Motherson Sumi: Integrating Diversity

Motherson Sumi (MSSL) has emerged from being a wiring harness manufacturer for domestic OEMs to a tier-I auto component global supplier to world’s largest OEMs. Over the last decade, the revenues for the company have seen a CAGR of 47.8%, the contribution of outside India revenues has jumped from 16% to 74% and global presence has increased from four countries to 25 countries. This has been done through effective organic and inorganic strategies implemented over the years.

Organically, the company has expanded capacities, increased tie-ups with OEMs, diversified product base and increased presence in export markets. Through the inorganic route, the company acquired Visiocorp (world’s leading rear view mirror manufacturer) in 2009 and turned it around. In 2011, MSSL acquired Peguform (world’s leading supplier of plastic moulded products). The company has also formed various JVs to improve its technical expertise, get entry into new markets and increase access to global OEMs.

This growth has been achieved with astute financial prudence and strict adherence to financial goals. In fact, MSSL is one of those rare companies which sets five-year goals for revenue growth, RoCE, exports and dividend payout and meets them consistently. While targets set in 2000 were successfully achieved by 2005 most of the targets set in 2005 were also closely met by 2010. For 2015, MSSL has set a target of achieving US$5bn revenues, 70% of which will be from exports, a RoCE of 40% and dividend payout of 40%.

Strong turnaround of Peguform would be critical for company’s bottomline growth going ahead. As Peguform contributes to ~50% of MSSL’s consolidated revenues, every 50bps improvement in its OPM will lead to ~3.5% increase in MSSL’s consolidated EPS. We expect MSSL’s consolidated earnings to more than double over FY12-14E. Higher debt is a concern but robust cash-flows will bring down the D/E ratio from 2.4x in FY12 to 1.8x in FY14E. At 13.8x FY14E P/E we find the risk reward favourable given 62% FY12-14 earnings CAGR, FY14E RoE of 29% and improving D/E ratio. We maintain our BUY recommendation with a 9-month price target of Rs187.