Motherson shared it’s Vision 2025 with investors whereby it targets to achieve $36 bn of revenues by FY 25.
This is almost 4.5x of Rs 60,000 crore ($8 bn) of revenues reported in FY20 i.e., an implied CAGR of about 35%.
Company’s revenue CAGR in previous 10, 5 and 3 yrs was 25%, 12% and 13% respectively. Given this track, it would be quite an achievement to achieve a 35% CAGR in the next 5 years and that too at a higher scale.
How does Company then plans to achieve this?
Some broader vision statements –
- Entering into new geographies, developing new technologies and addressing a wider mobility space (beyond PVs).
- Expansion into new divisions like medical, aerospace, logistics and IT.
Out of $36 bn, Company targets to achieve $9 bn through non-auto segment (almost as big as Company’s current auto business) and balance $27 bn in it’s core auto business. This also means it’s implied projected CAGR in auto business is 28% that again continues to be higher than it’s historical growth rates.
Routes to be followed to achieve these numbers – organic as well as inorganic growth opportunities.
Why did Motherson set such ambitious targets and are they achievable?
Company used to be a favourite of investors and the stock price delivered an excellent CAGR return of 34% from 2005 till 2018. However, after that the auto industry in general was going through a correction and given Motherson’s aggressive growth in the previous years, it had built up significant debt levels making investors jittery. The stock corrected from a high of Rs 254 in January 2018 to Rs 54 during Covid led correction in April 2020 i.e., by almost 79% !
It was therefore imperative for the management to try bring confidence of the investors back and in such situations there is nothing better than a 5 year kind of vision to try create a FOMO (Fear Of Missing Out). Many a times investors give benefit of doubt to the management based on their track record and especially if the stock was a good performer in the past.
As regards ability of the the Company to achieve the vision – only the time will tell. I would in my calculations at best assume a 12-18% kind of CAGR. In fact, I would tend to err on the side of greater caution for this company given the continued high debt levels that might further restrict it’s ability to fund the future growth.
Some key numbers for ready reference –
- Company had a debt of > Rs 13,000 crore on an equity base of Rs 10,945 crore as on March 31, 2020. Cash generated from operations during the year were Rs 6,352 crore. However, this should not be taken as benchmark as this amount was 10.5% of sales during the year whereas Motherson’s average Cash from operations/ Sales during the period 2010-2020 was 7.6%. Working capital and margins tend to fluctuate over years and hence average reflects better approximation for future.
- Company’s average Sales/ Net Fixed Assets during 2010-2020 was 3.86x. Assuming the same for future, $36bn of revenues would imply $9.3 bn or Rs70,000 crore of net fixed assets compared with Rs 21,000 crore as on March 31, 2020.