Vision 2025: Aspiring for USD36bn revenue with 40% ROCE by FY25
* At the analyst meet, Vision 2025 was emphasized with a target of $36bn revenue and 40% ROCE vs. $9bn revenue with a 24% adj. ROCE in FY20. Including SAMIL, FY20 revenue stands at $10bn. Factors supporting future growth include increasing content per vehicle, client additions, acquisitions and diversification toward non-auto segments.
* The ongoing restructuring exercise should result in a reduction in Sumitomo’s stake and allow MSS to pursue acquisition opportunities more aggressively. Acquisitions are expected to be funded by free cash flows and debt/equity infusion. Net debt/EBITDA upper limit has been set at 2.5x vs. FY20 level of 1.3x.
* The business situation continues to improve with growth in underlying segments and a healthy order-book. Utilization levels have increased to 75%+ in 80% of global plants. The increase in content per vehicle continues, owing to higher electronic content/electrification, light-weighting and premiumization.
* Our positive view on MSS is underpinned by its strong management capabilities and expectations of a gradual pick-up in underlying segments. FY20-23E EBITDA/earnings CAGRs are likely to be robust at 15%/28%. We retain Buy rating with a revised TP of Rs155 (Rs139 earlier), based on 20x FY23E EPS.
Targeting massive $36bn in revenues:
Management indicated that Vision 2025 revenue target of $36bn and 40% ROCE have four major catalysts: 1) business growth in current product lines; 2) new technologies in current products and processes; 3) adjacent expansion (new solutions in current industries); and 4) diversification into new industries. The first three catalysts are expected to take revenues of $27bn, while the fourth catalyst should add another $9bn. MSS will focus on increasing penetration into non-auto segments such as Aerospace, Logistics, Healthcare and IT, where SAMIL has experience.
Acquisitions to form a major portion of incremental revenues:
The ongoing restructuring exercise should result in a reduction in Sumitomo’s stake and allows MSS to follow acquisition opportunities more aggressively. Acquisitions are likely to be funded by free cash flows and debt/equity infusion. Net debt/EBITDA upper limit has been set at 2.5x vs. FY20 level of 1.3x. However, management has demonstrated over FY15-20 that it will pursue opportunities only if they provide medium-term visibility of healthy ROCEs.
Our positive view is underpinned by strong management capabilities and expectations of a gradual pick-up in the underlying segments. Business situation continues to improve with growth in underlying segments and a healthy order-book. We increase FY22/23E EPS by 13%/12% to Rs6.5/Rs7.8, mainly led by higher SMP margin assumptions, on better scale and aggressive cost savings. Following the revision, EBITDA/earnings CAGRs are likely to be robust at 15%/28% over FY20-23E. Retain Buy with a TP of Rs155 (Rs139 earlier) based on 20x FY23E EPS. Key downside risks: demand contraction in target markets, weak performance of large clients, and adverse currency rates, among others.
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