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MSUMI well poised to shift up a gear as automotive sector strengthens
Solid business with strong operational and technological DNA from Parent Cos - Motherson Group and Sumitomo Group (Japan), positions MSUMI well to drive robust growth. We are LONG.
Motherson Sumi Wiring India Limited (NSE: MSUMI), a JV between Motherson Group and Sumitomo Wirings Systems (Japan), is one of the leading players in the wiring harness segment, providing solutions for commercial and passenger vehicles including (two wheelers, four wheelers, etc) powered by traditional fuel (ICE), electric vehicles (EVs), or a mix of both (hybrid). MSUMI commands a robust 42% market share in the Indian automotive wiring harness solutions industry.
Indian automotive wiring harness market was sized at c.USD1.5bn in 2022 and is expected to reach USD2.4bn by 2028, implying a CAGR of 8.48%, helped by an increasing EV market (EV’s require more wirings) and rising premiumization of cars leading to increased value added features in vehicles.
Wiring harness industry is set to outpace overall automotive components industry
The automotive sector appears ideally positioned to gain traction, owing to easing semiconductor supply chain issues and wider industry tailwinds. The sector is further supported by several government initiatives such as the PLI scheme of INR26,058cr to boost production in the auto and drone industry and the INR3,000cr allocation under the Indian Semiconductor mission.
The wiring harness market is set to grow at a higher rate than the overall automotive components market due to the overall shift in consumption patterns such as a) increasing preference towards EVs which require 1.5x-2.5x wirings b) uptick in % of SUVs sales which require 1.5x wirings c) increasing adoption of 2W EVs which require up to 8x wirings v/s ICE.
Shifting consumer demand and solid technology key for the future
EV sales in India in 2022 recorded 210% y-o-y growth, crossing a million mark at a penetration rate of a modest 4.7%. Opportunities are further expected to increase as govt. targets a penetration of 30%+ by 2030. MSUMI is expanding manufacturing capacity by adding more units (moving from 23 to 26) in FY23 to cater to a heightened demand outlook. Management has also upped its focus on diversifying its product portfolio to cater to the rising blended demand. Increasing thrust in EV solutions is highly favorable.
Well placed to capture the increasing demand supported by strong fundamentals
Revenue/EBITDA grew at a CAGR of 19%/20% over FY20-FY22, driving an uptick in market share and hefty ROCE/ROE margins of 52%/37%. Debt-to-equity of 0.25x, cushioned by decent interest coverage of 22x and no near-term plans on raising debt, gives comfort around balance sheet health.. Working capital cycle has improved from 69 days in FY21 to 47 days in FY22 and is expected to strengthen further. Strong FCFF generation of INR420cr in FY22 is another noteworthy positive in the story.
Q3 Highlights: Revenue for Q3FY23 stood at INR1,687cr, up 16% y-o-y but down 8% q-o-q due to supply chain issues. COGS for the period increased by 21% on a y-o-y basis due to fluctuations in copper prices, accounting for 18%-20% of overall COGS. EBITDA margins in Q3FY23/Q3FY22 stood at 11%/14%, affected by increased COGS as well as employee costs due to increased training expenditure. The company follows a policy to expand capacities when it crosses 80% benchmark utilization, hence the company incurred INR147cr during 9MFY23 to meet the anticipated demand uptick in future.
A premium valuation reflecting steep growth prospects
MSUMI currently trades at 52.0x TTM P/E and 27.64x EV/TTM EBITDA. Comps Minda Industries (NSE: UNOMINDA) trades lower at 44.60x P/E and 21.60x EV/TTM EBITDA while Sona Comstar (NSE: SONACOMS) trades higher at 66.5x P/E and 40.10x EV/ TTM EBITDA. ZF Commercial (NSE: ZFCVINDIA) trades at 71.50x P/E and 38.90x EV/TTM EBITDA, and APTIV Plc (NYSE: APTIV) trades at 56.10x P/E and 17.50x EV/TTM EBITDA. MSUMI stock is down c.32% vs its 52wk high. Broader macros such as supply chain issues of automotive components, auto volumes slowdown & fluctuating copper prices have been key pressure points dragging the stock price but are not unique to MSUMI. Promoters hold 61.7% of the outstanding shares.
A solid business, with strong operational and technological DNA (given Motherson Group and Sumitomo Group (Japan) are Parent cos), strong domestic foothold with a market share of 42%, favorable sectoral tailwinds and comfort around forward looking financials should bode well for stock in the medium term. We are LONG.
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Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.