Company Update Rating matrix Rating : Hold Target : 335 Target Period : 12 months Potential Upside : 4% What s changed? Target Changed from 31 to 335 EPS FY17E Changed from 12.8 to 12 EPS FY18E Changed from 16. to 15 Rating Unchanged Key financials Crore FY15 FY16 FY17E FY18E Net Sales 34,49 38,13 42,243 48,529 EBITDA 3,22.7 3,454.3 4,234.5 5,24. Net Profit 862.4 1,273.7 1,687.4 2,111.1 EPS ( ) 6.1 9.1 12. 15. Valuation summary FY13 FY16 FY17E FY18E P/E (x) 46.6 35.2 27. 21.6 Target P/E (x) 54.5 36.9 27.8 22.2 EV/EBITDA (x) 15.2 14.4 1.9 8.7 P/BV (x) 13.7 1.7 5.7 4.8 RoNW (%) 25.9 3. 21.1 22.4 RoCE (%) 24.7 19.9 23.4 27.6 Stock data Particular Amount Market Capitalization ( Crore) 45618.5 Crore Total Debt (FY16) ( Crore) 5988.2 Crore Cash & Investments (FY16) ( Crore) 1932.9 Crore EV ( Crore) 49673.8 Crore 52 week H/L ( ) 359/26 Equity capital ( crore) 14.4 Crore Face value ( ) 1 Price performance 1M 3M 6M 12M Motherson Sumi Systems Ltd 2.3-1.2 5.6 29.2 Bosch Ltd 1.7-4.9-14.4 19. Wabco India Ltd 3.8-11. -6. -1.7 Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com PKC acquisition to propel growth January 23, 217 Motherson Sumi (MOTSUM) 323 Motherson Sumi (MSL) has announced a tender offer to acquire Finland based PKC Group Plc. PKC is a Global Tier 1 supplier of wiring harness & associate component to OEMs in the M&HCV and locomotive space in North America, Europe, Brazil & China. For CY16E, its revenue, margins were at 846 million (~ 6,1 crore) & 7.5%, respectively, while its net debt was at 47 million (~ 34 crore) The aggregate equity purchase price was at 571 million (~ 4,1 crore). The transaction will be funded from the recently raised QIP (~ 2, crore) by MSL & remaining through its internal accruals The PKC offer implies TTM EV/EBITDA multiple of ~9.8x & EV/sales of.7x. We believe PKC will help MSL 1) diversify its segment (increase CV exposure) and geographical presence (deepen its reach in North America) and 2) is a step forward to achieve its FY2 targets Acquisition of PKC = To further diversify (segment + geography) PKC group operates in the wiring harness (~95% of revenue) and electronics segments (~5% revenue). In terms of geography mix, North America accounts for 66% of overall revenue, Europe 28% of revenue, South America & APAC account for remaining of 5% & 1%, respectively. PKC is a market leader in the wiring harness space in North America with market share of 39% in HCV & 69% in MCV vehicles. In Europe, it holds a sizeable share of 57% in HCV & 77% in MCV. The company also enjoys a dominant position in the Brazil & Chinese market. MSL has strategic interest in the North American market, as it is line with its strategy of 3Cx15. i.e. no country, customer or component will contribute >15% of revenues. The management has clarified the client base of its subsidiary Stoneridge (that also caters to the CV space in US) is largely different from PKC and there would be no overlap of revenues thus benefiting the company. It will further diversify its segment mix, as MSL will have access to CV segment vs. its present rich dominance in the PV segment. Much needed acquisition to achieve its 22 target In the past, the management has been looking for acquisitions of potential target companies, keeping in mind the synergy benefits and its FY2 revenue target of $18 billion. There were concerns on the company s ability to achieve the ambitious the FY2 targets via the inorganic part (the management maintains its guidance of achieving revenue of $18 bn by FY2 through a mix of organic & inorganic route (65:35), respectively coupled with RoCE of >4%). If the acquisition of PKC (revenue of 6, crore) goes through, it will help MSL achieve its inorganic revenue target (~ 35, crore) by FY2. We continue to believe the target of inorganic route still remains high and a challenge to MSL, which needs to acquire companies keeping in mind the synergy benefits. Growth through acquisition remains critical in achieving target! MSL s competence in turning around businesses is evident from the success of SMR & SMP. The management s strong focus on RoCE augurs well for its performance. We remain positive on the long term perspective, though it s inorganic route of acquisition remains a challenge keeping in mind the synergy benefits. Thus, we value MSL on an SOTP basis with a target price of 335 & maintain HOLD rating on the stock. ICICI Securities Ltd Retail Equity Research
PKC Group to add value from FY18E onwards PKC s long term target is to achieve revenue of 1.4 billion by 218. It further aims to expand its EBITDA margins >1% and bring its gearing <75%. The target is supported by its strategic initiatives viz. 1) deepening its existing network 2) further penetration into APAC markets 3) exploring opportunities to cater to newer segments. Thus, we believe that if the acquisition goes through by March 217 (indicated by the management), it can add considerable value to MSL, going forward. Keeping in mind PKC s target for the next two years, backed by MSL s strong capabilities to focus on margin & RoCE, we believe the acquisition on a conservative basis will add value of > 3/share in FY18E (8x its EV/EBITDA of PKC s CY17 earnings). We are waiting for the proposal to go through before incorporating PKC s numbers in our overall estimates. Exhibit 1: SOTP valuation SOTP valuation EV/EBITDA (x) EBITDA (FY18E) EV ( crore) Remarks SMR 13.5 1,572 1,825 Adjusted for stake Subsidiaries (Ex-SMR/SMP) 11. 42. 4,62 SMP 13.5 1,99 13,144 Adjusted for stake Standalone 13.5 1,321.3 17,837 Total target EV 46,427 Net Debt (FY18E) -543 Adjusted for stake in SMRPBV Target Market Cap 46,97 Target price ( ) 335 Source: EPS adjusted for bonus, Company, ICICIdirect.com Research Exhibit 2: Valuations Revenues Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY14 344. 2.3 5.5 72.1 59.6 2.6 25.9 18.5 FY15 3449.3 13.4 6.1 12.7 52.9 15.2 25.9 24.7 FY16 3813.4 1.6 9.1 47.7 35.8 14.4 3. 19.9 FY17E 42243.2 1.8 12. 32.5 27. 1.9 21.1 23.4 FY18E 48528.8 14.9 15. 25.1 21.6 8.7 22.4 27.6 Source: EPS adjusted for bonus, Company, ICICIdirect.com Research Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 42,835 42,835. 49,361 49,361. Unchanged EBITDA 4,234 4,234. 5,24 5,24. Unchanged EBITDA Margin (%) 9.9 9.9 bps 1.5 1.5 bps PAT 1,687 1,687. 2,111 2,111. Unchanged EPS ( ) 12.8 12. -5.7 16. 15. -5.7 With MSL raising fund via QIP (6.3 crore share) & prefrential issue (1.8 crore share) its equity has been diluted by 6%. Hence EPS has been revised lower ICICI Securities Ltd Retail Equity Research Page 2
Exhibit 3: Revenue trend of PKC Group ( million) Exhibit 4: Operational performance of PKC Group ( million) Million 12 1 8 6 4 2 928 884 83 847 632 CY12 CY13 CY14 CY15 9MCY16 million 9 8 7 6 5 4 3 2 1 81 8.7 67 7.6 6 7. 7. 49 5.9 44 CY12 CY13 CY14 CY15 9MCY16 1. 9. 8. 7. 6. 5. 4. 3. 2. 1.. % Revenue EBITDA EBITDA margin % Exhibit 5: PAT trend of PKC Group ( million) Exhibit 6: RoCE (%) trend of PKC Group 14 12.2 8 6 4 2 24 14 7 12 1 8 7.7 9.9 8.6 million -2-4 -6-8 CY12 CY13 CY14 CY15-29 % 6 4 2 CY13 CY14 CY15 Sep-16 PAT RoCE Exhibit 7: Revenue mix (%) geography wise Exhibit 8: Gearing (%) of PKC Group 5 1 North America 1 8 82.9 28 66 Europe South America APAC % 6 4 2-1.1-5.6 31.4-2 CY13 CY14 CY15 Sep-16 Gearing ICICI Securities Ltd Retail Equity Research Page 3
Financial summary Profit and loss statement Crore Total operating Income 35,31.9 38,395.2 42,834.9 49,361.4 Growth (%) 15.1 9.6 11.6 15.2 Raw Material Expenses 21,631.4 23,167.2 26,97.8 3,5.1 Employee Expenses 6,365.3 7,399.7 7,944.3 8,589.6 FX (gain)/loss 11.4 97.3 2.6. Other expenses 3,821.2 4,276.7 4,555.7 5,67.8 Total Operating Expenditure 31,829.2 34,94.9 38,6.4 44,157.5 EBITDA 3,22.7 3,454.3 4,234.5 5,24. Growth (%) 33.6 7.9 22.6 22.9 Depreciation 92.6 1,135.7 1,15. 1,193.5 Interest 317.8 27.6 29.4 232.5 Other Income 17.7 32.9 31.4 64.7 PBT 1,817.2 2,339.8 2,87.5 3,842.7 Others.... Total Tax 525.6 583.6 88.3 1,7.6 Reported PAT 862.4 1,273.7 1,687.4 2,111.1 Growth (%) 12.7 47.7 32.5 25.1 EPS ( ) 7. 9.2 12. 15. Cash flow statement Crore Profit after Tax 862.4 1,273.7 1,687.4 2,111.1 Add: Depreciation 92.6 1,135.7 1,15. 1,193.5 (Inc)/dec in Current Assets -589.9-977.1-542.6-2,191.9 Inc/(dec) in CL and Provisions 1,46.3 85.2 389.5 1,961.7 CF from operating activities 2,599.4 2,237.5 2,639.2 3,74.4 (Inc)/dec in Investments.. -2,558.. (Inc)/dec in Fixed Assets -1,439.3-2,783.9-2,. -1,926. Others 189. -138.5 98.1 174.5 CF from investing activities -1,25.3-2,922.4-3,577.9-1,751.5 Issue/(Buy back) of Equity.... Inc/(dec) in loan funds 134.6 1,77.8-2,5. -1,. Dividend paid & dividend tax -318.5-39.6-497.4-663.2 Inc/(dec) in Sec. premium.... Others -497.2-231.9 2,27.8-232.5 CF from financing activities -681.1 455.3-726.6-1,895.6 Net Cash flow 985.8 41. -1,374.9-34.2 Opening Cash 96.1 1,891.9 1,932.9 558. Closing Cash 1,891.9 1,932.9 558. 217.8 Balance sheet Crore Liabilities Equity Capital 88.2 132.3 14.4 14.4 Reserve and Surplus 3,235.6 4,113.3 7,856.4 9,34.4 Total Shareholders funds 3,323.8 4,245.6 7,996.8 9,444.8 Total Debt 4,91.4 5,988.2 3,488.2 2,488.2 Deferred Tax Liability 145.7 192.6 192.6 192.6 Minority Interest / Others 1,14.2 1,441.1 1,861.1 2,611.1 Total Liabilities 9,73.2 12,5.3 13,791.4 15,59.4 Assets Gross Block 12,643.2 15,299.1 17,299.1 19,399.1 Less: Acc Depreciation 6,513.9 7,94.2 9,45.2 1,238.7 Net Block 6,129.3 7,358.9 8,253.9 9,16.4 Capital WIP 955.4 1,374. 1,374. 1,2. Total Fixed Assets 7,84.7 8,732.9 9,627.9 1,36.4 Investments.. 2,558. 2,558. Inventory 3,75. 4,53.3 4,61.1 5,777.6 Debtors 3,14.4 3,465.6 3,935. 4,52.5 Loans and Advances 1,313. 1,5.2 1,593.2 1,443.5 Other Current Assets 12.6... Cash 1,891.9 1,932.9 558. 217.8 Total Current Assets 9,981.9 1,952. 1,147.3 11,959.5 Creditors 4,864.1 5,567.4 6,133.9 7,46.7 Provisions 774.8 55.1 66.1 696.3 Total Current Liabilities 5,638.9 6,117.5 6,74. 7,742.9 Net Current Assets 4,343. 4,834.5 3,47.3 4,216.6 Other non-current Asset 242.5 518.5-11.6 593.9 Other non-current Liability.... Deferred Tax Asset 19.9 364.9 394.9 424.9 Application of Funds 9,73.2 12,5.3 13,791.4 15,59.4 Key ratios Per share data ( ) EPS 7. 9.2 12. 15. Cash EPS 12.7 17.2 19.9 23.5 BV 23.7 3.2 57. 67.3 DPS.. 3. 4. Cash Per Share 13.5 13.8 4. 1.6 Operating Ratios EBITDA Margin (%) 9.3 9.1 1. 1.7 PBT / Net sales (%) 5.3 6.1 6.8 7.9 PAT Margin (%) 2.5 3.3 3.9 4.3 Inventory days 37.2 39.5 37. 37. Debtor days 31.9 33.2 34. 34. Creditor days 51.5 53.3 53. 53. Return Ratios (%) RoE 25.9 3. 21.1 22.4 RoCE 24.7 19.9 23.4 27.6 RoIC 33.3 26.5 33.6 36.2 Valuation Ratios (x) P/E 46.6 35.2 27. 21.6 EV / EBITDA 15.2 14.4 1.9 8.7 EV / Net Sales 1.4 1.3 1.1.9 Market Cap / Sales 1.3 1.2 1.1.9 Price to Book Value 13.7 1.7 5.7 4.8 Solvency Ratios Debt/EBITDA 1.5 1.7.8.5 Debt / Equity 1.5 1.4.4.3 Current Ratio 1.3 1.3 1.1 1.1 Quick Ratio.8.7.7.6 ICICI Securities Ltd Retail Equity Research Page 4
ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Amara Raja (AMARAJ) 868 125 Hold 14832 28.5 31.2 39.4 3.4 27.9 22. 21.1 18.9 15.1 31.2 27.5 28.9 23.2 21. 21.9 Apollo Tyre (APOTYR) 185 225 Buy 936 21.5 2.7 22.5 8.6 8.9 8.2 5.4 6.5 6.1 2.5 15.3 14.7 17.7 15.6 14.7 Ashok Leyland (ASHLEY) 86 15 Buy 24366 2.5 5.9 6.7 34. 14.6 12.9 1.8 8.3 6.9 23. 27.4 28.2 13.1 24.8 23.2 Bajaj Auto (BAAUTO) 278 33 Buy 78364 126.2 153. 187.3 22.4 18.5 15.1 16.7 14.3 11.5 35.9 34.4 34.9 29.7 3.5 31.2 Balkrishna Ind. (BALIND) 1126 14 Buy 1879 58.7 77.7 93.2 2.3 15.3 12.8 11.6 9.8 7.8 19.5 2.5 23.5 2.3 2.5 23.5 Bharat Forge (BHAFOR) 934 1 Buy 21751 28. 29.6 44.5 33.3 31.6 21. 15.4 15.5 11.6 16.5 14.9 19.7 18.3 16.9 21.6 Bosch (MICO) 21131 24 Buy 66352 41.2 599.5 6.2 5.9 34.8 34.8 33.1 33.4 23.9 15.1 23.8 2.4 17.8 19.7 24.4 Eicher Motors (EICMOT) 2268 28 Buy 61259 471.5 653. 854.2 48.1 34.7 26.6 27.2 21.4 16.3 42.4 42. 41.5 36.9 37.1 35.4 Escorts (ESCORT) 346 36 Hold 413 7.5 14. 24.7 47.6 25.4 14.5 27.2 14.6 9.1 4.6 1.6 15.5 4.8 8.4 13.1 Exide Industries (EXIIND) 194 24 Buy 1646 7.3 8.5 1.3 26.4 22.9 18.8 15.8 13.6 11. 18.7 19.7 22.3 14. 14.7 16.1 Hero Mototcorp (HERHON) 311 3675 Buy 61927 156.9 188.2 26.4 19.8 16.5 15. 13.2 11.2 1.1 5.4 48.7 44.9 39.4 38.7 35.8 JK Tyre & Ind (JKIND) 126 145 Buy 2858 21. 17.7 26.9 6. 7.1 4.7 4.6 4.5 3.7 21.7 16.7 18. 27.2 19.2 23.1 Mahindra CIE (MAHAUT) 194 225 Buy 6266 6.2 1.6 13.1 31.4 18.2 14.8 12.5 9.1 7.3 7.3 11. 12.1 8.5 12.3 14.1 Maruti Suzuki (MARUTI) 5695 6765 Buy 1721 151.3 26.7 37.5 37.6 21.8 18.5 19.8 15.9 13. 22.7 25.1 24.9 16.9 23.6 22.8 Motherson (MOTSUM) 324 335 Hold 4548 9.1 12. 15. 35.7 26.9 21.5 14.4 1.9 8.7 19.9 23.4 27.6 3. 21.1 22.4 Tata Motors (TELCO) 531 595 Buy 161356 37.2 35.5 61.3 12.7 13.3 7.7 3.9 4.1 2.9 17. 12.9 18.3 15.3 11.7 16.8 Wabco India (WABTVS) 523 62 Buy 9937 17.7 138.8 167.4 48.5 37.7 31.3 32.9 25.1 2.5 19.4 2.3 2. 22.4 24.2 23.7 ICICI Securities Ltd Retail Equity Research Page 5
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