EUR 120.00 For Business Accounts Only

MOSL: MOTHERSON SUMI (Buy)- Challenges at SMP are transient; Scope of increase in content

Motherson Sumi: Challenges at SMP are transient; Scope of increase in content | Value accretive M&A core part of strategy

(MSS IN, Mkt Cap USD5.4b, CMP INR118, TP INR144, 22% Upside, Buy)

 

While underlying automotive trends are not supportive, MSS has been impacted by ramp-up issues at its recently commissioned plants (particularly the Tuscaloosa plant). These issues are transient in nature, partly due (a) teething trouble for the large greenfield plant and (b) visa-related issues. We expect a strong recovery as these plants drive growth based on orders on hand. MSS in on right side of global megatrends in the automotive industry, which will drive a further increase in content. This, coupled with disciplined capital allocation toward value-accretive acquisitions, would add to the organic growth potential.

• Strong order book to dilute impact of weak demand environment: SMBPBV had an exit order book of ~EUR18.2b (net addition of EUR1b over Mar-18 after EUR6.8b orders started commercial production in FY19). The weak demand environment has not resulted in any deferment of in-hand orders. On the contrary, car manufacturers are accelerating their new product launches to create excitement in a weak environment, in turn expediting timelines of new projects at vendor level. Also, EU passenger vehicle volumes have stabilized and base should turn favorable from Sep-19. While WLTP-2 norms would be implemented from Sep-19, it is likely that OEMs will be relatively better prepared this time round resulting in less impact.
• Orders worth EUR6.8b commenced commercial production in FY19, but yet to ramp up: In FY19, SMRPBV commenced execution of orders worth EUR6.8b (of this, ~EUR4.3b started in 2HFY19) at SMRPBV, implying estimated annual revenue potential of over EUR1b. These orders would be largely executed at the recently commissioned new plants. After production commenced for orders worth EUR6.8b in FY19, SMRPBV had a balance order book of EUR18.2b as of Mar'19. It can service entire existing order book from expanded capacities, implying strong growth in revenues as well as substantial reduction in capex at SMRPBV.