Samvardhana Motherson Rating- Buy - Vision 2025- Focus on profitable growth

Samvardhana Motherson Rating: Buy | Vision 2025: Focus on profitable growth

Auto component major Motherson Sumi Systems reiterated its Vision 2025 despite the first half of the plan period witnessing incessant challenges. It aspires for—revenue of $36 bn with 40% RoCE, further diversification of revenue and 40% dividend payout. The vision entailed 25% of revenue from non-auto segment. Annualised revenue run-rate was at $12 bn and adj. RoCEs (return on capital employed) stood at 19% for 1HFY23

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RoCE target of 40% hinged on asset utilisation, operating leverage and turnaround of underperforming plants: It has capacities in place to take production back to pre-Covid levels and service its strong order book at SMRPBV (Samvardhana Motherson Automotive Systems Group BV). Hence, if production normalises the company will see twin benefits of operating leverage and increase in asset turnover. Further, there is scope of a turnaround of the underperforming plants that can also contribute to RoCE improvement notably. It currently has 11 plants, which are operating at losses.

Motherson’s products are big beneficiaries of increasing premiumisation and electrification trends. The trend favouring SUVs benefits all the key businesses of the company as content goes up between 20% and 200% overhatchbacks. Likewise, sale of higher trim levels also leads to an increase in content by 10% to 200% for top variant over base variant. Lastly, content in EVs goes up by 40% to 240% as against relevant ICE (internal combustion engine) counterparts. The company expects the share of EVs to improve to 20%/38% by FY25/FY29 in global markets.

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In the identified four businesses (Aerospace, Health & Medical, Logistics and IT) in the non-auto space, the company is putting building blocks in place and each of the businesses is at a different stage of scale-up. In Aerospace business, its focus is on structural parts, propulsion components and cabin parts. Its booked business has doubled over the last year to $400m, driven by acquisition of CIM Tools (Apr’22), qualification for plastic parts (Boeing) and wiring harness (Airbus). In health & medical segment, it is putting up a Greenfield plant at Chennai (operational by Apr’23 estimates) and has planned for phased certifications from Apr’23 onwards.