Published on 5/12/2022 3:36:55 PM | Source: Emkay Global Financial Services Ltd

Buy Samvardhana Motherson International Ltd For Target Rs.94 - Emkay Global Financial Services

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* We attended Samvardhana Motherson International’s (SAMIL’s) analyst meet, where Management re-iterated its aspirational target to increase revenue to USD36bn in FY25 from USD10bn in FY22, driven by both organic growth and acquisitions.

* Company expects robust organic growth over FY22-25E, owing to pick-up in underlying industry, better content per vehicle (CPV) and revenue surge in nascent segments. CPV is expected to notably increase due to premiumization/electrification.

* Management is evaluating multiple-acquisition opportunities, with an aim to increase revenues by +USD15bn. These acquisitions could require +USD2bn, which is expected to be funded through debt and internal accruals.

* We retain a constructive view on expectations of an industry-upcycle and better walletshare. We reaffirm BUY, with SOTP-based TP of Rs94, based on our Dec-24 estimates.

Key takeaways from Analyst Meet

* Management has retained revenue target of USD36bn in FY25 vs. USD10bn in FY22 and USD12bn in FY23 (annualized). The target is expected to be achieved on the back of organic and inorganic growth.

* Organic growth is likely to be supported by: i) growth in the underlying industry buoyed by pent-up demand and ramp-up in production owing to better chip supplies (Exhibit 1); ii) growth in CPV, owing to premiumization, with increasing share of UVs and top-end variants (Exhibits 2-5); iii) Increase in CPV, owing to EV transition (Exhibits 6-7); and iv) robust growth in nascent segments, such as aerospace, logistics, healthcare and IT/industrial solutions.

* SAMIL’s largest subsidiary SMR PBV has a pending order-book of EUR18.2bn, with 37% share of EV programs.

* In the aerospace division, Company has booked orders worth USD400mn, to be executed over 5-7 years

* In the logistics division, the company has <1% share in new-car transportation which is expected to improve ahead. In addition, incremental revenue of +USD150mn is expected due to packaging services to group companies.

* In the IT division, the company expects robust growth as a result of client additions and growth in captive requirements

Key takeaways from Analyst Meet (continued)

* Inorganic efforts: Pre-requisites for the acquisitions include: 1) customer support, 2) attractive valuations, and 3) potential for pre-tax ROCE improvement to 40%. Over the past 2.5 years, SAMIL has announced seven acquisitions, with more acquisitions expected in future. SAMIL plans acquiring companies with aggregate revenue of +USD15bn, if they meet the pre-requisites. It would fund such acquisitions through debt and internal accruals.

* SAMIL continues to work towards diversification, wherein it targets reducing customer, component & country dependence to less than 10% (3CX10 policy; Exhibits 8-10).

* Aspirational ROCE target stands at 40% for FY25 vs. 7% in FY22 and 8% in FY23 (annualized). ROCE stands at 18% in FY22 and 19% in FY23 (annualized), after excluding new sites and acquisitions. ROCE expansion is expected to be driven by: 1) completion of capex cycle, 2) improvement in working capital, 3) turnaround in loss-making units (mostly new plants/acquisitions), 4) achieving manufacturing-cost reduction, along with digitization efforts, and 5) positive operating leverage.

* Dividend payout target remains at 40% for FY25




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