Motherson Sumi Wiring India Ltd:Annual Report 2023-24 Analysis

Motherson Sumi Wiring India Ltd: A Comprehensive Overview #

About the Company #

• Year of Establishment and Founding History: Motherson Sumi Wiring India Limited (MSWIL) was formed in 2022 as a result of the restructuring of Motherson Sumi Systems Limited (now Samvardhana Motherson International Limited). It specializes in wiring harness solutions.
• Headquarters Location and Global Presence: The headquarters of MSWIL are located in Noida, India. Being part of the larger Motherson Group, MSWIL benefits from the group’s global presence and infrastructure.
• Company Vision and Mission: The company aims to be a leading global solutions provider in the wiring harness industry, focusing on customer satisfaction, innovation, and sustainable growth.
• Key Milestones in Their Growth Journey:
  • 2022: Demerger from Motherson Sumi Systems Limited and listing as an independent entity.
• Stock Exchange Listing Details and Market Capitalization: MSWIL is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
• Management Team and Leadership Structure: The company is led by a team of experienced professionals with expertise in the automotive component industry.

Their Products #

• Complete Product Portfolio with Categories: MSWIL primarily focuses on manufacturing wiring harnesses.
• Quality Certifications and Standards: The company adheres to globally recognized quality standards to ensure the reliability and performance of its products.

Primary Customers #

• Target Industries and Sectors: The primary customers of MSWIL are automotive manufacturers.
• Geographic Markets (domestic vs. international): The company serves customers primarily in the Indian market, leveraging the domestic automotive industry’s growth.

Major Competitors #

• Direct competitors in India and globally: Key competitors include other wiring harness manufacturers operating in the automotive sector.
• Competitive advantages and disadvantages: MSWIL benefits from its strong parentage and established relationships with automotive OEMs.

Future Outlook #

• Expansion plans or growth strategy: The company aims to grow by expanding its product portfolio, increasing its market share, and exploring new opportunities in the automotive industry.
• Industry trends affecting their business: The automotive industry’s shift towards electric vehicles (EVs) and advanced driver-assistance systems (ADAS) presents both challenges and opportunities for MSWIL. The company is investing in developing wiring harness solutions for these new technologies.

Financial Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from operations increased consistently, from INR 70,680 million (FY 2022-23) to INR 83,282 million (FY 2023-24), representing an 17.8% growth.
• EBITDA increased from INR 7,980 million (FY 2022-23) to INR 10,133 million (FY 2023-24), showing a 27.0% increase.
• Profit After Tax (PAT) rose from INR 4,870 million (FY 2022-23) to INR 6,383 million (FY 2023-24), indicating a 31.1% growth.
• Return on Capital Employed (ROCE) was reported at 48% for FY 2023-24.
• The debt-equity ratio improved from 0.28 (FY 2022-23) to 0.15 (FY 2023-24), with a negative net debt reported for FY 2023-24.
• Trade receivable turnover (days) remained stable at 37 days. Inventory turnover days improved from 84 (FY 2022-23) to 78 (FY 2023-24).
• The operating profit margin increased from 9.5% to 10.4% and net profit margin increased from 6.9% to 7.7%.
• Interest Coverage Ratio (in times) improved from 28.71 (2022-23) to 37.12 (2023-24).
• The current ratio (in times) is 1.66 to 1.94.

Business Segment Performance #

• Passenger vehicles constitute the largest segment, contributing 58% of the total revenue.
• Commercial vehicles account for 12% of revenue.
• Two-wheelers contribute 14% of revenue.
• Off-road vehicles and related products account for 10% of revenue.
• Other segments, including tier 1/2 suppliers, contribute 6% of revenue.

Major Strategic Initiatives and Their Progress #

• Two new Greenfield projects are being set up in Pune (Maharashtra) and Navagam (Gujarat), expected to be operational in FY2025.
• MSWIL is actively investing in wiring harness technologies for electric and hybrid vehicles.
• Localization efforts for high-voltage wiring harnesses and related components, including CCS2 charging connectors, are in progress.
• Digital and automation initiatives are implemented to enhance operational efficiency, including digital boards for wiring harness assembly, AGVs, COBOTS, and RPA.

Risk Landscape Changes #

• The company acknowledges operational, financial, regulatory, strategic, and IT and information security risks.
• Labor cost inflation is identified as an emerging risk.
• Supply chain risks are mitigated through localization.
• Cyber Security Risk.

ESG Initiatives and Metrics #

• All units are ISO 14001 certified, with an aim to achieve ISO 50001 certification by 2030.
• Renewable energy sources, including solar and wind power, are being integrated, with 15 units currently powered by solar energy.
• Water conservation measures include STPs, rainwater harvesting, and a water pond at the Chennai facility.
• Waste management initiatives encompass recycling of food waste, reducing paper usage, and a partnership with Padcare Labs for recycling sanitary napkins.
• Workforce diversity: 43% female among permanent workers and 51% female among total associates (workers).
• LTFIR rate for employees: 0.242 (FY 2023-24), 0.412(FY 2022-23)
• LTFIR rate for workers: 0.087 (FY 2023-24), 0.326 (FY 2022-23)

Management Outlook #

• Management anticipates continued growth in the Indian automotive market, particularly in the passenger vehicle and two-wheeler segments.
• MSWIL is focused on increasing content and value per OEM.
• The company is committed to supporting customer growth plans and the transition towards clean mobility, including electric and hybrid vehicles.
• Continued investment in skill upgrading programs for employees and associates.
• 94% of the company’s top suppliers are ISO 14001 certified.

Detailed Analysis #

Financial Position Analysis #

Balance Sheet Analysis #

Aggregate Financial Position #

Significant Changes in Major Line Items (>10% YoY) #

• Cash and Cash Equivalents: Increased significantly from INR 361 million to INR 1,670 million (362.6% increase), indicating improved liquidity.
• Other Bank Balances: increased significantly.
• Other Current assets: Increased from INR 897 million to 1726 Million
• Borrowings(Current): Decreased to zero from INR 740
• Other Equity: Increased from INR 8,884 million to INR 12,347 million (39% increase), mainly driven by the retained earnings.
• Lease liabilities (non-Current): decreased from 2274 million to 1768 Million.

Working Capital Trends #

Analysis: The company’s working capital management will be observed closely because inventories are a major line item in working capital.

Asset Quality Metrics #

The asset quality is good.

Debt Structure and Maturity Profile #

• Short-Term Borrowings: Reduced to zero as of March 31, 2024, indicating a shift towards longer-term financing or improved liquidity.
• Long-Term Borrowings: Remain relatively low, with a slight increase in non-current borrowings.
• Lease Liabilities: Constitute a significant portion of the debt, split between current and non-current portions, reflecting the Company’s asset-light model.

Off-Balance Sheet Items #

As per Note 39 to the Financial Statements, claims against the Company not acknowledged as debts amount to INR 389.0 million as of March 31, 2024.

Revenue Breakdown by Segment/Geography #

• Passenger Vehicles: 58% of total revenue in FY 2023-24.
• Commercial Vehicles: 12% of total revenue in FY 2023-24.
• Two-Wheelers: 14% of total revenue in FY 2023-24.
• Off-Road Vehicles: 10% of total revenue in FY 2023-24.
• Others (including Tier 1/2 suppliers): 6% of total revenue in FY 2023-24.
• Geographical Breakdown: Primarily focused on the Indian domestic market (negligible exports). Total revenue from operations grew by 17.8% year-over-year, from INR 70,680 million in FY 2022-23 to INR 83,282 million in FY 2023-24.

Cost Structure Analysis #

• Cost of Materials: 65.5% of revenue in FY 2023-24, consistent with 65.5% in FY 2022-23. Absolute cost increased by 17.7%, from INR 46,317 million to INR 54,537 million.
• Employee Cost: 16.3% of revenue in FY 2023-24, improved from 16.7% in FY 2022-23. Absolute amount increased by 14.5% to INR 13,551 million.
• Other Expenses: 6.1% of revenue in FY 2023-24, down from 6.5% in the previous year. Increased by 9.8% in absolute terms, reaching INR 5,062 million.

Margin Analysis #

• Operating Profit Margin: Improved to 10.4% in FY 2023-24 from 9.5% in FY 2022-23.
• Net Profit Margin: Increased to 7.7% in FY 2023-24 from 6.9% in FY 2022-23.
• EBITDA Margin: Increased to 12.2% from 11.3%.

EPS Analysis #

• Basic and Diluted EPS: Increased to INR 1.44 in FY 2023-24 from INR 1.10 in FY 2022-23. Because no potential equity shares are outstanding, basic and diluted EPS are the same.

Cash Flow and Liquidity Analysis #

Operating Cash Flow (OCF) #

• FY 2023-24: INR 10,081 million, driven by a profit before tax of INR 8,455 million, adjusted for depreciation (INR 1,473 million) and finance costs (INR 273 million). Key working capital changes included an increase in trade receivables (INR 955 million) and inventory decrease contributing INR 697 million.
• FY 2022-23: INR 4,011 million.

Investing Cash Flow (ICF) #

• FY 2023-24: (INR 2,079 million), primarily due to capital expenditure (INR 1,111 million) and investment in fixed deposits (INR 1,000 million).
• FY 2022-23: (INR 1,937 million).

Working Capital Management Efficiency #

• Trade Receivable Turnover: Remained stable at 37 days in both FY 2023-24 and FY 2022-23.
• Inventory Turnover: Improved to 78 days in FY 2023-24 from 84 days in FY 2022-23.
• Accounts Payable Days: 62 days for FY2023-24.

CAPEX Analysis #

• FY 2023-24: INR 1,111 million, with INR 400 million allocated to new plants and INR 711 million for capacity enhancement and other projects.
• FY 2022-23: INR 1,977 million.

Dividend and Share Buyback #

• Dividend Payout Ratio: 55% of PAT for FY 2023-24 (INR 0.80 per share), compared to 59% for FY 2022-23 (INR 0.65 per share).
• Total Dividend Paid: INR 2,874 million in FY 2023-24, compared to INR 2,684 million in FY 2022-23.
• No share buybacks were explicitly mentioned. A bonus share issue was done prior year.

Debt Service Coverage #

• Interest Coverage Ratio: Improved significantly to 37.12 times in FY 2023-24 from 28.71 times in FY 2022-23.
• Debt Equity Ratio: Decreased from 0.28 in 2022-23 to 0.15 in 2023-24.
• Net Debt to EBITDA: Decreased from 0.4 times to 0.1 times.

Liquidity Position #

• Current Ratio: Improved to 1.94 in FY 2023-24 from 1.66 in FY 2022-23.
• Cash and Cash Equivalents: Increased significantly to INR 1,670 million as of March 31, 2024, from INR 361 million as of March 31, 2023.

Future Outlook: Segment-Wise Financial Analysis #

Passenger Vehicle Segment (58% of FY 2023-24 Revenue) #

Management Guidance and Assumptions #

Management assumes continued growth driven by increasing demand, particularly in the SUV sub-segment, and rising content per vehicle due to premium feature additions.

Market Growth Forecasts #

FY 2023-24 saw record production of 4.9 million passenger vehicles, a 6.9% year-on-year increase, with SUVs being a major driver, market is forecasted to keep this trend.

Planned Strategic Initiatives #

Securing new programs from major OEMs and expanding into high-voltage wiring harnesses, battery management systems (BMS), and components for electric/hybrid vehicles.

Capital Expenditure Plans #

Investment in two new Greenfield projects in Gujarat and Maharashtra to expand production capacity for high and low-voltage harnesses and components, with operations to start in FY2025.

Efficiency Improvement Targets #

Implementation of digital and automation initiatives. Leveraging digital boards for assembly, AGVs, COBOTS, and RPA.

Potential Challenges and Opportunities #

Challenges include potential labor cost inflation. Opportunities lie in premiumization, increasing electronic content per vehicle, and the growing electric/hybrid vehicle market.

Commercial Vehicle Segment (12% of FY 2023-24 Revenue) #

Management Guidance and Assumptions #

Management is securing new business for buses and light-duty trucks, expecting a positive response towards alternative powertrains.

Market Growth Forecasts #

FY 2023-24 production reached 1,066,000 units, a 3% growth. Government infrastructure projects are supporting demand.

Planned Strategic Initiatives #

Securing new business related to upcoming model launches.

Capital Expenditure Plans #

Addressed through the overall company capex plans, likely including capacity expansion in existing and new facilities.

Efficiency Improvement Targets #

Addressed through overall company digital and automation initiatives.

Potential Challenges and Opportunities #

Opportunities exist in increasing adoption of CNG-powered vehicles and expansion in the electrification of the segment.

Two-Wheeler Segment (14% of FY 2023-24 Revenue) #

Management Guidance and Assumptions #

Management notes growth and is securing new orders for upcoming model launches.

Market Growth Forecasts #

FY 2023-24 sales witnessed growth, reaching nearly 18 million units.

Planned Strategic Initiatives #

Collaborating with existing clients and new entrants in both ICE and EV models, capitalizing on frequent model launches and new features.

Capital Expenditure Plans #

Addressed through the overall company capex plans.

Efficiency Improvement Targets #

Addressed through overall company digital and automation initiatives.

Potential Challenges and Opportunities #

Opportunities exist in the dynamic and rapidly evolving EV market.

Off-Road and Agricultural Segment (10% of FY 2023-24 Revenue) #

Management Guidance and Assumptions #

Experiencing steady growth and securing contracts from major manufacturers.

Planned Strategic Initiatives #

Focus on product innovation and offering vertically integrated solutions.

Capital Expenditure Plans #

Addressed through overall company capex plans.

Efficiency Improvement Targets #

Addressed through overall company digitalization and automation initiatives.

Scenario Analysis and Sensitivity #

Sensitivity to Key Assumptions: #

• Copper Price Volatility: A pass-through arrangement for copper exists with a time lag (mostly a quarter). Fluctuations significantly impacting raw material costs.
• Component Supplier Pricing Pressure: Inflationary pressures and commodity price increases impact component costs. The Company’s ability to pass on these increases to customers and successful localization efforts are crucial sensitivities.
• Labor Cost Inflation: Sensitivity to increases in labor costs, especially given state government regulations.
• Technological Disruption: The Company needs to maintain innovation, related R&D expenditure accounted for 1% of the revenue, to mitigate the risk.
• Electrification Adoption Rate: While the Company is investing in EV-related capabilities, the rate of EV adoption in India, especially in the passenger car segment, could be faster or slower than anticipated, affecting demand.

Audit and Regulatory Analysis #

Auditor’s Opinion and Qualifications #

• The auditor’s opinion is unqualified, stating that the financial statements give a true and fair view in conformity with generally accepted accounting principles in India.
• There were no qualifications, reservations, or adverse remarks contained in the Auditors’ Report.
• The auditors noted that the maintenance of books of account is proper as required by law, but highlighted that, in one of the three accounting softwares, the audit trail features had not been enabled at database level and for direct changes made.

Key Accounting Policies and Changes #

• The Company’s financial statements were prepared using the historical cost basis, except for specific assets and liabilities measured at fair value or revalued amount (defined employee benefit plans, for example).
• The Company applied amendments to Ind AS 8 (Definition of Accounting Estimates) and Ind AS 1 (Disclosure of Accounting Policies), which had no material impact and only a disclosure impact, respectively.
• Amendments to Ind AS 12 created separate recognition of deferred tax assets and liabilities but are having a neutral impact since those are eligible for offset.

Internal Control Effectiveness #

• The auditor’s report includes a separate opinion on the adequacy and operating effectiveness of internal financial controls over financial reporting. The opinion is unqualified, indicating that, in all material respects, adequate internal financial controls were in place and operating effectively.
• The auditors did identify an issue with the audit trail in one of the three accounting software.

Regulatory Compliance Status #

• The Company is compliant with applicable environmental laws and regulations.
• There were no penalties or strictures imposed by SEBI, Stock Exchanges, or any statutory authority on capital market matters in the last two years. However, the Company was fined INR 11,800 for a short notice of record date fixation.
• The Company confirmed compliance with Secretarial Standards on General and Board Meetings.
• There is compliance to the applicable sections of Companies Act 2013.

Legal Proceedings and Potential Impact #

• The Company has disclosed the impact of pending litigations on its financial position. Details can be found in note 39.
• Disputed dues of Goods and Services Tax and Custom Duty have been reported, all of which are pending litigation.
• The Company has assessed, under legal guidance, that there are no probable material impacts of the outflow of economic resources.

Related Party Transactions #

• All related party transactions during the financial year were in the ordinary course of business and on an arm’s length basis, approved by the Audit Committee.
• The Company is seeking shareholder approval for entering into a related party transaction contract with SAMIL and SWS.
• Related party disclosures are detailed in Note 36 of the financial statements.
• The nature of the relationship between the Company and the related parties has been defined, including the name of the related party.

Subsequent Events #

• There are no material changes and commitments affecting the financial position of the company after the end of the financial year.
• CRISIL Ratings Limited reaffirmed the credit ratings as Crisil AA+/Stable (Long Term Rating) and Crisil A1+ (Short Term Rating) on July 16, 2024.
• The Board of Directors reconstituted several committees.

Accounting Quality Assessment #

• The Company’s use of the historical cost basis, with exceptions for fair value measurements as required, is standard practice. The use of estimates is disclosed, and relevant sensitivity analyses (e.g., for defined benefit plans) are provided.
• The Company’s revenue recognition policies are clearly described, and specific judgments related to revenue recognition are explained, enhancing transparency.
• The level of detail provided in the notes to the financial statements indicates a high degree of transparency in accounting policies and practices.

Regulatory Risk Assessment #

• The primary area of regulatory risk identified is the pending litigation, as indicated by the disputes related to GST and custom duty.
• The Company’s compliance with applicable financial and environmental regulations, and the absence of penalties in recent years, suggest a low current regulatory risk profile.
• The Company is actively managing and monitoring risks, evidenced by the Risk Management Committee and formalized risk management policy.