 2,944 2,843 2,679Depreciation 3,796 7,145 8,172 10,081 11,431

Working Capital Change (4,748) 2,495 2,933 (631) (864)

OPERATING CASH FLOW ( a ) 2,453 17,429 26,186 29,259 36,646

Capex (33,610) (12,394) (17,203) (15,000) (15,000)

Free cash flow (FCF) (31,158) 5,035 8,983 14,259 21,646

Investments & Others 3,092 545 3,280 (3,364) (3,725)

INVESTING CASH FLOW ( b ) (30,518) (11,849) (13,923) (18,364) (18,725)

Debt Issuance 29,866 (577) (766) (2,000) (2,500)

Interest expenses (1,649) (2,495) (2,944) (2,843) (2,679)

FCFE (2,940) 1,964 5,273 9,416 16,467

Share capital Issuance 1,701 1,042 (2,060) - -

Dividend (1,035) (1,376) (2,205) (2,738) (3,687)

FINANCING CASH FLOW ( c ) 28,883 (3,406) (7,975) (7,581) (8,865)

NET CASH FLOW (a+b+c) 817 2,175 4,288 3,314 9,056

Non-operating and EO items 208 (788) (1,171) (1,229) (1,200)

Closing Cash & Equivalents 4,557 5,944 9,062 11,147 19,002


KEY RATIOS


PROFITABILITY (%)

GPM 36.0 35.7 37.0 37.3 37.7

EBITDA Margin 7.2 7.6 9.4 10.8 11.9

EBIT Margin 4.8 4.9 6.8 8.1 9.2APAT Margin 0.8 1.8 3.6 4.5 5.5

RoE 14.9 21.4 29.2 34.0 35.8

RoIC or Core RoCE 7.5 10.6 21.0 25.9 32.3

RoCE 3.9 8.3 16.8 20.1 23.4

EFFICIENCY

Tax Rate (%) 52.3 46.0 31.3 31.3 31.3

Asset Turnover (x) 3.0 3.6 4.0 4.0 4.0

Inventory (days) 54.3 36.6 38.5 38.5 38.5

Debtors (days) 72.8 41.3 37.9 37.9 37.9

Payables (days) 123.8 77.5 82.5 82.5 82.5

Cash Conversion Cycle (days) 3.2 0.4 (6.1) (6.1) (6.1)

Debt/EBITDA (x) 3.8 2.1 1.4 1.0 0.7

Net D/E 2.0 1.5 1.0 0.6 0.3

Interest Coverage 4.3 5.0 7.1 9.8 13.8

PER SHARE DATA

EPS (Rs/sh) 3.9 5.0 8.7 13.9 21.0

CEPS (Rs/sh) 6.5 13.2 21.7 29.3 38.1

DPS (Rs/sh) 1.2 1.6 2.5 3.1 4.2

BV (Rs/sh) 21.2 26.0 33.6 48.3 69.3VALUATION

P/E 107.0 62.5 36.3 22.7 15.0

P/BV 14.8 12.1 9.4 6.5 4.5

EV/EBITDA 29.3 16.1 10.7 8.1 6.1

OCF/EV (%) 0.8 5.6 8.5 9.6 12.5

FCF/EV (%) (9.9) 1.6 2.9 4.7 7.4

FCFE/mkt cap (%) (1.1) 0.7 1.9 3.4 5.9

Dividend Yield (%) 0.4 0.5 0.8 1.0 1.3





Page | 23

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