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Macro uncertainty prevails, better switch to MSWIL…

About the stock: Samvardhana Motherson International (SAMIL) (erstwhile Motherson Sumi) primarily serves the global PV industry with wiring harnesses, vision systems (mirrors) and plastic body parts as key product lines.

* History of successful turnarounds in acquisitions and inorganic-led growth

* SMRPBV order book was at €16.1 billion as of FY22

Key highlight:

* SAMIL, in the recent past, informed exchanges about its mirror business under SMR entering into a share purchase agreement with Ichikoh Industries, Japan for acquiring its mirror business involving three plants in Japan and China largely serving Japanese OEMs

* It is being acquired at an EV of ~| 300 crore for a business realising ~| 900 crore sales and ~| 75 crore EBITDA i.e. at a valuation of ~4x EV/EBITDA and ~0.3x P/S. We believe the acquisition has been executed at a healthy valuation and should be accretive for SAMIL. However, the size of the acquisition is small within the broader scheme of things at Motherson

What should investors do? SAMIL’s stock price has been under pressure in the past amid concerns over demand, supply disruptions at its overseas markets.

* Given the macro uncertainty in global markets vis-à-vis a more stable demand environment domestically, we are dropping coverage on SAMIL (which is a play on a recovery in global automobile space) and would advise investors to switch their holding to Motherson Sumi Wiring India (MSWIL)

* MSWIL is a leading, full-system wiring harness solutions provider in India catering to all major OEMs. It is indeed a good proxy to the domestic automobile space with superlative return ratio profile (RoCE ~50%) and structural levels for long term secular growth rate given the content/vehicle increase due to rise in electronic content in vehicles as well as electrification

* Key saviour for SAMIL in these turbulent times is its largely powertrain agnostic product profile (wiring harness, mirrors, plastic body parts, etc), which is largely immune to EV risk and outsized operating leverage gains as and when its overseas greenfield plants start hitting peak utilisation levels

Key triggers for future price performance:

* With a revival in OEM volumes and steady order-book, we expect 4.4% net sales CAGR over FY22-24E. Margins are seen at 8.6% in FY24E

Alternate Stock Idea: Leaving aside SAMIL, in the ancillary space we like MSWIL.

* Structural levers for long term secular growth coupled with high RoCE

* BUY with a target price of | 105 i.e. 42x P/E on FY24-25E average EPS

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