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Vision 2025: Aspirations unchanged…

…normalization of global PV production, content enrichment and M&A

In MOTHERSO’s Vision 2025 mid-way update meet, Mr Laksh Vaaman Sehgal (Director) shared the strategy and levers to meet the company’s targets as well as showcased its work in the futuristic products and segments (non-autos). Apart from acquisitions, a large part of organic drivers are linked to improvement in production of global PVs, continued benefit of content enhancement and focus on improvement in underperforming plants.

* Vision 2025 status: MOTHERSO reiterated its Vision 2025 (five-year plan set in Apr’20) despite the first half of the plan period witnessing incessant challenges. It aspires for: revenue of USD36b (including notable contribution from M&As) with 40% RoCE, further diversification of revenue (3CX10 – no component, customer or country >10% of revenue) and 40% dividend payout. The vision entailed 25% of revenue from non-auto segment. Annualized revenue run-rate was at USD12b and adj. RoCEs (for new plants and acquisitions) stood at 19% (8% reported) for 1HFY23.

* Route 36 – roadmap for USD36b of revenue by FY25E: MOTHERSO’s revenue aspiration of USD36b is based on four pillars: a) strong organic growth as global PV production normalizes after last three years of headwinds, b) content increase through premiumization (more luxury cars and more higher trim levels) and EVs, c) increasing contribution from nonauto, and d) acquisitions. Global PV production bottomed out in FY22 at 76.5m units (from peak of 95.1m in FY18) and 1HFY23 annualized rate is 83.1m units.

* RoCE target of 40% hinged on asset utilization, operating leverage and turnaround of underperforming plants: It has capacities in place to take production back to pre-Covid levels and service its strong order book at SMRPBV. Hence, if production normalizes the company will see twin benefits of operating leverage and increase in asset turnover. Further, there is scope of a turnaround of the underperforming plants that can also contribute to RoCE improvement notably. It currently has 11 plants, which are operating at losses (v/s 37 units in FY16). Lastly, normalization of working capital (higher by 10 days than pre-Covid) would also contribute to RoCE improvement.

* Strong content enhancement opportunities across businesses: MOTHERSO’s products are big beneficiaries of increasing premiumization and electrification trends. The trend favoring SUVs benefits all the key businesses of the company as content goes up between 20% and 200% over hatchbacks. Likewise, sale of higher trim levels also leads to an increase in content by 10% to 200% for top variant over base variant. Lastly, content in EVs goes up by 40% to 240% (over 7x increase in 2W wiring harness) as against relevant ICE counterparts. The company expects the share of EVs to improve to 20%/38% by FY25/FY29 in global markets (from 2% in FY20).

* Non-autos – putting building blocks in place: In the identified four businesses (Aerospace, Health & Medical, Logistics and IT) in the non-auto space, the company is putting building blocks in place and each of the businesses is at a different stage of scale-up. In Aerospace business, its focus is on structural parts (USD400b market size), propulsion components (USD215b) and cabin parts (USD200b). Its booked business has doubled over the last year to USD400m, driven by acquisition of CIM Tools (Apr’22), qualification for plastic parts (Boeing) and wiring harness (Airbus). In Health & Medical segment, it is putting up a Greenfield plant at Chennai (operational by Apr’23E) and has planned for phased certifications from Apr’23 onwards. In IT segment, MOTHERSO has added over 200 customers around the world in less than two years and revenue share from external customers stood at 34% in 1HFY23 (v/s 22% in FY20).

* M&A – key pillar for Vision 25; large deal pipeline: MOTHERSO’s approach to M&A continues to be led by its customers. It is assessing 50 live opportunities currently across businesses, including non-autos. The company does not see financing as a constraint to M&A, as it can: a) further lever balance sheet by USD2.3b (based on analyst estimate of EBITDA) which can result in acquisition of a company worth USD15b revenue, b) use equity as currency for mergers (either fund-raise or share swap), and c) take partial stake in target companies.

* Valuation & view: Vision 2025 is the guiding force for the next phase of growth for the company. Like in the last five-year plan, we believe MOTHERSO would focus on profitable growth rather than acquisitions to meet revenue targets. For organic growth, it would need to enable healthy operating environment, which has been adverse for the last 2-3 years. While 40% RoCE target looks unlikely even if there are industry tailwinds, we expect strong recovery in capital efficiency led by improving asset utilization and profitability. The stock trades at 18.6x/14x FY24E/FY25E consol. EPS. Maintain BUY with a TP of INR95 (premised on Sep’24E SOTP).

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