Samvardhana's Bet On Premium Products, EVs Pays Off

THE GLOBAL AUTOMOTIVE INDUSTRY has been grappling with macroeconomic headwinds and supply chain constraints owing to the pandemic and high inflation in recent years. While original equipment manufacturers (OEMs) struggled to meet pent-up demand, auto component companies were hit by the semiconductor crisis. Yet, in the past few quarters, auto ancillaries have taken a big leap as the industry moves towards premiumisation and electrification.

It's then no surprise that 80% revenues of Samvardhana Motherson, a wholly-owned subsidiary of Samvardhana Motherson Automotive Systems Group B.V, for the quarter ended September 30, 2023, came from the company’s global business. Spanning 41 countries, the Noida-based Tier-I auto component and wiring company is a supplier to OEMs globally. With Daimler and Audi as primary customers, it has 350 manufacturing capacities across geographies. While Samvardhana currently leads India's auto component market, its hyper-localised operations give it an edge over other auto ancillaries.

In FY23, Samvardhana Motherson's total income rose 23% year-on-year to ₹79,281 crore, while net profit went up 71% to ₹1,496 crore.

With supply chain situation easing out, Samvardhana will precede its peers, according to analysts. "In terms of supply and demand situation, the Motherson Group could be one of the big winners because of the larger portfolio in their basket, especially on the premium side" says Saji John, research analyst, Geojit Group.

As the automotive industry shifts gears from internal combustion engine (ICE) to electric vehicles (EVs), the company is expanding presence in the EV segment. As of September 30, 2023, EVs contributed 22% to its product portfolio.

"We are completely engine agnostic. We do not do any parts for the engine. We do interiors and exteriors, so these will remain regardless of whether it’s an ICE engine or a battery or a hybrid or a hydrogen in the future. And we are building all capabilities," says Laksh Vaaman Sehgal, Vice Chairman, Motherson Group.

"They have been expanding relationships with EV companies. Of the automotive order book, more than 20% is from EV models," adds Kumar Rakesh, research analyst, BNP Paribas.

While EVs might not be a turning point in Samvardhana's growth story, its recent non-automotive segment acquisition spree, especially in aerospace, health and medical segments, has grabbed eyeballs. In the past year, it acquired 15 companies with a combined gross revenue of €6.4 billion. Some of them include Japan-based Yachiyo Industry for ₹1,300 crore, Germany-based Dr. Schneider Holding for ₹1,096 crore and Gurgaon-based Prysm Systems for ₹115 crore, among others.

"Our target for the group is very clear. We want to be a $36 billion company, but we have a top-line and bottom-line target. We want to achieve that with a 40% return on capital. The idea is to grow together with our customers," says Sehgal.

The acquisitions also form a part of the company’s 'Vision 2025' plan, under which Samvardhana will operate with the '3C10' philosophy, where no country, component or customer would contribute more than 10% of overall revenue.

With a history of aggressive acquisitions, Samvardhana Motherson is looking to generate revenue inorganically as part of the 'Vision 2025' target with an aim to create a strong foot-hold in the non-automotive segment. "One of the areas they are looking to diversify into is aerospace," says Rakesh.

"One of the reasons why you would see Samvardhana acquiring aerospace suppliers is to get a head start and then build bigger businesses out of it. The diversification strategy, and more specifically the challenges for a new entrant in the aerospace industry, is the reason why you could see acquisitions in that space," adds Rakesh.

Managing Debt

In the September quarter, the company took fresh term loans of €848 million to fund various acquisition-related payments and repay shareholder debt of €254 million and other existing term loans.

"The size of our company is close to $21 billion in gross revenues. So having a debt of €1-1.5 billion is really not much for a company of that size, that is profitable and generating free cash flow every year. So, at the net debt to EBITDA we are still at 1.9, we are quiet comfortable, and in the next year, we will bring it back to the previous level. We are very cognizant of debt," says Sehgal.

According to Geojit's John, an increase in debt on account of the payout impact of the acquisition closure is likely to be a near-term concern. "Though the company claims it is below the threshold of 2.5x of net debt to EBITDA, we believe the payback period will be delayed due to an increase in fixed costs, which is high interest and depreciation," feels John.

"The acquisitions we have done over the last one year will pan out this year and we will have another one year left for our 2025 target. We do have acquisitions on the horizon, majority of which will be automotive-focused," adds Sehgal.

And with more acquisitions in the pipeline, Samvardhana Motherson’s debt is likely to spike in the coming quarters. Rakesh, however, feels owing to a healthy cash flow through existing business in the past few quarters, the company will meet its debt target. "Most acquisitions have been small and usually have been tuck in. The acquired companies offering new capabilities while valuations being reasonable are some of the ways to use these as strategic tools, instead of a revenue buy," he adds.

Outlook Ahead

In the past few quarters, Samvardhana has swung to profitability mainly on account of an improved supply chain and rising global automotive production. "Consumer confidence across most geographies is still strong or improving. We see consumer confidence as a strong lead indicator of auto demand and hence do not see a material risk. If the macroeconomic situation worsens materially, then possibly we could see a risk," says Rakesh.

Analysts see more upside in Samvardhana Motherson. According to BNP Paribas, the stock has been up 22% in the last six months. "We believe that there is more upside in the stock. We have a positive stance on Samvardhana, driven by continued improvement in production, which should translate into better revenue growth as well as margin expansion. Strong earnings growth should translate into more upside in the stock performance as well, in our view," says Rakesh.