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Published on 19/06/2019 2:25:43 PM | Source: Motilal Oswal Securities Ltd

Buy Motherson sumi systems Ltd For Target Rs. 144 - Motilal Oswal

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Challenges at SMP are transient

Scope of increase in content | Value accretive M&A core part of strategy

While underlying automotive trends are not supportive, MSS has been impacted by ramp-up issues at its recently commissioned plants (particularly the Tuscaloosa plant). These issues are transient in nature, partly due (a) teething trouble for the large greenfield plant and (b) visa-related issues. We expect a strong recovery as these plants drive growth based on orders on hand. MSS in on right side of global megatrends in the automotive industry, which will drive a further increase in content. This, coupled with disciplined capital allocation toward value-accretive acquisitions, would add to the organic growth potential.

 

Strong order book to dilute impact of weak demand environment:

SMBPBV had an exit order book of ~EUR18.2b (net addition of EUR1b over Mar-18 after EUR6.8b orders started commercial production in FY19). The weak demand environment has not resulted in any deferment of in-hand orders. On the contrary, car manufacturers are accelerating their new product launches to create excitement in a weak environment, in turn expediting timelines of new projects at vendor level. Also, EU passenger vehicle volumes have stabilized and base should turn favorable from Sep-19. While WLTP-2 norms would be implemented from Sep-19, it is likely that OEMs will be relatively better prepared this time round resulting in less impact.

 

Orders worth EUR6.8b commenced commercial production in FY19, but yet to ramp up:

In FY19, SMRPBV commenced execution of orders worth EUR6.8b (of this, ~EUR4.3b started in 2HFY19) at SMRPBV, implying estimated annual revenue potential of over EUR1b. These orders would be largely executed at the recently commissioned new plants. After production commenced for orders worth EUR6.8b in FY19, SMRPBV had a balance order book of EUR18.2b as of Mar’19. It can service entire existing order book from expanded capacities, implying strong growth in revenues as well as substantial reduction in capex at SMRPBV

 

Unusual problems at two green-field plants, issues sorted out with normalcy expected in six months:

Impact of the ramp-up of green-field plants at Hungary and Alabama should remain for another six months due to unusual problems with these sites — issues that it seldom faced in the 33 green-field plants commissioned in the last 3.5 years. It was challenging to get trainers from Germany to train workers at its Alabama plant due to visa issues in the US. This led to higher wastages and inefficiencies. But, visa issues have now been sorted; and plant stabilization is expected in six months. Once processes have stabilized, 60-65% utilization is needed for a plant to break-even. The current utilization at the Hungary plant is 60-65%, with the Alabama plant at 40%; but both these plants are not fully stable yet.

 

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