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Simplicity in complexity drives supernormal profits

Content to go up materially due to visible auto industry megatrends

* Market leader in the India wiring harness industry: Motherson Sumi Wiring India (MSUMI), a JV between Sumitomo Wiring System (SWS) and Motherson Group, is a market leader in the Indian wiring harness industry with a market share of over 40%. The wiring harness business is unique from the perspective of high human capital intensity (refer to exhibit 4) and lower capex requirement. MSUMI enjoys superior profitability led by improved efficiency and economies of scale, as reflected in the industry leading gross/EBITDA/ EBIT margins (refer to Exhibit 6).

* Pure play on the Indian automotive industry…: After the restructuring of Motherson Sumi Systems (MSS), MSUMI transformed into an India-based pure play wiring harness player with a focus on the domestic market. It derives over 95% of its revenue from the domestic business with negligible exposure to exports. Hence, MSUMI is a direct beneficiary of the Indian automotive industry recovery, with a high exposure to the domestic PV segment.

* …and on automotive megatrends…: Globally, the automotive industry is witnessing several megatrends such as premiumization, electrification, connected/autonomous vehicles etc. MSUMI, through its wiring harness content in vehicles, is well positioned to benefit from these megatrends. The wiring harness content is likely to gain from: a) increasing electronic content in Indian PV (to rise 2.45x by 2030) and b) electrification of vehicles (content to increase by over 5x in e-2Ws and over 2x in e-PVs).

* …driving strong growth and capital efficiency: We estimate MSUMI’s revenue/EBITDA/PAT to report 15%/22%/23% CAGR over FY22-25E. Strong operating performance coupled with limited capex has driven strong FCFF and MSUMI has turned into a net cash company in FY22 (net cash of ~INR11.5b by FY25E despite over 50% payout). Consequently, RoIC would improve to 62% by FY25E from 53% in FY22, though RoE would decline to 41% from 51% over the same period, due to cash drag.

* Valuation & view – Initiate coverage with a BUY rating: The stock trades at 34.1x/26.7x FY23E/24E EPS. We believe MSUMI deserves rich valuations due to its: a) strong competitive positioning, b) top-decile capital efficiency, and c) position as a prime beneficiary of EVs and other megatrends in Autos. Our target P/E of 35x is in line with the other auto component companies, which enjoy similar competitive positioning, growth potential and superior capital efficiency (refer to Exhibit 23). We initiate coverage on the stock with a BUY rating and a TP of ~INR80 (premised on ~35x Mar-24E EPS).

* Key risks: a) Customer/segment concentration, and b) Electrification, which influences the competitive landscape.

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