Motherson is among the leading makers of automotive components worldwide. Motherson Sumi Systems, a large-cap auto ancillary company with a market valuation of Rs 79,406.26 crore, was trading at Rs 251.70 as of 3:30 pm IST on 11 January, gaining Rs 11.70, or 4.87 percent. According to NSE, the stock hit a 52-week high of Rs 272.85 and a 52-week low of Rs 143.15 on 02 June 2021 and 01 February 2021, respectively. The stock is now trading 7.72 percent lower than its 52-week high and 75.52 percent higher than its 52-week low. Emkay Global Financial Services Ltd, a brokerage company, has given a buy call on the stock with a target price of Rs 300, expecting the stock to reach the target price within a 12-month timespan.
Investment rationale for Motherson according to the brokerage
- At its analyst call, management reiterated that the proposed restructuring exercise aligns the interests of all stakeholders, and is earnings-accretive for minority shareholders. Management re-emphasized expectations of better content per vehicle, helped by increasing EV penetration, in both the entities - Motherson Sumi Wiring India Limited (MSWIL) domestic wiring harness business and Samvardhana Motherson International Limited (SAMIL) new name for the existing listed entity after the de-merger of domestic wiring harness business and merger with parent entity.
- SAMIL shares will trade ex-MSWIL from 14th January. The merger with the promoter entity is expected to take place on 24th January. MSWIL's listing is expected in mid-March, subject to regulatory approvals.
- EV opportunity: Global high-voltage wiring harness market is expected to grow to US$7bn in 2028, implying a 17% CAGR over 2021-28. In addition, the Power electronics market is likely to surge to US$81bn in 2030 from US$20bn in 2020. Further, the automotive software and electrical & electronic components market should grow to US$469bn by 2030, implying a 7% CAGR over 2020-30 (Source: Based on external market research published in MSS presentation).
- Being powertrain-neutral, over 98% of the product portfolio is favorably positioned for upcoming mega-trends for SAMIL.
- EV-related updates: 1) In SMR PBV, 27% of the order book of EUR15.3bn as of Sep'21, is from EVs, 2) In PKC, there have been multiple order wins for wiring harness for electric trucks and buses globally, 3) In SMR, there has been strong traction with EV OEMs globally, with more than one-third of the market share for exterior mirrors, 4) In SMR, content has increased with the adoption of new technologies, such as light-weight mirrors and camera monitoring systems, 5) In Precision Metals, specialized solutions for EV-specific requirements have been developed (such as HVACs for E-buses in India).
- The share of non-automotive verticals stands at <1% of revenues, but management remains focused on increasing this share. SAMIL will pursue acquisition opportunities aggressively, and management is evaluating opportunities in both Auto and Non-auto segments.
- Focus remains on India and Emerging markets. India has a 20% revenue contribution and over 40% of profit contribution in H1FY22. Emerging markets contributed 57% of revenues in the same period.
- EV penetration should lead to higher content per vehicle. The company has won orders for E-PV components from multiple OEMs. The support of the parent company (Sumitomo Wiring Systems) will be in the form of: 1) Component supplies, 2) Technical assistance. 3) New technology products, including gateways, body ECUs, Junction box, etc., along with solutions for hybrids/EVs.
Buy With A Target Price of Rs. 300
The brokerage has said in its research report that "Retain Buy with a TP of Rs300 (23x Dec'23E EPS). We expect robust growth prospects for MSS in the medium term, driven by expectations of a cyclical upturn in the underlying Auto segment in domestic/global markets and increasing content per vehicle due to premiumization/electrification. In addition, the proposed restructuring exercise creates a platform for future growth through inorganic and organic routes. This restructuring exercise is a step toward the company's Vision 2025 - revenue target of USD36bn with ROCE of 40%."
The above stock has been picked from the brokerage report of Emkay Global Financial Services Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.