Equity Research: Motherson Sumi Wiring India Limited (MSWIL)

Summary

Motherson Sumi Wiring India Limited (MSWIL) has good upside growth potential.

Motherson Sumi Wiring India Limited (MSWIL), a JV between Motherson Sumi (MSSL; ~33.4% stake) and Japan’s Sumitomo Wiring Systems (SWS; ~25.3% stake), is headquartered in Noida and employs ~40k+ people. It was recently listed on the bourses following MSSL’s re-organization exercise as a vertical demerger of its domestic wiring harness (DWH) business; the demerger fulfilled SWS’ long-standing request for focused participation in the domestic passenger car industry. As part of the agreement, there would be no change in the shareholding of MSSL and SWS within 1 year from the listing. 

The company’s journey began in 1983 when it commenced supplies to MSIL. Having started off as a ‘build to print’ partner for OEMs (pure play manufacturing), the company has, over time, evolved into a preferred full system solutions supplier encompassing increasing value add in areas such as cost and manufacturing optimization, design and integration of advanced technologies. Its product portfolio span from simple, single wire leads to complex harnesses that contain hundreds of wires and connectors with a variety of protective coverings. 

Over FY12-22, MSWIL’s revenues have grown at ~10% CAGR, outpacing PV industry/MSIL volume CAGR by ~880/~760 bps respectively. Sustained increase in content per vehicle (5-10% every year as per the management) has enabled the company to consistently retain its dominance and develop a robust franchise, especially in PVs, where current market share is estimated at ~60-65% (MSIL wallet share currently is estimated at ~85%). 

Motherson Sumi Wiring India Limited (MSWIL) has a good upside potential of 20%. MSWIL, led by its dominant franchise in wiring harnesses [WH; ~65% market share in PVs; Maruti Suzuki (MSIL) as anchor client] and structural growth drivers (rising content/vehicle on continued premiumization) offers a superior proxy play on the long-term growth in the Indian PV industry as well as disruptive trends (content ~1.5-2x higher in EVs). Despite building-in share loss to Yazaki as MSIL looks for a 2nd/alternate source, It is expected that MSWIL will register 28% EPS CAGR in FY22-24E with 66% RoCE/7.3% FCF yield (on sales)/~60% payout riding on 14% PV industry volume CAGR and operating leverage gains. It is valued at 10% premium to MSIL driven by strong market position, growth prospects & return ratios/FCF generation. 

Dominant player with strong parentage; to retain ascendancy despite expected share loss to Yazaki: MSWIL is dominant in PVs (~60-65% market share; ~85% wallet share with MSIL); it has stayed ahead of underlying industry and MSIL amid 5-10% content increase/year. MSWIL’s scale, investment in vertical integration and localization efforts over the years have ensured cost-competitiveness that is difficult to replicate; moreover, strong parentage support from Motherson Sumi (MSSL;~33% stake) and Sumitomo Wiring (SWS;~25% stake) act as its key competitive advantages; riding on these we expect MSWIL to retain >60% wallet share with MSIL despite building in some market share loss to competitor Yazaki (client’s sourcing diversification rather than any competence gap at MSWIL). 

To gain from premiumization: Higher premiumization (electric/electronics, feature-rich additions around safety, connected, etc.) would further augment WH content (as per Aptiv, EVs provide 2-3x addressable opportunity of ICE ). MSWIL, is among the suppliers for the Nexon Max (was not a part of the earlier Nexon EV) and in future would serve E-2Ws; its potent capabilities should help maintain preferred solutions supplier status and offset any moderate share loss. 

Expect 28% FY22-24E EPS CAGR: MSWIL is a superior play on the PV story led by premiumization-led higher content per vehicle, higher ASPs and a recovery in the underlying industry; we expect 21% FY22-24E revenue CAGR. Operating leverage gains along with cost controls are expected to drive 25%/28% EBITDA/EPS CAGR; a lean B/S and high asset turnover should ensure continuation of robust RoCE profile (~66% in FY24E). We initiate coverage with BUY, valuing MSWIL at Rs81 i.e., 33x FY24E PER (10% premium to MSIL). At CMP of ~Rs70, it trades at ~27x FY24E PER and provides ~20% potential upside. 

Key Valuation Metrics:

Multiple  Drivers For High Growth Potential:

• The PV industry in India is on a path to rapid premiumization; as vehicles incorporate more and more features/functionalities, the need for rising connections directly influences WH content.
• Automotive megatrends related to CASE (Connectivity, Autonomous, Safety and Electric) are long term drivers for higher wiring content.
• MSWIL’s own capabilities around cost—competitive and quality products are further bolstered by ready access to SWS’ world class technology in wires and components.

Vehicle Premuimization :

• Domestic consumer preferences have evolved rapidly in favour of SUVs over the past 3-5 years, with the segment now forming 40% of the domestic PV industry mix (vs. ~21% in FY19). Apart from aesthetic appeal, the introduction of more and more features related to comfort/convenience, entertainment and safety (partly led by regulation) by OEMs has also driven the shift; these features are now an important purchase consideration for customers/point of differentiation for OEMs.
• Equipping new models with distinctive and additional features is not just limited to SUVs; it is also finding application in the case of newer entry-level car models and other more basic form factors
• A car purchase is an aspirational move in India, and feature-rich offerings are part of an ongoing movement of premiumization within the industry.

Communication, Safety, Electrification to drive content increase:

• The WH system in a vehicle is often compared to the nervous system in a human body; it plays a vital role in connecting devices as well as relaying electricity and signals/information throughout the vehicle. 
• The integration of more features/functionalities in modern vehicles requires the integration of more circuits, which in turn, require the integration of more ‘connections’; hence, the WH content in a vehicle has a direct correlation with the number and complexity of features in a vehicle; the current automotive megatrends of ‘CASE’ (Connected, Autonomous, Safety, Electric), thus, provide strong growth tailwinds for domestic WH content per vehicle. 
• As vehicles become more ‘connected’ (i.e., capable to communicate with other vehicles and surrounding infrastructure like traffic systems), the penetration of electronics that enable this connectivity is only set to increase. Similarly, regulatory focus on safety and increasing customer awareness/demand for safety features along with a natural progression towards ‘active’ (i.e. preventive) safety measures (vs. ‘passive’ i.e., damage mitigation) are long term enablers for higher WH content. Electrification is in its infancy in India; as adoption increases and OEMs further improve product quality with additional features, WH content would improve further. For instance, the present leading EV model (Nexon) already possesses several features addressing comfort, safety and communication that are not there in the ICE Nexon.
• As per Siemens, modern vehicles contain more than 70 specialty cables as against ~10 in older cars.

Consumption of Wiring Harness in EV’s is at 8% of vehicle price vs 4% in case of ICE:

• WH for EVs feature some additional components and are slightly more complex when compared to WH for ICE vehicles. EVs additionally require a high voltage WH separately for the drivetrain in order to connect its various parts such as batteries, inverters and motors. This results in a) greater content per vehicle under EVs vs ICE and also b) premium pricing. Resultantly, WH ASPs for EVs are upto 1.5-2x of WH ASPs for ICE vehicles. Presently, WH ASP for electric PVs are estimated at ~8% of the overall selling price of the vehicle, as against 4% in the case of an ICE PV. 
• Aptiv, a major global player in the WH industry, views high voltage EVs as offering a ~2x increase in its addressable content i.e., high voltage distribution and connection systems and cable management systems. 
• A WH system is integral within the overall vehicle design (usually the first component to be fit on a chassis during vehicle production); as vehicle architectures become increasingly ‘born-electric’, its role in saving space/lowering weight (to accommodate larger batteries for higher range) is slated to assume greater significance. 
• As per Aptiv, presently, a battery EV (BEV) created on an existing ICE platform features wiring that is ~13kgs heavier (~24% heavier).

MSWIL to focus heavily on EV’s:

• In its 4QFY22 earnings call, MSWIL confirmed that as part of making its business even more resilient against disruption, it would invest heavily towards new products/technologies/materials etc. for electrification and also hydrogen.
• Under EVs, MSWIL sees a the present low-voltage wiring continuing (except for engine-related wiring), with further augmentation of content in the form of wiring needed for new technologically advanced features and other introductions like charging cables, etc. Combined, this would take WH content in EVs much higher than in ICE vehicles.
• The company is one of the suppliers to TTMT’s new Nexon (extended range) apart from also being present in E-2Ws; it has also already executed other global EV programs from India.
• As PV electrification picks up pace in India over the coming years (refer OEM plans below) and clients transition to ‘born electrics’ (vs converted ICE products at present), the addressable opportunity for MSWIL would expand significantly.

MSWIL have strong competitive advantage:

• Having started off as a ‘build to print’ partner for OEMs (pure play manufacturing), the company has, over time, evolved into a preferred full system solutions supplier encompassing increasing value add in areas such as cost and manufacturing optimization, design and integration of advanced technologies. Its product portfolio span from simple, single wire leads to complex harnesses that contain hundreds of wires and connectors with a variety of protective coverings. Its capabilities in engineering and design have enabled MSWIL to now be associated with OEMs throughout the product manufacturing cycle. 
• MSWIL enjoys competitive advantages by way of its large operational scale and strong parentage support from MSSL (sourcing, sharing of common support functions, strategic guidance and leasing of land and building) and SWS (sourcing, technical assistance and infusion of leading technologies). Access to this support not only helps the company co-create value-added solutions, but also shorten time to market. 
• Over FY12-22, its revenues grew ~10% CAGR, outpacing domestic PV industry/MSIL volume CAGR by ~880/~760 bps respectively. We expect the company to continue to outperform peers and the underlying industry in coming times, despite building in some loss in market share to competition like Yazaki as MSIL diversifies sourcing. We view the development as being related to customer strategy rather than a capability/competency gap at MSWIL. 
• Reduced market share with MSIL is expected to be offset by increased traction with other players and entry into emerging segments (e.g., MSWIL is one of the suppliers for the Nexon Max). MSWIL is also present in E-2Ws and intends to focus heavily on the opportunity in electrification; we note that success in this segment would help the company address 2W space at a bigger scale.

Strong growth expected:

• MSWIL is expected to post 21% revenue CAGR over FY22-24E, thus continuing its trend of outperformance vs domestic PV industry volumes and volume growth at anchor client MSIL (CAGR expected at ~14%/~19% respectively) 
• EBITDA is seen posting ~25% CAGR in this time frame; FY23E/FY24E margins are expected to improve to 13.2%/13.8% respectively. It should be noted that copper is a large constituent of the RM basket for MSWIL (~18-22% depending upon segment; higher in EV harnesses); however price fluctuations generally would only have timing-related impact on financials as costs are passed on – usually with a 3-month lag. 
• EPS is expected to grow at ~28% CAGR over FY22-24E to ~Rs2.5. It is expected that the company will maintain healthy dividend payout of ~60% in FY23E/FY24E. 
• Amid controlled capex and healthy profitability, strong RoCE and FCF generation should continue; FY24E RoCE/FCF yield (% of sales) seen at ~66%/~7%.

Key Financials of MSWIL:

Conclusion:

Motherson Sumi Wiring India Limited (MSWIL) has a good upside potential of 20%. MSWIL, led by its dominant franchise in wiring harnesses [WH; ~65% market share in PVs; Maruti Suzuki (MSIL) as anchor client] and structural growth drivers (rising content/vehicle on continued premiumization) offers a superior proxy play on the long-term growth in the Indian PV industry as well as disruptive trends (content ~1.5-2x higher in EVs). Despite building-in share loss to Yazaki as MSIL looks for a 2nd/alternate source, It is expected that MSWIL will register 28% EPS CAGR in FY22-24E with 66% RoCE/7.3% FCF yield (on sales)/~60% payout riding on 14% PV industry volume CAGR and operating leverage gains. It is valued at 10% premium to MSIL driven by strong market position, growth prospects & return ratios/FCF generation.