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Company Overview:

MSSL is a flagship company of the SamvardhanaMothersonGroup . MSSL, along with its subsidiaries and joint ventures, is one of the top manufacturers of automotive wiring harnesses and mirrors for passenger cars and a leading supplier of plastic components and modules to the automotive industry globally. The company operates over 230 facilities spread across 33 countries.

Broadly, MSSL’s products can be classified into three categories – modules and polymer products (under SMP), rear view mirrors (under SMR) and wiring harnesses. The company’s product portfolio spans across a wide array of products, including wiring harnesses, mirrors for passenger cars, injectionmoulded products, modules including dashboards, door trims, bumpers, blow-moulded components, liquid silicone rubber-moulded components, injection-moulding tools, extruded rubber products, precision machined metal components and waste recycling systems.

MSSL supplies to most of the leading auto OEMs in the domestic as well as global markets. Some of the company’s key clients include Volkswagen AG, Daimler, Ford, BMW, Maruti Suzuki and Renault Nissan.

Key Points:

MSSL to outpace industry growth; Aims at $18 billion revenue by FY2020:

MothersonSumi Systems Limited (MSSL) has given a revenue target of $18 billion for FY2020, indicating almost triple of revenues from $6.5 billion in FY2017. MSSL has indicated that half of the growth (about $6 billion) would come through organic growth opportunities. The company has identified opportunities across its product range – wiring harnesses (complex wiring systems to comply with stringent emission norms), mirrors (camera-based rear view systems and digital mirrors with greater field of vision) and polymers (lightweight foam plastics and increased sensor technology in bumpers) – all of which would significantly enhance the company’s topline. Further MSSL’s subsidiaries – SamvardhanaMothersonPeguform (SMP) and SamvardhanaMothersonReflectec (SMR) – reported a combined order book of Euro12.9 billion as of March 2017 (includes Euro4 billion of new orders), which highlights consumer confidence and provides topline growth visibility. Apart from organic growth, MSSL also highlighted inorganic growth opportunities ($5 billion-6 billion), which would significantly boost the company’s topline going ahead.

PKC’s acquisition to fuel growth; Open up huge cross-selling opportunities:

MSSL recently completed the acquisition of PKC Group (PKC) by purchasing 93.75% shares for a consideration of Euro571 million (Rs.4,150crore). PKC is the leading supplier of wiring harnesses to the commercial vehicle (CV) industry (commanding 62% and 43% market share in the US and Europe heavy-duty truck market, respectively; and 31% and 23% market share in the US and Europe medium-duty truck market, respectively). As per MSSL, the acquisition is complementary as PKC supplies to the CV segment, while MSSL predominantly is a passenger vehicle (PV) wiring harness provider. Acquisition of PKC would enable MSSL to become a full-fledged wiring harness solutions provider (catering to both the PV and CV segments). Further, PKC is exploring opportunities to almost double its topline to Euro1.4 billion by 2018 (as compared to Euro0.84 billion in 2016) by enhancing its presence in the Asian truck market (particularly China) and entering new segments such as railways and aerospace wiring harness. Further, MSSL is targeting to cross-sell (mirrors and polymer products) to PKC’s existing customers (such as MAN, Paccar, Volvo and Ford).

Focus to improve margins; Targets ROCE of 40% by FY2020:

SMP and SMR have opened up several new plants in the past three to four years to cater to increasing customer requirements. The plants have now reached optimum utilisation levels, giving benefits of operating leverage, which would improve margins. Additionally, MSSL’s focus on value-added products in wake of the stricter emission and enhanced safety norms is likely to augment margins (MSSL has indicated that new order wins offer better margins). MSSL is also targeting to significantly enhance PKC’s performance by improving operational efficiencies and incorporating best manufacturing practices. MSSL is targeting to augment PKC’s ROCE from 7-8% currently to about 40% by FY2020 (MSSL’s wiring harness division ex. PKC generates ROCE of 40%). We expect MSSL’s consolidated margins to improve from 10% in FY2017 to 11.4% in FY2019.

Key risks:

MSSL derives about 85% of its revenue from exports, which are predominantly Euro denominated. Any adverse movement in the currency would impact the company’s performance.

Outlook and valuation:

On a robust growth path; Expect 15-18% upside in the next 6-8 months:

MSSL is likely to post 24% and 36% growth in its topline and bottom line, respectively, over FY2017- 2019, which is amongst the fastest in the auto ancillary space. MSSL is well placed to outpace the auto industry’s growth through increasing content per vehicle and opening up cross-selling opportunities through PKC’s acquisition. Moreover, with increasing valueadded products and improved performance by PKC, we expect MSSL’s return on equity (ROE) to improve significantly from about 18.8% in FY2017 to 22.4% in FY2019. MSSL is a quality auto ancillary company having a diversified product and customer profile with a proven track record of outpacing the industry’s growth and successful improvement in the performance of its subsidiaries.

At the CMP of Rs.318, MSSL is trading at 32.4x FY2018E and 22.4x FY2019E earnings, respectively. We have a positive view on the stock and expect 15-18% upside over the next six to eight months.