Brokerage firm ICICI Securities is bullish on Samvardhana Motherson International Limited (SAMIL). Recommends 'buy the stock of the company for a target price of Rs 110 apiece. Given its estimated target price and the stock's current market price, the brokerage sees gains of up to 50%. SAMIL is a mid cap Auto Ancillary stock having a market cap of Rs 33,227.05 crore. Below are the key takeaways from the report:
Stock Outlook & Performance
The stock of Samvardhana Motherson International last traded at Rs 73.55 apiece on NSE, down 2.52% compared to its previous close. The stock is trading 19.01% up from its 52 week low. Its 52 week low was recorded on 25 October 2022 at Rs 61.80 and its 52-week high on 12 January 2022 at Rs 169.30, respectively.
The stock over the last month has gained nearly 13.07%, whereas, in the last 3 months it gained 19.45%, respectively. However, in the last 1 year, it has fallen by 30.89%. In the last 3 years, it has given 10.73% positive returns. In 5 years it gave 38.19% negative returns.
Drivers of organic growth intact; world lightweight vehicle (LV) production on recovery path
Post declining from peak production levels of 95mn-77mn vehicles in past three years due to covid and semiconductor-led disruptions, the global LV market is recovering, albeit on a low base. Industry CAGR at ~5%+ in next 3-4 years would likely be aided by the premiumisation trend (value-addition for same components being ~1.5-3x for SUVs vs hatchbacks) and electrification (value addition of components being ~2-3x for EVs vs ICE PVs). This would drive in excess of ~10% organic revenue CAGR for SAMIL along with continued wallet share gains and kit value per vehicle additions. With SUV mix increasing steadily in emerging markets like India, and SAMIL's revenue mix from emerging markets now at 57% (vs 49% in FY20), growth in value addition per vehicle has been driving revenue, despite a declining global LV market. In terms of new markets, Japan is the key geography SAMIL. Company is targeting Japanese OEMs (taking care of almost ~30% of global car market) and has made an initial footing there through its recent acquisition of Ichikoh for automotive mirrors. In the non-auto space, SAMIL recently acquired CIM Tools based out of Bengaluru in the aerospace components domain and is ramping up the acquired entity's orderbook (~US$400mn) in product offerings barring engine and wings.
Inorganic revenue addition aimed at US$15bn to take total revenue to US$36bn in next 3-4 years
Going by the consensus EBITDA outlook for FY23E-FY25E, SAMIL's balance sheet would allow a funding pool for inorganic growth to the extent of US$2.3bn, keeping 'net debt / EBITDA' capped at 2.5x. Thus, assuming 6% EBITDA margin of the acquired entity and EV/Sales of the deal at ~20%, SAMIL can look at revenue of US$15bn from the acquired entity/entities. Similar to the acquired mirror business in form of SMR, SAMIL would acquire any entity only post any request from its key customers and having visibility of reaching ~40% RoCE ahead. Areas of acquisition can be anything from wiring harness to EV components, ICE engine consumable parts, electronic components, etc. other than non-auto areas.
Aims to stick to its targeted ROCE of 40% and maintain ~40% dividend payout
SAMIL is looking forward to improve its profitability with freight rates, power rates and raw material prices normalising gradually amidst pricing contracts getting renewed (likely from CY23). Thus, with reversal of the elevated working capital (due to global supply chain disruptions) and controlled capex (at ~Rs20bn per annum), SAMIL is aiming to inch up its RoCE from present sub-10% levels to mid-teens. Additionally, the company's focus would be to enhance revenue potential for the group by backward integrating internally all possible components and, in turn, enhancing asset turns of the overall entity. Thus, to make a vehicle mirror, SAMIL would internally source the plastic parts, the camera, the LED lights along with making the mirror glass itself. Also, for instance, to make a bumper module assembly, other than making the injection moulding for the plastic bumper, SAMIL would also make the lighting, electronic harness, etc. besides adding traded goods into the integrated final assembly; this would add to its asset-turns along with enhancing absolute profit per unit.
Aiming to treble scale in next three years, Buy for Rs 110 Target Price
SAMIL is targeting to treble its revenue to US$36bn in next 3-4 years through a mix of organic and inorganic growth with 25% of the revenue mix aimed to come from the non-auto segment (currently it is sub-3%). Besides, by focusing on capital allocation, efficient working capital management and improved profitability, SAMIL is aiming to maintain its targeted RoCE of 40% for the envisaged US$36bn entity, post taking care of ~40% dividend payout. ~60% of the incremental revenue is expected from inorganic route, funded by internal cashflows with net debt being capped at 2.5x EBITDA. Industry volume growth, vehicle premiumisation, vehicle electrification, new product introduction and wallet share gains would be the key drivers of organic growth. Japan would be a new large market targeted to contribute meaningfully to SAMIL's revenue (currently it is not even among SAMIL's top-10 revenue-contributing markets). Aerospace, logistics, medical equipment and IT services would be the key areas in the non-auto domain, which SAMIL would be aiming to ramp up profitably to add to revenue. Maintain BUY with estimates unchanged and DCF-based TP of Rs110, implying 25x FY24E earnings.
The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.