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Samvardhana Motherson International 

Compelling play on global auto recovery; Reiterate Buy

SAMIL at its recent ‘Vision 2025’ mid-term review meet signalled its intent to reach close to USD36bn revenue by FY25. While this acquisition-fuelled revenue target maybe difficult to come by, we believe the worst is largely behind for the company. Recovery in global automotive production (after a gap of 3 years), receding concerns on supply issues and rising content per vehicle (led by premiumization/shift towards EVs) is expected to drive strong earnings recovery (c.55% over FY22-25E). SAMIL is at the end of its capex cycle and has the requisite capacity to capture medium-term growth opportunities. Lower working capital requirement on easing supply chain, higher operating leverage and improving profitability is expected to drive ROCE going ahead. The stock has underperformed the Auto index by c.58% over past 1 year owing to headwinds related to global PV production and is currently trading at an attractive 15x FY25E EPS. We reiterate BUY with Sept’23 TP of INR 115.

* Well positioned to benefit from recovery in global auto production: During the past 3 years, various challenges like Covid-19, chip shortages, commodity/energy/labour inflation, etc. have led to decline in global light vehicle (LV) production from c.93mn units in FY19 to c.76.5mn units in FY22. Owing to these challenges, SAMIL’s topline remained range bound between USD c.9bn-10bn (during FY19-22). Also, unattractive valuation of global Auto Ancillary companies restricted large inorganic opportunities. With Covid-19 mostly behind, passenger vehicle production is expected to recover from ebb. Commentaries from some of its key customers suggest strong demand tailwind led by low inventory, premiumization, healthy order-book and receding supply chain issues are expected to benefit SAMIL going ahead.

Premiumization; shift to EVs to drive higher content per vehicle: SAMIL is expected to be one of the key beneficiaries of the premiumization trend in the global auto industry. Its content per vehicle is expected to increase by c.2.5x-3x driven by shift from hatchbacks to SUVs and premium cars. Also, its key businesses (wiring harness, modules & polymer, Mirrors, etc.) are well placed to gain c.2x-3x from favourable mix (increasing preference for top end variants) in the medium-to-long term. Furthermore, SAMIL’s product verticals are powertrain agnostic and the company is already a key supplier to leading EV makers globally (current revenue share at ~5%). Hybrids and EVs together are expected to form major share of global light vehicle sales by FY28-29 and SAMIL’s businesses are positioned well to gain from shift towards electrification (content opportunity of up to c.3x-3.5x under EVs vs. ICE).

Expect normalisation of WC, strong financial recovery to drive ROCE: The company is towards the end of its capex cycle and investments are in place to support medium-term growth. Receding chip shortages and easing supply constraints are also likely to drive normalisation in working capital going ahead. Overall, the company is focusing on improving ROCE led by 1) lower capex intensity, 2) normalisation of working capital, 3) focus on improving profitability and 4) higher operating leverage. Current net debt/EBITDA stands at 2x and the company targets to maintain it below ~2.5x.

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