Steering On For Top Speed Run

Company Name: MOTHERSON

CMP: Rs 66

Market cap: Rs 45,333 crore

Samvardhana Motherson International (Motherson) is among the leading original equipment manufacturers (OEMs) to global auto majors. It came into being in 1986 through a joint venture (JV) with Sumitomo Wiring Systems and Sojitz Corporation of Japan as a single product (wiring harness) company. Since then, it has expanded into polymer products (through Samvardhana Motherson Peguform or SMP), automotive mirrors (Samvardhana Motherson Reflectec or SMR), wiring harness for commercial vehicles through PKC Group and elastomers. Other categories include precision metals and modules, technology and industrial solutions, logistics solutions, lighting and electronics, aerospace, health and medical and services. In 2020, it demerged its domestic wiring harness division into a new company—Motherson Sumi Wiring India Ltd (MSWIL). Motherson now holds 100 per cent stake of SMRP BV (which includes both SMR and SMP businesses) and 33.4 per cent stake in MSWIL.

India and the US contributed 18 per cent each of consolidated revenue in FY22, followed by Germany (16 per cent), China (13 per cent), Hungary (6 per cent) and others (more than 5 per cent each).

In the last few years, Motherson was adversely impacted by internal company issues, and tough operating environment. As a result, its stock underperformed the NSE Auto Index by 62 per cent and 72.5 per cent over one and three years, respectively.

Higher inflation, rate hikes by central banks, global supply chain disruption in the automotive industry due to semi-conductor shortages, Covid, and geo-political issues have impacted it. However, the global automotive supply chain is gradually regaining normalcy. Global passenger vehicles production grew 28 per cent year-on-year (y-o-y) and 11 per cent quarter-on-quarter (q-o-q), in Q2FY23.

Motherson’s operating performance is now expected to recover on the back of improving supply, stable costs, and increased demand. A substantially lower channel inventory also lends to medium-term visibility for demand. In fact, key global OEMs have indicated a healthy order book, especially in the premium vehicle category and Motherson is set to benefit from this global recovery, given that 76 per cent of its consolidated revenue comes from international business. The mega trends being witnessed in the global automotive industry are also expected to beneft the company, going forward.

Increase in the product line would be an important driver of growth for Motherson. This is likely to be driven by trends such as premiumisation (increase by 10 per cent to 200 per cent across businesses), rising SUV mix (increase by 50 per cent to 200 per cent increase), and electrification (increase by 40 per cent to over seven-fold increase). A strong order book and improved supply will cushion against macro headwinds and prevent sharp dip in volumes.

The global business, namely SMR (over 17 per cent CAGR over FY22-25), SMP (over 11 per cent CAGR), and PKC (over 5.6 per cent CAGR) is expected to show good growth, despite factoring in for the impact of commodity cost deflation. This recovery would be supported by the strong order book for SMRP BV. Motherson is well poised for a strong recovery, led by normalisation of production. With improvement in supply side issues (driving operating leverage) and correction in key commodity prices, it is expected there will be a sharp recovery in profitability for key businesses. At a consolidated level, net sales, earrnings before interest, tax, depreciation and amotisation (Ebitda) and profit after tax (PAT) are likely to register a 10 per cent, 21.5 per cent and 63 per cent CAGR, respectively, over FY22-25.

This would drive down net debt from about Rs 85.5 billion in Q2FY23 to marginal net cash by FY25. With high operating leverage, reasonable financial gearing and no risk of EVs, Motherson remains the preferred pick in the auto component industry.