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18 May 2015 Asia Pacific/India Equity Research Auto Parts & Equipment

Motherson Sumi Systems Limited (MOSS.BO / MSS IN) Rating UNDERPERFORM* Price (18 May 15, Rs) 499.30 Target price (Rs) 420.00¹ Upside/downside (%) -15.9 Mkt cap (Rs mn) 440,342 (US$ 6,929) Enterprise value (Rs mn) 476,469 Number of shares (mn) 881.92 Free float (%) 35.0 52-week price range 522.3 - 261.0 ADTO - 6M (US$ mn) 13.2 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Jatin Chawla 91 22 6777 3719 [email protected] Akshay Saxena 91 22 6777 3825 [email protected]

INITIATION

Solid player but too high expectations ■ Initiating coverage on Motherson Sumi with an UNDERPERFORM rating and a Rs420 TP. Motherson Sumi has a ~65% market share in the Indian wiring harness market, is a global leader in exterior rearview mirrors, and has a strong presence in the European auto interiors and bumpers market. The company has a strong track record of turning around distressed companies, and is focused on increasing its content per vehicle in India. ■ Could miss the street's margin estimates. The street expects Motherson to post a large margin expansion in all the three key entities: (1) highest-ever margins in India, (2) 150-200 bp margin expansion p.a. in SMP, and (3) continued improvement in SMR. We believe SMP estimates are very aggressive, given that (i) it would require SMP margins to go beyond the best in the industry, (ii) SMP has a number of new plants coming up which entails high start-up costs, and (iii) interiors is a very competitive business. ■ Needs a sizeable acquisition to meet its FY20 target. Motherson's FY20 target of ~US$18 bn implies a doubling of current revenue to US$12 bn (achievable), and a significant acquisition. While acquisition targets are still available, especially in Europe where a number of firms are family owned, due to a European recovery, the pricing would be higher than earlier. After the recent consolidation, its main competitors are all also looking for acquisitions. ■ Stock trades at a 40% premium to global peers. FY16 consensus estimates have been cut by ~5% in the past six months, and we believe there is room for more cuts; our estimates are ~15% below the street's. Motherson trades at >20x P/E even on FY17E consensus, a 40% premium to global peers and hence downgrades could also result in derating. Hence, we initiate coverage with an UNDERPERFORM rating and a Rs420 TP (16% potential downside). Key risks to our call: a faster-than-expected margin expansion in SMP, and acquiring a large company in distress and turning it around quickly.

Share price performance 600 400 200 0

Price (LHS)

Rebased Rel (RHS)

400 300 200 100 0

The price relative chart measures performance against the S&P BSE SENSEX IDX which closed at 27687.3 on 18/05/15 On 18/05/15 the spot exchange rate was Rs63.55/US$1

Performance over Absolute (%) Relative (%)

1M -3.8 -1.2

3M 7.9 12.9

12M 90.2 75.5

Financial and valuation metrics Year Revenue (Rs mn) EBITDA (Rs mn) EBIT (Rs mn) Net profit (Rs mn) EPS (CS adj.) (Rs) Change from previous EPS (%) Consensus EPS (Rs) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)

3/14A 304,279.0 23,971.0 15,799.0 7,650.0 8.67 n.a. n.a. 14.7 57.6 0.5 20.0 14.9 29.2 103.2

3/15E 349,788.0 28,485.9 19,461.5 10,309.0 11.69

3/16E 420,889.0 37,975.9 27,610.1 14,046.9 15.93

3/17E 497,536.7 49,919.2 37,903.6 19,161.7 21.73

11.6 34.8 42.7 0.6 16.7 12.5 31.8 79.7

18.3 36.3 31.3 1.0 12.6 10.0 35.4 59.6

25.7 36.4 23.0 1.4 9.4 7.8 38.2 36.4

Source: Company data, Thomson Reuters, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do

business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

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18 May 2015

Focus charts Figure 1: From being a wiring harness player, Motherson

Figure 2: Share of revenues from outside India has

has diversified into interiors, exteriors, and mirrors

steadily grown with European acquisitions

Polymer & Metal Working Others Tooling 1% 3% 11%

100%

Wiring Harness 18%

80% 60%

Exterior modules 17%

Interior Modules 22%

40% 20%

0% FY05

Rearview mirrors 28%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Sales from outside India

Source: Company data


Figure 3: Industry interactions suggest interior business

Figure 4: SMP is already at profitability levels close to its

steady-state RoCE is ~20% & EBIT margins ~5%

larger peers', which limits scope for improvement 8.0%

30% 20%

15%

15% 5%

EBIT margins

6.0% 4.0%

2.0%

3%

0%

0.0% Blended EBIT margins Exteriors

Pre Tax Roce

2011

Interiors

2012

Faurecia interior

2013

Faurecia exterior

2014

Plastic Omnium exterior

Source: Company data, Credit Suisse estimates


Figure 5: Over 2009-14, global auto demand witnessed a

Figure 6: The average deal size in auto components M&As

7% CAGR, and is expected to slow to 4% CAGR ahead

has steadily increased in the past few years

120

80

4% CAGR

7% CAGR

25

120

20

100 80

15

60

10

40

40

5 0 2009

2014

20

0

2017E

0 2008

Global PV volumes (Mn units)

2009

2010

Total Deal Size (USD Bn)

2011

2012

2013

Average deal size (USD Mn) (RHS)


Source: PWC Global M&A

Figure 7: Our numbers are ~15% lower than consensus,

Figure 8: Even on elevated consensus estimates, the

primarily on the margin improvement front

stock is trading at ~21x CY16E earnings vs peers at ~12x

5.0%

22.0

0.0%

16.0

-5.0%

10.0

-10.0% -15.0%

P/E (CY16)

4.0

CS vs consensus

FY16

-20.0% Sales

EBITDA

Source: Credit Suisse estimates, I/B/E/S Datastream

Motherson Sumi Systems Limited (MOSS.BO / MSS IN)

FY17

PAT

Source: I/B/E/S Datastream

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18 May 2015

Solid player but too high expectations A strong auto components company Run by one of the best management teams when it comes to execution in the Indian auto components industry, Motherson has consistently outperformed the industry. It has set for itself highly ambitious five-year targets on both revenue and ROCE and gone out and achieved those, resulting in very high investor belief in management. A ~45% revenue CAGR in the past ten years has been achieved on a dual strategy of making acquisitions and increasing the content per vehicle. The acquisitions—most of which have been distressed assets done at the behest of key clients (OEMs)—have added significant value. The company has managed to get good deals not only on acquisition price but in terms of commitment for future business, better product pricing, cross-selling opportunities, etc.

Management has a very strong execution track record

Margin expansion pace will be lower than expected The street is expecting a 150-200 bp margin expansion every year at SMP for the next two years, which would take SMP margins beyond the best in the industry. Despite SMR enjoying best-in-class margins, the street is building in continued margin expansion. For the Indian business too, its current margin estimates of 20%-plus are higher than previous peak levels. With Motherson building nine new plants in the next two years (~20% of revenue), we reckon start-up costs related to training people, trial production, learning phase on new machines/techniques would impact margins. The exterior business is capacity-intensive because of the need to invest in the paint shop, and experience of its competitors suggests that Motherson's aggressive capacity additions could impact industry margins. Car interiors is a low-margin business since it requires limited capex and has a relatively low technology barrier. OEMs have kept smaller players alive in order to keep a check on pricing. Given the rising importance of interiors in consumer decisions, suppliers are being forced to increasingly adopt new technologies/processes, which impact margins. Large players such as Magna, Johnson Controls & Visteon have moved out of this business in the past two years citing low profitability, which highlights its profitability challenges. Player consolidation and global platform consolidation could be medium-term margin drivers.

Street margin assumptions on SMP are very aggressive

Start-up costs on new plants (20% of revenues) will likely drag margins

Car interiors is structurally a low-margin business

Needs a sizeable acquisition to meet its FY20 target Motherson has set itself a target of growing its revenue from ~US$6 bn in 2015 to US$18 bn in 2020, assuming a doubling of its current revenue from ~US$6 bn to ~US$12 bn and the rest coming from acquisitions. With the global auto industry growth likely slowing from 7% to 4%, Motherson will have to outperform the industry by ~10% to achieve this target. Although achievable, after the recent industry consolidation all top players, having strengthened their offerings, are vying for higher market share. On the inorganic side, we reckon that Motherson will have to make atleast one very large acquisition to achieve its target. While targets are still available, especially in Europe where a number of firms are family-owned, due to a European recovery, the pricing would be higher than earlier—average deal values have increased 3x in the past three years. After the recent consolidation, its main competitors are also looking for acquisitions and Chinese suppliers too are likely to be aggressive buyers in the future. Given that any new product line will be done by the privately held entity, this would also limit the availability of attractive targets.

Motherson wants to triple revenues in the next five years, will need a large acquisition

Given the global recovery in autos, acquisition may not be available at very attractive terms

Rich valuation despite the growth We expect Motherson to post strong growth but believe expectations are too high. FY16 consensus estimates have been cut by ~5% in past six months, and we believe there is room for more cuts; our estimates are ~15% below the street's. Even on consensus estimates, it trades at ~21x vs global peers which trade at ~12x. While its ROE is much higher than peers, the stock trades at a P/B multiple of almost 10x, which is almost 3x its peers. The key risk to our call is a faster-than-expected margin expansion in SMP, and management buying a large-sized company in distress and turning it around quickly.


We believe street estimates are too high; even on consensus, the stock is trading at a 40% premium to peers

3

18 May 2015

Motherson Sumi Systems Limited

MOSS.BO / MSS IN

Price (18 May 15): Rs499.30, Rating: UNDERPERFORM, Target Price: Rs420.00 Target price scenario Scenario Upside Central case Downside

TP 420.00

Income statement (Rs mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (Rs mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (Rs mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

Key earnings drivers SMRPBV revenue growth (%) SMRPBV margins (%)

%Up/Dwn Assumptions

3/14A 8.2 6.7

3/15E 3/16E 17.2 27.6 7.4 8.4

3/17E 18.2 9.3

(15.88) 3/14A 304,279 193,614 — 86,694 23,971 8,172 15,799 2,943 3,106 — 15,962 — 4,994 10,968 (2.0) 3,316 — 7,650 — 7,650 3/14A 15,799 — (5,057) 2,467 11,278 24,487 (17,203) 7,284 — — — — (33.0) (17,236) 2,186 (2,580) (798) (2,943) (4,135) 3,116 — 3,116 3/14A 9,061 32,384 32,822 11,763 86,030 59,189 749.0 — 6,471 152,439 — 17,924 6,742 59,954 84,620 29,834 — 496.0 114,950 29,593 7,896 152,439

3/15E 349,788 218,905 — 102,397 28,486 9,024 19,461 3,002 3,417 — 19,876 — 5,267 14,609 — 4,300 — 10,309 — 10,309 3/15E 19,461 — (6,214) 1,655 10,793 25,695 (15,000) 10,695 — — — — — (15,000) (2,054) (3,069) 8,000 (3,002) (125) 10,571 — 10,571 3/15E 19,632 30,144 37,500 15,740 103,016 65,165 749.0 — 6,922 175,852 — — 7,748 67,018 74,766 55,758 — — 130,524 35,185 10,142 175,852


3/16E 420,889 262,496 — 120,417 37,976 10,366 27,610 3,234 3,690 — 28,066 — 7,438 20,629 — 6,582 — 14,047 — 14,047 3/16E 27,610 — (7,438) (6,017) 14,056 28,211 (20,000) 8,211 — — — — — (20,000) — (5,115) — (3,234) (8,349) (138) — (138) 3/16E 19,494 40,359 46,125 17,314 123,293 74,799 749.0 — 6,922 205,763 — — 8,523 80,641 89,164 55,758 — — 144,922 44,117 16,724 205,763

3/17E 497,537 309,178 — 138,440 49,919 12,016 37,904 3,234 4,059 — 38,729 — 10,263 28,465 — 9,304 — 19,162 — 19,162 3/17E 37,904 — (10,263) (1,943) 16,075 41,772 (25,000) 16,772 — — — — — (25,000) — (7,161) — (3,234) (10,395) 6,377 — 6,377 3/17E 25,871 47,709 54,525 19,046 147,150 87,783 749.0 — 6,922 242,605 — — 9,375 95,327 104,702 55,758 — — 160,460 56,117 26,028 242,605

Per share data 3/14A 3/15E 3/16E 3/17E Shares (wtd avg.) (mn) 882.0 881.9 881.9 881.9 EPS (Credit Suisse) (Rs) 8.7 11.7 15.9 21.7 DPS (Rs) 2.50 3.00 5.00 7.00 BVPS (Rs) 33.6 39.9 50.0 63.6 Operating CFPS (Rs) 27.8 29.1 32.0 47.4 Key ratios and 3/14A 3/15E 3/16E 3/17E valuation Growth(%) Sales revenue 20.2 15.0 20.3 18.2 EBIT 107 23 42 37 Net profit 72.1 34.8 36.3 36.4 EPS 14.7 34.8 36.3 36.4 Margins (%) EBITDA 7.9 8.1 9.0 10.0 EBIT 5.19 5.56 6.56 7.62 Pre-tax profit 5.25 5.68 6.67 7.78 Net profit 2.51 2.95 3.34 3.85 Valuation metrics (x) P/E 57.6 42.7 31.3 23.0 P/B 14.9 12.5 10.0 7.8 Dividend yield (%) 0.50 0.60 1.00 1.40 P/CF 18.0 17.1 15.6 10.5 EV/sales 1.57 1.36 1.13 0.95 EV/EBITDA 20.0 16.7 12.6 9.4 EV/EBIT 30.3 24.5 17.3 12.4 ROE analysis (%) ROE 29.2 31.8 35.4 38.2 ROIC 14.9 18.1 22.7 26.6 Asset turnover (x) 2.00 1.99 2.05 2.05 Interest burden (x) 1.01 1.02 1.02 1.02 Tax burden (x) 0.69 0.74 0.74 0.74 Financial leverage (x) 4.07 3.88 3.38 2.95 Credit ratios Net debt/equity (%) 103 80 60 36 Net debt/EBITDA (x) 1.61 1.27 0.95 0.60 Interest cover (x) 5.4 6.5 8.5 11.7 Source: Company data, Thomson Reuters, Credit Suisse estimates

4

18 May 2015

A strong auto components company Run by one of the best management teams when it comes to execution in the Indian auto components industry, in our view, Motherson has consistently outperformed the industry. Management has in the past set itself highly ambitious five-year targets on both revenues and ROCE and subsequently achieved those which has boosted investor confidence. In the past ten years, ~45% revenue CAGR has been achieved through a two-pronged strategy of making acquisitions and increasing the content per vehicle in India. The acquisitions, most of which have been distressed assets and done at the behest of key clients (OEMs), have added phenomenal value. Management has managed to get good deals not only on acquisition price but in terms of commitment for future business, better product pricing, cross selling opportunities, etc. Management has proven its execution credentials by turning around most of these distressed assets. In the India business the strategy has been to increase the content per vehicle by introducing new products. Motherson, which started of primarily as a wiring harness company, got into plastic injection moulded parts, rear-view mirrors, etc.

Well-diversified player One of the key factors which differentiates a strong auto player is to have a well-diversified revenue stream so that it is relatively insulated from business cycles of its clients. Motherson is targeting no single customer, single country or single component that contributes over 15% of revenues. Until 2000, the company was primarily a supplier of wiring harness to Maruti Suzuki in India, but since then there has been a lot of improvement.

Motherson is targeting for no single customer, country or component to be over 15% of revenues

Geographic mix: From negligible in 2000, Motherson now gets over 80% of its revenues from outside India thanks to its acquisitions. It has now spread to 25 countries with over 150 manufacturing facilities and 24 design centres. Figure 9: Share of revenues from outside India has been

Figure 10: Europe constitutes major share of revenues at

continuously increasing

~60% (by manufacturing location of products)

90%

America 11%

80%

India 13%

70% 60%

Asia 16%

50% 40% 30%

20% 10% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Europe 60%

Sales split FY14




Customer mix: With the European acquisitions, VW group (VW, Audi, Seat combined) has become the major customer accounting for 45% of Motherson's revenues. It has also been able to increase its presence with OEMs such as Hyundai, Renault-Nissan, etc. With these acquisitions. Maruti, from accounting for ~80% of revenues until 2000, now contributes just 5% of revenues.


5

18 May 2015

Figure 11: VW group constitutes ~45% of revenues Volvo 1% M&M Fiat Toyota 1% 1% 2% Porsche 2% Kia Tata 2% 2% GM 3% Daimler 3%

Audi 20%

Others 9%

VW 19%

Ford 5%

Maruti 5% Ren-Nissan 6%

Revenue split by customer (FY14)

Hyundai 6%

Seat 6%

BMW 7%


Product mix: Motherson was earlier primarily into just wiring harness, but has also diversified its product mix with the European acquisitions. SMP (Samvardhana Motherson Peguform), acquired by Motherson in 2011 is an established Global Tier 1 designer and manufacturer of automotive modules specialising in high quality interior and exterior products. It is one of the largest manufacturers of bumpers, rocker panels, instrument panels and interior door panels for European OEMs. SMR (Samvardhana Motherson Reflectec), acquired by Motherson in 2009, is a global Tier I supplier of rear view vision systems to all the leading automobile OEMs. SMR develops and produces a wide range of exterior mirrors from basic, manually adjusted mirrors to high-value mirrors with integrated systems such as camera-based detection systems, side turn indicator lamps and assist system signal lights. Figure 12: Plastic components major at ~50% Metal Working Others Polymer & 1% 3% Tooling 11%

Figure 13: Share of wiring harness down with acquisitions 100%

Wiring Harness 18%

13% 0% 80%

8%

3%

3%

14%

1%

28%

30%

56%

56%

15%

13%

FY13

FY14

39%

22% 17%

1%

2%

62%

56%

60%

Exterior modules 17%

Interior Modules 22%

40% 66%

60%

8%

20% 27%

Rearview mirrors 28%

30%

39%

21%

0% FY08

FY09

Wiring Harness


11%

FY10

FY11

Modules and Polymers

FY12

Mirrors

Others


Share of wiring harness which was ~75% a decade back is now at just ~15%. Plastic components (exteriors and interiors) are the major revenue streams – at ~55% of revenues followed by mirrors at ~30%.


6

18 May 2015

Figure 14: The company is a leading player in rear view

Figure 15: In interiors and exteriors it has decent share in

mirrors

premium vehicles though small overall 35%

Exterior rear view market shares (Volumes in 2010)

SMP market-share in key segments (Only premium) 30%

Others 21%

Magna 24%

25% 20%

Metagal 4% Ichikoh 6%

15% 10%

Murakami 6%

SMR 22%

Ficosa 17%

5% 0% Bumpers

Door Panels Overall


Instrument Panels

Europe


Strong execution track record Motherson is one of the few companies that has set clearly defined five-year targets and delivered on most of them. These targets are across a fairly diverse set of metrics. The company announced its first five-year target in FY2000 for FY05, then FY10 target in FY05 followed by its FY15 target in FY10. It has recently announced its FY20 targets. Its focus is also on capital efficiency instead of just growth. What matters more to the company is RoCE (return on capital employed) rather than just operating margins. For FY15 target, while it has been able to deliver on RoCE targets for the standalone business, for the consolidated business there has been a miss. The main reason for this is that its big ticket international acquisitions (largely SMP) are still in a turn-around stage.

Apart from top line, Motherson focuses on ROCE

Figure 16: The company has a successful track record of delivering on five-year targets 2005

2010

2015

2020

Target

Achieved

Target

Achieved

Target

Achieved

Target

Rs10 bn

Rs10.3 bn

US$1 bn

US$1.5 bn

US$5 bn

US$5.5 bn

US$18 bn


30%

29%

60%

70%

70%

84%

Max from single customer

25%

27%

20%

15% 26-27

25 41% (parent), 26% (consol) 37%

Revenue

No. of countries present RoCE

40%

39%

Dividend payout

40%

43%

37% (parent), 40% 22% (consol) 40% 32%

40% 40%

40% 40%


Acquisitions have been a key driver M&A has been a key driver of the company's growth in the past. In the first phase the acquisitions/JVs were about acquiring capabilities and in the second phase, they were more about penetrating global markets and acquiring new customers. While it has made a number of acquisitions since early 2000s, the two large acquisitions in Europe—Visiocorp (now SMR) in 2009 and Peguform (now SMP) in 2011, placed it in an altogether different league. Its primary target has been distressed companies which are available at very cheap valuations, but these acquisitions are done in consultation with major OEMs. It regularly seeks OEMs' views to find out which companies are good or in trouble and worthy of buying. For both the two large European acquisitions, leading carmakers had asked Motherson to take over the ailing businesses and promised to help in the turnaround. Daimler wanted Motherson to acquire VisioCorp and promised contracts.


Most of the acquisitions have been done at the behest of the customer and hence done on very favourable terms

7

18 May 2015

Similarly, Volkswagen suggested Motherson to buy Peguform because the latter's owners wanted to sell the company, which wasn't doing well. Hence, OEMs wanted to revive these target companies for their own benefit which resulted in Motherson getting promised revenues and better pricing, which went a long way in turning them around. Figure 17: While there have been a number of acquisitions since 2002, recent ones since 2009 are by far the biggest Company

Product

Year

Country

FY14 sales (Rs mn)

Wiring harnesses

2002

Ireland

3,309

G&S Kunststofftechnik GmbH

Injection moulded plastics

2005

Germany

475

Reiner Präzision GmbH

Machined metal products

2005

Germany

Wexfor Electronics

ASL Huon

Wiring harnesses

2006

UK

Injection moulded plastics

2006

Australia

Formagru

1,392

Plastic parts

2006

Czech Republic

890

Rubber compounding

2007

Australia

1,115

Visiocorp

Mirrors

2009

Germany

90,690

Peguform

Modules and polymers

2011

Germany

155,412

Wiring harnesses

2014

USA

18,600

Modules and polymers

2014

Germany

19,200

Empire rubber

Stoneridge Scherer & Trier Source: Company data

Has continuously increased content per vehicle Motherson also has a well-proven record of outperforming the industry. In India it is the leading supplier of wiring harnesses and has a market share in excess of 65% of the passenger car segment. In the last decade, the company's domestic revenues have witnessed ~25% CAGR versus ~10% growth for the industry. Its content per vehicle has more than tripled over the same time which is also a function of growth in the share of higher-priced vehicles in the country. Motherson has also backward-integrated into key input products such as wires, connectors, terminals, fuse boxes which has led to higherthan-industry growth.

Motherson has outperformed the auto industry by ~15% CAGR over the last ten years on rising content per vehicle

Figure 18: Motherson's domestic revenues have grown at

Figure 19: Content per vehicle has more than tripled in

a ~25% CAGR in the last decade vs ~10% industry growth

the same time

70% 60%

18,000

30%

15,000

25%

12,000

20%

9,000

15%

6,000

10%

3,000

5%

50%

40% 30% 20% 10%

0% -10%

0

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E PV industry

Motherson domestic sales

Source: Company data, SIAM

Outperformance

0% FY05

FY07

FY09

Content per car (Rs)

FY11

FY13

FY15E

YoY increase

Source: Company data, SIAM

Even SMR which is a leading supplier of exterior mirrors (22% market share) and interior mirrors (9% market share) has had its revenues witness ~15% CAGR in the last five years (since acquisition) versus ~7% growth for the global car industry. Again, this outperformance is also a function of higher value addition in rear view mirrors – from just the basic function of viewing objects behind vehicles, rear view mirrors are now also incorporating camera, sensors and radars to assist drivers, along with styling elements


8

18 May 2015

such as LED turn signal. There has been a clear trend of faster growth in these higher value add mirrors over basic mirrors. Figure 20: Trend towards higher value add mirrors…

Figure 21: …leading to SMR outperforming the industry

12%

25%

10%

20%

8%

15%

6%

10%

4% 5%

2% 0%

FY11

0% Basic

Medium

Premium

FY12

FY13

Global car industry growth

Exterior rear view mirros growth (2010-13)

FY14

FY15E

SMR revenue growth

Outperformance



Direct beneficiary of structural growth factors As highlighted above, increase in content per vehicle has been one of the main factors leading to Motherson outperforming the industry in both wiring harness and mirrors. In fact Motherson Sumi is the direct beneficiary of the five trends (highlighted in our report On the fast track dated 4 Nov 2014) which we believe will lead to continued outperformance of larger component players over OEMs. Primarily, the biggest factors favouring Motherson are: (1) increased outsourcing by OEMs (2) Vendor consolidation (OEMs moving towards a lesser supplier model to cut costs in the wake of platform consolidation), and (3) Higher content per vehicle driven by regulation and consumer aspirations (be it more plastic content in cars for light-weighting or increasing demand for more features and functionality in vehicles driving a change in traditional electric distribution systems. Figure 22: Global suppliers revenues have grown well

Figure 23: …as OEMs are increasingly outsourcing in

ahead of PV industry…

order to focus on core marketing 120%

20.0%

Value added by player 15.0%

100%

10.0%

80%

35%

30%

25%

65%

70%

75%

1995

2004

Today

5.0% 60%

0.0% 40%

-5.0%

20%

-10.0%

0%

-15.0% 2006

2007

2008

2009

2010

Suppliers revenue growth

2011

2012

2013

2014

OEM

Global PV growth

Source: Industry (~600 suppliers)


Supplier

Source: Industry

9

18 May 2015

Supplier share in vehicle value creation is increasing as OEMs are increasingly focussing on marketing, aftersales, services, etc., in the wake of extra competition and this outsourcing trend is expected to continue. Suppliers' profitability has also increased with regards to OEMs compared to the pre-crisis period when profitability was similar. Figure 24: Vehicles per global platform increasing 1000

Figure 25: Suppliers' profitability gap to OEMs increasing 8.0%

Volumes per platform ('000 vehicles) 800

6.0%

600

4.0%

400 2.0% 200 0.0% 0 -2.0% 2001 2014

2020E

Source: Industry


2003

2005

2007

OEM's EBIT margins

2009

2011

2013

Suppliers margins

Source: Industry (~600 suppliers), 15 OEMS

10

18 May 2015

Pace of margin expansion will likely be lower than expected The street seems to be expecting a very strong margin expansion for Motherson Sumi – almost a ~150-200 bp margin expansion every year at SMP for the next two years which would take SMP margins beyond what the best players in the industry enjoy currently. The street is also expecting a continued margin expansion at SMR where margins have already expanded from ~5% to ~10% in the last five years. For the Indian business, too, street estimates suggest margins of 20%+, the highest in its history. The exterior business is a capacity-intensive business because of the need to invest in the paint shop and hence players are normally a little edgy when it comes to setting up too many new plants. Motherson's competitors suggest that by committing to set up too many new plants adjacent to customers to win business, it is adding to capacities in an industry with low margins which will impact margins for the entire industry. Moreover, when a firm is setting up new plants, there are upfront costs involved with training people, trial production, learning phase on new machines/techniques. These start-up costs which can be as high as 1-2% of lifecycle sales impact margins in the 12 months of operation starting from six months before the start of production. With Motherson getting ~20% of revenues from new plants being operational by FY17, this should impact margins negatively. The global interior business is a very low margin business because of the fact that it requires limited capex and has relatively lower technology barriers. OEMs have also chosen to keep the smaller players alive in order to keep a check on pricing. At the same time given the rising importance of interiors in consumer decisions they have forced suppliers to increasingly adopt new technologies/processes which have resulted in lower margins. A number of large players such as Magna, Johnson Controls & Visteon have moved out of the business in the last couple of years sighting low profitability which highlights the challenges that Motherson faces in increasing margins. Both player consolidation and global platform consolidation are positive driver for margins in the medium term.

Profitability assumptions higher than best-in-class peers' As discussed above, one of Motherson's key growth strategies has been to acquire good businesses which are in trouble hence available at distressed valuations, and then turn them around. Both SMR and SMP had low single-digit EBITDA margins at the time of acquisition, but the company has now improved SMR's margins to ~10% levels and SMP's margins to ~7% levels. Consensus is widely expecting this margin expansion trajectory to continue, however our interactions with industry experts suggest that the pace of margin improvement should slow down now. Given that SMR has already reached a steady level of profitability, we focus our analysis on the margin improvement possible at SMP and given the varied nature of the businesses, we look at interiors and exteriors separately.

Bulk of the margin improvement going forward has to come from SMP

Interiors: The main components which SMP manufactures in interiors are door panels (28% of SMP's revenues) and instrument panels (31%). The automotive interior components supplier industry is highly competitive and fragmented globally. Interiors is a challenging business – there is lack of product standardisation (since each model has 100% different interiors so very diverse technologies are required) and there is also need for production to be close to customers, hence there is limited benefit of scale and margins are capped. This results in high development expenses.


11

18 May 2015

France-based Faurecia is by far the global leader in interiors with ~15% market share. In the last five years, the company's operating margins (EBIT) have averaged at ~3% levels and EBITDA margins at ~6% levels (SMP blended margins are already at similar level than this today). In fact, Faurecia has also indicated that it is amongst the most profitable players globally in interiors so it is unlikely that SMP has too much scope to improve further. Faurecia at its most recent investor day had cut its guidance on both profitability (EBIT from 4.5% to 4%) and RoCE (from 20% to 15%) for the interiors business despite the recent industry consolidation.

Global leader Faurecia has EBIT margins of 3%; recently cut margin guidance from 4.5% to 4%

Figure 26: Faurecia, the world's largest player in interiors,

Figure 27: While the company expects to improve

has been operating at 3% EBIT margin only in interiors

profitability, it had recently cut its 2016 targets

9.0%

20%

8.0%

Faurecia interiors

7.0%

15%

6.0% 5.0%

10%

4.0%

3.0% 5%

2.0% 1.0%

0.0%

0% 2011

2012

Faurecia EBITDA margin interiors

2013

2014

Operating Margin

EBIT margin interiors


RoCE

Earlier target

New


As per our interaction with various industry experts too, OEMs have been very demanding in the interiors business and have very high expectations. Given that interiors have become very critical element of consumer choice, OEMs want suppliers to keep on innovating with increasing demand for qualities such as improved fit, finish and craftsmanship. Even though a few basic techniques will suffice they want suppliers to come with different technologies. This results in difficultly in achieving economies of scale as suppliers have to pay for new machine, get used to it and lose time in mastering something new. Moreover, given the increasing pricing pressures which OEMs are facing in the wake of competition, they have limited ability of compensating the suppliers for this extra innovation.

OEM expectations on interiors are very high as it is a key element of consumer choice

There have been a host of exits in the industry with Magna, Johnson Controls and Visteon all selling their interiors businesses, citing low levels of profitability and thus indicating the challenges in the business. However, this might be a positive for the industry in the medium term as market consolidation is happening. Interiors is reasonably capital intensive (though less than exterior) and the asset turns in the business is at around 5x, with operating margins at ~3% levels, pre-tax RoCE for the business in current scenario is only ~15% much below Motherson's target of ~40% for the blended business. Utilisation needed to make decent money is ~75%. With a 5% EBIT level that we build in for Motherson, it can be a ~25% ROCE business, still lower than Motherson's group ROCE target of 40%.

A number of top players in the interiors business have chosen to exit in last two years


12

18 May 2015

Figure 28: In the current scenario, steady state RoCE in interiors is ~15% only Interiors Blended margins

~3%

Asset turns

~5

Pre-tax ROCE

15%

Utilization needed to make decent margin

75%


Exteriors (Bumpers): The other main component which SMP manufactures is bumpers (~40% of revenues). Exterior is a less competitive business than interior but is more capital intensive. For this reason, exterior is a more regional business as compared to interior. Typically, for interiors, for one model a large supplier can get a global contract, but given the capital intensive nature of bumpers (because of the need to have a paint shop), it is developed at one place and prototypes can be given to different players for different regions as OEMs prefer to give business to a supplier which has already set up a plant close to their plant.

Exteriors is more capital intensive than interiors

France-based Plastic Omnium with a ~10% market share is the global leader in bumpers. Its operating margins (EBIT) have averaged at 7% levels in the last few years but as per our European analyst, margins in the exterior business would be lower by ~100 bp (as margins are higher in fuel systems which is other main business of the company). Figure 29: Plastic Omnium's blended margins have

Figure 30: Faurecia's exterior EBIT margins too have

averaged at ~7%, exterior's will be slightly lower

averaged at ~5% levels

10%

8.0%

7.0% 8%

6.0% 5.0%

6%

4.0% 4%

3.0% 2.0%

2%

1.0% 0%

0.0% 2010

2011

2012

2013

Plastic Omnium EBIT margins


2014

2011

2012

2013

Faurecia EBITDA margin exteriors

2014

EBIT margin exteriors


Faurecia, which has ~5% share globally in bumpers, does report segmental margins. The company's EBIT margins in exteriors too have averaged at 3% levels similar to interiors. However, the company has indicated that margins have been dragged by losses in South America (which has been a tough geography of late for all suppliers), profitability is slightly better in other regions. As per the company, bumper EBIT margins in Europe are at ~5% levels, in North America at high single digits and in China at ~10%.

Margins in exteriors are higher than interiors as asset turns are lower

So, margins in exterior are slightly greater than in interiors which is expected given that asset turns are lower as it is a more capital-intensive business (utilisation needed to make decent money is ~85% versus ~75% in interiors). Steady state margins in exterior in the current scenario are at ~5% versus 3% in interior (as there is less competition in exterior), but asset turns are lower in exterior at four versus five in interior (as exteriors is more capital intensive). Consequently, general pre-tax RoCE in exterior is 20% versus 15% in interior. The return ratios are better than interiors as given the higher capital requirements the number of smaller players in exteriors is lower than in interiors.


13

18 May 2015

Figure 31: Exteriors' margins are highest in China followed by North America and Europe at ~5%, steady state RoCE in the current scenario is at ~20% Bumpers Margins Europe

~5%

Margins North America

High single digit

Margins China

~10%

Margins other regions

Low single digit

Blended margins

~5-6%

Asset turns

~4x

Pre Tax Roce

~20-25%

Utilization needed to make decent margin

85%


Globally, for the industry too, the trends are similar. Interior is amongst the least profitable businesses in components while exterior is in the middle range. Amongst the regions, China is the most profitable followed by America and then Europe. Hence Motherson is in a less profitable industry both in terms of product and region.

Interiors is one of the least profitable component segments globally

Figure 32: Globally, interiors is amongst the lowest

Figure 33: Even Europe (which will remain a primary

profitable business in components

market) is less profitable for SMP

10.0%

10.0%

8.0%

8.0%

6.0%

6.0%

4.0%

4.0%

2.0%

2.0%

0.0%

0.0% Tires

Powertrain

Exterior

Chassis

Interior

Electrics

EBIT margin of supplier by type


China

USA

Europe

Japan

Korea

EBIT margin of supplier by region


The street is expecting almost a 200 bp margin expansion every year for SMP on (i) the start of new efficient plants (ii) better pricing on new contracts from OEMs, and (iii) operating leverage at existing plants. However we expect only a ~125 bps margin expansion for the next two years. High capacity additions will imply pricing aggressiveness Until now Motherson has been disciplined on pricing (given the returns target), but going forward given that the company is going for large capacity additions, it may become aggressive on pricing. The company is increasing presence in regions such as America and China, which may mean competition on pricing. Particularly for some of the components such as bumpers for which it is setting up as many as four new facilities (brownfield or greenfield), peers expect it to become more aggressive on pricing in order to gain share.


Bumpers is a high-capex business; with four new plants Motherson might become aggressive on pricing

14

18 May 2015

Figure 34: Motherson is going for large capacity additions which will imply price aggressiveness Location

Type

Entity

Foshan (China)

Greenfield Plant

SMP

2QFY15

Time

Products A/B/C pillars

Oldenburg (Germany)

Brownfield (New Painting facility)

SMP

3QFY15

Bumpers & Rocker panels

Schierling (Germany)

Greenfield Plant

SMP

3QFY15

Bumpers

Marysville (USA)

Greenfield Plant

SMR

4QFY15

Exterior mirror

Chongqing (China)

Greenfield Plant

SMR

4QFY15

Exterior mirror

Polinya (Spain)

Brownfield (New Painting facility)

SMP

1QFY16

Bumpers

Boetzingen (Germany)

Brownfield Expansion

SMP

3QFY16

Door panels based on natural fibre plastic

Zitlaltepec (Mexico)

Greenfield Plant

SMP

1QFY17

Bumpers, Rocker panels, wheel covers, etc.

Beijing (China)

Greenfield Plant

SMP

1QFY17

Door panels


Ramp-up costs on new facilities to also impact margins Our interaction with industry experts suggest that for a new plant there is a period of six months each before and after the start of production when there are high ramp-up costs. Typically ~1.5% of the lifetime costs of the model (which is usually a 6-7 year cycle) come in this period; hence margins for a new plant are significantly lower in the first year. With Motherson building 9 new plants in next 2 years (~20% of revenues), blended margins for Motherson may remain impacted for some time.

Start-up costs are as high as ~1.5% of model cycle sales

A new plant typically entails US$100 mn in costs—of which capex is US$20-40 mn, similar is development cost (which are amortised by supplier) and rest is tooling costs which is typically borne by the OEM. Setting up of a new plant is also an important decision as the contract by an OEM is usually given for one generation of the model only and if the model is not successful then almost all of the unamortised development and capex costs have to be borne by the supplier only. Even in the latest quarter (4QFY15) while SMP saw a 12% QoQ growth in revenues with the ramp-up of new plants, margins contracted ~100 bps QoQ indicating the adverse initial impact of new plants. Figure 35: Despite revenue pick-up, SMP's margins disappointed this quarter 700

8.0%

600

7.0%

500

6.0%

400

5.0%

300

4.0% 1QFY14

2QFY14

3QFY14

4QFY14

SMP Net Sales (Eur Mn)

1QFY15

2QFY15

3QFY15

4QFY15

EBITDA margin (%) (RHS)


Premium not necessarily high margin One of the factors being cited for Motherson's high margin is the higher share of premium vehicles. It is true these products have a wide pricing range - bumper price ranges from €20 to €300 per car set, and so do instrument panels. Even in SMR's case (price range for a basic exterior rear view mirror is €8/unit; medium exterior rear view mirror is €16/unit;


15

18 May 2015

and premium exterior rear view mirrors €34/unit today). However higher realisations don't necessarily mean higher pricing. Not only are development costs higher for premium vehicles' products, the rate of rejection of these parts by premium OEMs is also higher so margins for premium segment-focussed OEMs are not necessarily higher than mass segment-focussed OEMs. Limited scope of having materially better cost structure than peers The other reason which is quoted for Motherson having margin lever is increased sourcing from home country India for European operations. However this has limited benefit – given for both instrument panels and bumpers one has to be very close to the customer, so there is limited sourcing that can be done from India. Moreover, all its peers already have established development centres in low-cost countries – for e.g., Faurecia has 100 engineers in India so there is no reason for Motherson to have significantly better cost structure than peers. Whilst Motherson has increased the sourcing of some electric components for SMR from India, the recent depreciation in the euro versus the INR has a negative impact on the same. Motherson has a very cost efficient tooling facility in India which can help it eke out some savings in upfront costs on a project and hence help it generate better returns than peers.

Motherson's peers also have design centres in lowcost locations

Figure 36: Peers already have low-cost sourcing 100% 22%

22%

24%

28%

80%

38%

40% 58%

60%

40%

78%

78%

76%

72%

62%

60% 42%

20%

0% Faurceia

GKN

Continental

Plastic Omnium

Headcount distribution High cost countries

Autoliv

Valeo

Leoni

Low cost countries


Margins to increase going ahead for SMR and SMP albeit lower than expectations Most of the industry participants suggest that the margin improvement in the last few years for suppliers has been purely led by higher utilisation with volumes having picked up in the US, China growing fast and Europe stabilising. SMR's and SMP's margin improvement has been more in line with the utilisation-led improvement for the industry. Going forward with global auto demand expected to slow down, utilisation-led margin improvement wouldn't be possible. Hence the easy part of margin improvement is now behind us and the company has to now work really hard to further improve profitability either by moving into higher value-add process or improving efficiencies or negotiating better-priced contracts.

We expect ~250 bp margin improvement in SMP in the next two years

Going forward, we do expect a bit of margin improvement, and more so in the interiors business where there has been some consolidation in the industry. We expect margins to improve ~100 bp for SMR and stabilise at ~11% levels; and a ~250 bp margin improvement for SMP over 2 years with margins to stabilise at ~9% levels.


16

18 May 2015

Figure 37: SMR's margins to expand ~100 bp to 11%

Figure 38: SMP's margins to expand ~250 bp to ~9% 10.0%

12.0% 10.0%

8.0%

8.0% 6.0%

6.0% 4.0%

4.0% 2.0%

2.0%

0.0%

0.0% FY12

FY13

FY14

FY15E

FY16E

SMR EBITDA margin



FY17E

FY12

FY13

FY14

FY15E

FY16E

FY17E

SMP EBITDA margin


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18 May 2015

Needs a sizeable acquisition to meet its FY20 target Motherson has set itself a target of growing its revenues from ~US$6 bn in 2015 to US$18 bn in 2020, assuming a doubling of current revenues from ~US$6 bn to ~US$12 bn and the rest coming from acquisitions. With the global auto industry growth likely slowing from ~7% to ~4%, Motherson would have to outperform the industry by ~10% to achieve its target. Although achievable, after the recent industry consolidation all top players, having strengthened their offerings, are vying for higher market share (for e.g., Grupo Antonio acquisition of Magna's interior business is complementary in both products and markets). On the inorganic side, we reckon Motherson will now have to make at least one really large acquisitions if it wants to achieve its target; the last few acquisitions post SMP have been much smaller ones. Whilst availability of targets is not a big issue especially in Europe where a number of firms are family owned, with the European auto market now recovering pricing would be higher than earlier. Also, most of the large firms in the interior business are now aggressively looking to consolidate and hence are on the lookout for acquisitions – this implies greater competition for Motherson when it goes looking for acquisitions. In the next few years we might also see some of the Chinese players being more aggressive on acquisitions as they look to support the growing traction of Chinese local brands in the home market with better quality components. Given that any new product line will be done by the privately held entity (SMIL) rather than the listed entity, this would also limit the availability of attractive targets.

Organic target looks achievable Share gains wouldn't be as easy—larger players too have aggressive targets Given that Indian business is now just ~15% of revenues, we focus on the international operations whose performance will primarily determine revenue growth potential for the company. The street widely expects large market-share gains for these subsidiaries, given that both SMR and SMP are expanding fast with aggressive plant additions (especially in China and North America). Our industry interaction suggests that market share for suppliers in developed economies such as North America, Europe, etc., is relatively resilient with OEMs preferring the same supplier even for the new generation models. Market share fluctuations for suppliers are higher in emerging countries like China. Figure 39: SMP is not in the Top 3 in exteriors..

Figure 40: In interiors it is likely the seventh biggest player globally at best

Steel 4%

Plastic Omnium 10%

Player

Magna 9%

In-house 33%

Faurecia 5%

Motherson 3% Flex-N-gate 3%

Share

Type

Faurecia

14%

Multi - OEM, global

Competitor 1

9%

Multi - OEM, global

Competitor 2

6%

Multi - OEM, global

Competitor 3

5%

Mono-OEM, global

Competitor 4

4%

Multi - OEM, local

Competitor 5

3%

Multi - OEM, local

Competitor 6

3%

Multi - OEM, global

Hyundai Mobis 3%

Bumpers global share

Others 30%




18

18 May 2015

While SMR is amongst the biggest player in mirrors, we note that SMP is not in the biggest league yet in either exterior or interior. In bumpers, Plastic Omnium is the only true global player (Top 3 in all regions and is the No.1 in both Europe and China). SMP is the fourth biggest player. As for interiors, Faurecia is by far the biggest player. SMP is likely the seventh biggest player at best. Other players bigger than Peguform in interiors are likely to be Yangfeng (biggest supplier in China), Johnson Controls (has now sold interiors business to Yangfeng), Magna (selling interior operations to Group Antolin—a Spanish supplier), IAC and Visteon (also divesting its interior business). We note that industry consolidation is helping these other larger players, too, and they also have aggressive targets for increasing market share. Plastic Omnium has a global target of increasing its share in bumpers from 10% to 15% and Faurecia has a target of increasing its interior market share in China from 10 to 15%. While Motherson does have committed order for most of its new plants, it is too simplistic to assume that there will be linear market share gains for the company as other larger players have similar ambitions. Also, typically market share gains happen only when model-cycle changes.

Post industry consolidation other global players also have aggressive market share gain targets

Figure 41: Plastic Omnium has a further target of

Figure 42: Faurecia has a target of increasing share in

increasing share from 10% to 15%

China from 4% to 10%

16%

10%

14% 8%

12% 10%

6%

8% 4%

6% 4%

2%

2% 0%

0% 2014

2018 target

Plastic Omnium Bumpers market share


Current

Target

Faurecia interiors market share in China


Lightweighting (higher usage of plastics) not the right solution for CO2 norms Another factor that is cited in Motherson's favour is higher plastic usage in vehicles in order to reduce the weight to meet emission standards. Given that SMP is a large player in plastic interior and exterior, it will no doubt benefit from this trend, but we note that this is not applicable to all components. As an example in bumper, the share of plastic components is at 96% already (while steel is left at just 4%); hence, there is limited further potential of steel for plastic substitution. As per our European team, light weighting is among the least cost-effective ways to achieve emission reductions and the street is overestimating the need for lightweight parts to reach emissions targets. More so for Europe where as per the current 2020 targets, lower the fleet average weight for an OEM, lower is its CO2 target. This disincentivises OEMs from employing weight reduction and there is better relative cost effectiveness of other CO2-reduction technologies such as powertrain.


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18 May 2015

Figure 43: Cost (€) per percentage point reduction in CO2

Figure 44: Cost (€) per percentage point reduction in CO2

(Petrol cars)

(diesel cars) 0

20

40

60

80

100

0

120

Tyres

Tyres

Aerodynamics

Aerodynamics

Powertrain

Energy Management

Energy Management

Powertrain

Transmission

Light-weighting

Light-weighting

Transmisson

Electrification

Electrification

20

40

60

80

100

120

Cost (Euros) per percentage point reduction in CO2 for petrol cars

Cost (Euros) per percentage point reduction in CO2 for diesel cars

Source: IKA data, assuming mid-segment cars and excluding

Source: IKA data, assuming mid-segment cars and excluding

technologies still under research

technologies still under research

140

Signs of a slowdown in auto demand in key regions While the key growth story for Motherson is market share gains, global auto demand is expected to slow down which is a small negative. CS expects global auto demand growth to slow to ~4% CAGR from 2014-17 compared with ~7% from 2009-13 with the slowdown in key markets of US and China. European auto demand is now stabilising after a multiyear down turn, but our analysts expect US auto demand to slow from 10% CAGR to 1% and China auto demand to slow from 17% CAGR to 5-7% CAGR.

CS expects global auto growth to slow down from 7% CAGR to 4% CAGR

Figure 45: Over 2009-14 global auto demand witnessed

Figure 46: After witnessing a 10% CAGR, US volumes

7% CAGR; is expected to slow to 4% CAGR ahead

expected to remain flat 18

120

1% CAGR

4% CAGR 15

100

7% CAGR 80

12

60

9

40

6

20

3

0

10% CAGR

0 2009

2014 Global PV volumes (Mn units)


2017E

2009

2014

2017E

USA PV volumes (Mn units)


Another concern in China is the fact that growth of late has been driven by local brands which grew at ~35% in 1QCY15 while foreign JVs were barely flat. European suppliers are more skewed towards foreign JVs (which account for ~90% of their sales) and that is likely to be the case for Motherson too which is setting up new facilities in China.


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18 May 2015

Figure 47: Similarly, China volumes also slowing down

Figure 48: Local brands growing faster than foreign JVs

after a period of very high growth

in China is an additional headwind for foreign suppliers

25.0

35%

7% CAGR

30%

20.0

17% CAGR

25%

15.0

20% 15%

10.0

10% 5.0

5%

0.0

0% 2009

2014

2017E

3QCY14

China PV volumes (Mn units)

4QCY14

Chinese brands growth


1QCY15

Foreign JV's growth


SMRPBV to grow at ~20% CAGR over FY15-17E outperforming the industry by ~15% SMR has outperformed the industry by ~10% in the last five years; over FY15-17 we expect SMR and SMP to witness ~20% CAGR and outperform the industry by ~15% driven by an increasing presence in the US and China which will have faster growth for the company, continued increase in vehicle content and also cross-selling opportunities. While SMP is primarily focussed on VW group (~70% of revenues), for SMR, Hyundai group is a big client (30% of revenues) so there is scope of extending SMP's range to SMR's clients and vice-versa. Figure 49: Expect SMRP to grow revenues at ~20% CAGR

Figure 50: Faster growth in America and China where it is

over FY15-17 outperforming the industry by ~15%

expanding presence

25.0%

45.0%

SMRPBV revenue growth (% YoY)

40.0% 20.0%

35.0% 30.0%

15.0%

25.0% 20.0%

10.0%

15.0% 10.0%

5.0%

5.0% 0.0%

0.0% FY14

FY15E

SMR revenue growth (% YoY)

FY16E

FY17E

FY14

SMP revenue growth (% YoY)


FY15E America

FY16E Asia

FY17E

Europe


Inorganic targets might be more expensive now Motherson's FY20 target of US$18bn implies US$6bn coming from inorganic acquisitions, which would mean atleast one large acquisition. Like with earlier acquisitions, we think Europe is most likely to be the destination. Three of the company's biggest acquisitions have been from Germany which is the auto hub of Europe. The country scores high on innovation front with a large number of small but successful companies that have found


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18 May 2015

niches for their products. Moreover, Germany has also amongst the largest proportion of family-owned businesses. Younger generations are increasingly reluctant to take over these firms. In addition, the younger generation may lack capabilities to run these businesses, not to mention the fact that there are limited financing options for these organizations. Hence many of these companies have been looking to sell out. Figure 51: Over 90% of businesses are family owned in

Figure 52: Germany also has most companies with niche

Germany

high technology

100%

"Hidden champions" globally 1400

80%

1200 1000

60%

800 40%

600 400

20%

200 0

0% USA

Germany

% of businesses family owned


Source: Germany Trade and Invest

In future it might not be so easy for company to find good targets as (1) Valuations are likely to be higher than what Motherson has paid in the past: Distressed valuations might not be possible for large acquisitions which are now needed to really move the needle. Most of the remaining firms have already become lean and efficient during the downturn so might not be interested in selling now. Moreover, valuation expectations have also increased in an improving economy. So bargain or insolvent companies are more difficult to come by than earlier. Average deal values have increased 3x in the last three years. Figure 53: Profitability of European suppliers has

Figure 54: The average deal size in components M&A has

improved since the downturn

steadily increased in the last few years

10.0%

25

8.0%

120 100

20

6.0%

80 15

4.0%

60 10

2.0%

40 5

0.0% -2.0% 2005

2006

2007

2008

2009

2010

2011

European suppliers EBIT margins

Source: Industry


2012

2013

20

0

0 2008

2009

2010

Total deal size (USD Bn)

2011

2012

2013

Avergae deal size (USD Mn) (RHS)


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18 May 2015

(2) Bigger suppliers from developed countries will also give competition if any interesting target comes on block: This time around Motherson will also face greater competition from its bigger peers like Faurecia that have improved their balance sheet since the downturn. Companies that were relatively uninterested have sold out already so the bigger players left are serious about growing business. The recent strength in the USD against all currencies too favours USD-based companies. Moreover, given the cultural difference, we think some of these target companies would prefer to be taken over by a company from a developed economy rather than Motherson. Figure 55: Balance sheets of Motherson's bigger peers

Figure 56: Share of acquirer companies from China is

have also improved so they will give competition

also increasing

7.0

12%

6.0

10%

5.0

8%

4.0

6%

3.0

4%

2.0 2%

1.0 0% 2009

0.0 2007

2008

2009

2010

2011

Faurecia Debt/ Equity

2012

2013

2014

2015e

2010

2011

2012

2013

Proportion of acquirer companies from China (%)

Plastic Omnium



(3) Additional competition from Chinese suppliers: Chinese component players are becoming more aggressive – there have been a number of recent acquisitions by Chinese players in Europe. Chinese suppliers have the advantage of a large local market, support from Chinese OEMs who need help when competing with global brands in domestic market and also larger access to funds (given many are state owned). Target firms are also increasingly becoming more acceptable to being acquired by the Chinese to get access to local market and Chinese contacts. Figure 57: Chinese suppliers have made number of acquisitions in Europe in past few years Acquirer

Target

Target Country

Year

BHAP

Inalfa

Netherlands

2011

Deal Size

Citic

KFM Castings

Germany

2011

>€300 mn

CQLT

Saargummi

Germany

2011

€64 mn, debt of €82 mn

Ningbo Huaxiang

Sellner

Germany

2011

€19 mn

Ningbo Joyson Electronic

Preh

Germany

2011

Bohong

Westcast Industries

Canada

2012

Heibei Lingyun Industrial

Kiekert

Germany

2012

Ningbo Huaxiang

HIB Trim Parts

Germany

2013

€34 mn

TMT

ZF Boge

Germany

2013

$399.3 mn

Wangfeng

Meridian Lightweight

Canada

2013

C$188 mn

Wanxiang Group

A123

USA

2013

$251 mn

Group of Chinese investors

Iee

Luxembourg

2013

AVIC

Hilite

Germany

2014

AVIC

Koki Technik

Germany

2014

Shanghai Prime Machinery

Nedschroef

Netherlands

2014

$245 mn

€473 mn €325 mn



23

18 May 2015

New targets have to be in existing product lines Moreover, the company has clearly indicated that any new product line (outside wiring harness, mirrors or plastic interiors and exteriors) will be in the privately held group entity – SMIL and that would limit availability of attractive targets. Company has given target of increasing SMIL's revenues from 2Bn USD to 6 Bn USD by 2020. Figure 58: Motherson's group structure—any new line of business will done by SMIL



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18 May 2015

Valuations rich despite the growth We expect Motherson to show strong growth but believe expectations are too high. FY16 consensus estimates have been cut by ~5% in past six months; we think there is room for more. Our estimates are ~15% below street. Even on consensus estimates it trades at ~21x CY16 earnings compared to most peers which trade at ~12x. Whilst its ROE is much higher than peers it trades at a P/B multiple of almost 10x which is almost 3x its peers. The key risk to our call is a faster than expected margin expansion in SMP and management buying a large sized company in distress and turning it around quickly.

Our numbers are ~15% lower than consensus Our earnings estimates for FY16/17 are ~15% lower than consensus. While top line is broadly in line, the primary difference seems to be on the margin front. As discussed in the previous section, the pace of margin expansion trajectory will disappoint consensus. Figure 59: Our numbers are ~15% lower than consensus primarily on margin improvement front FY16 Sales EBITDA EBITDA margin EPS

FY17

CS

Consensus

Difference

CS

Consensus

420,889

413,112

1.9%

497,537

492,408

1.0%

37,976

42,866

-11.4%

49,919

56,584

-11.8%

9.0%

10.4

10.0%

11.5%

15.9

18.3

21.7

25.7

-12.9%

Difference

-15.3%

Source: Credit Suisse estimates, I/B/E/S Datastream

The other risk to earnings will come from the sharp depreciation in the euro versus the INR. Even though there has been some rebound of late, the euro is down ~15% versus the INR in last year or so. Given that ~66% of EBITDA is from Europe, while translating the same into INR, it will hurt the consolidated earnings. Earnings momentum on the stock has been negative in the last few months but we expect more downgrades going forward. Figure 60: While Euro has seen some bounce-back, it is

Figure 61: Earnings momentum has been negative in the

still down significantly versus the INR

last few months see more downgrades ahead 25

90

20

80

15

10

70 5

60 Jan-14 Mar-14 May-14

-

Jul-14

Sep-14 Nov-14

Jan-15 Mar-15 May-15

Euro/ INR rate

Source: the BLOOMBERG PROFESSIONAL™ service

Feb-13

Jun-13

Oct-13

Feb-14

Jun-14

Motherson 2015 consensus earnings

Oct-14

Feb-15

2016


In the last two five-year plans, company has announced targets of reaching 40% RoCE for the consolidated business, but has fallen well short of meeting those targets. While standalone RoCEs are still ~40%, for SMRP they have been in ~25% range. We also compare SMRP with Faurecia and Plastic Omnium on this front. While these companies have other businesses too so not strictly comparable, interiors and exteriors combined still form over ~50% of revenues for them.


25

18 May 2015

Figure 62: The company has never reached its

Figure 63: SMRP's current RoCE's are at levels similar to

aspirational ~40% RoCE for the consolidated business

peers, though there might be some improvement ahead

35.0%

40%

30.0%

35%

30%

25.0%

25% 20.0%

20%

15.0%

15%

10.0%

10% 5%

5.0%

0%

0.0% FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Motherson Consol

FY14

Motherson standalone

SMRPBV

Faurecia

Plastic Omnium

Pre tax RoCE (%)

Pre-Tax RoCE ex cash (%)



As discussed above capital intensity is highest in exteriors, so Plastic Omnium (which is primarily an exterior company) has lowest fixed asset turnover. However given that EBIT margins are lowest for Faurecia (due to drag from South American operations), its RoCEs are the lowest. Figure 64: SMRP has slightly better asset turns, lowest for

Figure 65: Working capital days for SMRP are higher than

Plastic Omnium (as bumpers are more capital intensive)

peers though 40

5

WC Days

30 20 10 3 0 -10

Non current Asset turns

-20 -30

1 2011

2012

Faurecia

2013

Plastic Omnium


2011

2014

2012 Faurecia

SMRP

2013 Plastic Omnium

2014 SMRP


Trading at large premium to global peers Compared to global peers, Motherson has by far the highest growth expectations. Over FY15-17, the company's earnings are expected to witness ~50% CAGR (as per consensus expectations) and ~40% CAGR (as per CS estimates) compared to 15-20% CAGR for most global peers. However, even adjusting for this growth, the stock's valuations are very rich. Even on consensus estimates it is trading at ~21x CY16 earnings versus peers trading at an average of ~12x. Post CY16, Motherson's earnings growth profile should converge with peers as the bulk of possible margin expansion at SMP would have happened and the big initial delta from expansion into the US and China would also


Motherson trades at a P/E of 21x on consensus vs 12x for global peers

26

18 May 2015

have come in. While the stock's return ratios are also higher than peers, on P/B to ROE also it is trading at large premium compared to peers. Figure 66: Even on elevated consensus estimates, the

Figure 67: While the stock's ROE is higher, that more than

stock is trading at ~21x CY16 earnings vs peers at ~12x

reflects on P/B where it trades at over 100% premium

22.0 P/E (CY16)

16.0

60.0

12.0

50.0

10.0

40.0

8.0

30.0

6.0

20.0

4.0

10.0

2.0

0.0

0.0

10.0

4.0

ROE(CY15)

P/B (RHS)



Figure 68: The stock has seen a sharp re-rating in line

Figure 69: On P/E trading at ~26x one year forward, On

with the broader Indian market

P/B it is trading at ~10x

30

10

24

8 6

18

4

12

2

6 0 Jan-06

0 Jan-05

Jan-08

Jan-10

Jan-12

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-14 Price to 12M fwd BPS

Motherson Price to 12M fwd EPS



Returns gradual even in the best case scenario Another way of looking at the current valuations is what can be the stock's returns if management were to deliver on its targets. Assuming the company reaches revenues of US$18 bn by FY20 with ~300 bp EBITDA margin expansion (~140 bp post tax and minority interests), its profits can grow at 37% CAGR by FY20. Giving a steady state multiple of 15x (which is still a 10% premium to global peers) as one would not expect a US$18 bn company to continue growing at a >25% revenue CAGR, it would imply a ~14% stock return over a four-year period (price in FY19 valued on FY20 earnings) which is not too great for a bull-case scenario.


27

18 May 2015

Returns gradual even in the best-case scenario Revenues (US$ bn)

FY15

FY20E

Five-year CAGR

5.5

18

27%

Increase in EBITDA margins

300 bp

Increase in PAT margins (post tax and minority)

140 bp

Pre-exceptional profit margin

3.0%

4.4%

Profits (US$ bn)

0.165

0.792

Forward P/E multiple (~10% premium to peers) Market cap (US$ bn)

37%

15 7

14% (returns until FY19)

11.9


Initiate with UNDERPERFORM and a TP of Rs420 We initiate coverage on Motherson Sumi with an UNDERPERFORM rating and a target price of Rs420 which implies ~15% downside from the current market price. We value the Indian business at 22x FY17E P/E (~10% premium to the historical average, in line with the broader market re-rating) and international subsidiaries at 17.5x FY17E P/E (~40% premium to global peers). Figure 70: Our SOTP-based target price is Rs420 FY16 EPS

FY17 EPS

Multiple

Value

Standalone

7.0

8.9

22

196

International Subs

8.9

12.8

17.5

224

Target Price

420


Key risks The key risks to our call include the following:







Faster-than-expected turnaround in European subsidiaries: We have assumed only a gradual margin improvement in SMR and SMP given the tough business and the fact that the company is already at levels close to best-in-class peers. If the company is able to achieve greater cost savings and efficiencies, the pace of margin expansion will be faster than expected. The company finding bargain M&A targets: For Motherson, the key growth driver in the past has been the company finding good businesses which are in trouble hence worthy of being acquired at bargain valuations. We have discussed above the factors why it will be incrementally difficult for the company to grow via this method, but M&A opportunity can be a wild-card. Sharp rebound in global auto demand: CS estimates global automotive demand to slow down particularly in regions such as the US and China where Motherson hopes to grow rapidly via expansions. If this were to not happen, the company could enjoy higher organic growth in these geographies.

Company background Motherson Sumi is the flagship company of Samvardhana Motherson group—it was established in 1986 as a JV with Sumitomo wiring systems. The company is the leading supplier of wiring harnesses for passenger vehicles in India. Until early 2000s it was primarily just a wiring harness supplier to Indian car industry but since then started diversifying its presence by acquiring companies abroad. Its revenues reached an altogether different trajectory with two big acquisitions in Europe—rear view mirror business of Visiocorp (now called SMR) in 2009 and Peguform (now called SMP—leading supplier of plastics interiors and exteriors). Motherson holds a 51% stake in these entities while the rest 49% is held by the other promoter group company—SMIL. Motherson caters exclusively to the OEM segment with no share from replacement.


28

18 May 2015

Figure 71: India is just ~15% of revenues after large

Figure 72: EBITDA split is roughly equal between India,

European acquisitions

SMR and SMP though given profitability difference

400,000

100%

Sales break-up (Rs Mn)

350,000

80%

300,000

250,000

60%

200,000

40%

150,000 100,000

20%

50,000 0%

0 FY05 Standalone

FY07 SMR

FY09 SMP

FY11 S&T

FY13

Stoneridge


FY15E Others

FY11

FY12

FY13

EBITDA split Standalone

FY14 SMR

FY15E

SMP


Figure 73: Key management personal Name

Designation

Mr. V C Sehgal

Chairman

Mr. Laksh Vaaman Sehgal

Director

Mr. Pankaj Mittal

COO

Remarks He established Motherson group in 1975 and driving force behind company's growth. He is currently chairman of Motherson Sumi He has served as CEO of SMR. Prior to that he worked with the group's collaborators in Germany and Japan. He has been Chief Operating Officer of Motherson Sumi Systems Ltd. since Jan-2005 and serves as its Whole-Time Director



29

18 May 2015

Companies Mentioned (Price as of 18-May-2015) American Axle & Manufacturing Holdings Inc. (AXL.N, $24.92) Autoliv (ALV.N, $124.79) BorgWarner, Inc. (BWA.N, $61.82) Continental (CONG.DE, €209.25) DELPHI Automotive PLC (DLPH.N, $87.25) Daimler (DAIGn.DE, €85.03) Dana Holding (DAN.N, $22.01) Denso (6902.T, ¥6,364) Faurecia (EPED.PA, €41.74) Johnson Controls Inc (JCI.N, $50.48) Lear Corp (LEA.N, $114.47) Magna International (MGA.N, $55.65) Maruti Suzuki India Ltd (MRTI.BO, Rs3696.95) Motherson Sumi Systems Limited (MOSS.BO, Rs499.3, UNDERPERFORM, TP Rs420.0) Plastic Omnium (PLOF.PA, €24.98) Valeo (VLOF.PA, €147.8) Volkswagen (VOWG_p.DE, €215.7)

Disclosure Appendix Important Global Disclosures Jatin Chawla and Akshay Saxena, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratin gs are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the ana lyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U. S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of asso ciated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.


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18 May 2015

Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution

Rating

Versus universe (%)

Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 16% (43% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most c losely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Motherson Sumi Systems Limited (MOSS.BO) Method: Our target price of Rs420 for Motherson Sumi Systems Limited is based on an SOTP (sum-of-the-parts) valuation where we value the Indian business at 22x FY17E P/E (price-to-earnings; ~10% premium to historic average in line with broader market re-rating) and international subsidiaries at 17.5x FY17E P/E (~40% premium to global peers) Risk:

Risks to our Rs420 target price for Motherson Sumi Systems Limited include: a faster than expected margin expansion in SMP and management buying a large sized company in distress and turning it around quickly

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names

The subject company (MOSS.BO, CONG.DE, EPED.PA, DLPH.N, MGA.N, AXL.N, VLOF.PA, VOWG_p.DE) currently is, or was during the 12month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AXL.N, VLOF.PA, VOWG_p.DE) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (CONG.DE, DLPH.N, MGA.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AXL.N, VLOF.PA, VOWG_p.DE) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (AXL.N, VLOF.PA, VOWG_p.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MOSS.BO, EPED.PA, 6902.T, MGA.N, JCI.N, AXL.N, VLOF.PA, MRTI.BO, VOWG_p.DE) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (CONG.DE, DLPH.N, MGA.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (LEA.N, DLPH.N, BWA.N, JCI.N, AXL.N, ALV.N). Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (MOSS.BO, MRTI.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (VLOF.PA). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.


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18 May 2015

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MOSS.BO, PLOF.PA, LEA.N, CONG.DE, EPED.PA, 6902.T, DLPH.N, MGA.N, BWA.N, JCI.N, AXL.N, VLOF.PA, ALV.N, MRTI.BO, VOWG_p.DE, DAIGn.DE) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (CONG.DE, VLOF.PA, ALV.N, VOWG_p.DE, DAIGn.DE). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (CONG.DE, EPED.PA, DLPH.N, AXL.N, VLOF.PA, VOWG_p.DE) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited...................................................................................................... Jatin Chawla ; Akshay Saxena For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.


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18 May 2015

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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