Standalone performance: strength across most parameters

MSSL witnessed a strong performance across most parameters on a standalone basis in FY13. While revenue growth of 20.5% was exemplary in a weak environment for auto sales in domestic as well as export markets, OPM expansion of 210bps yoy was a shot in the arm. B/S strength improved with net debt/equity falling to 0.5x from 0.7x, while RoE and RoCE jumped by 460bps and 1,100bps respectively. The company generated free cash flow of Rs3.3bn as compared to negative free cash flow in the past three years.

SMR and SMP performance improving

Capital efficiency improved at SMR, with its RoCE improving to 15.3% (+450 bps yoy). SMP’s operational cash flow showed remarkable improvement and the growth was attributed to 1) margin improvement and turnaround of loss making plants 2) Full year consolidation in FY13. SMR too saw improvement with free cash flows of a –ve €23mn in FY13 v/s –ve €87mn in FY12.

Synergies materializing for SMR and SMP

One of the key parameters for the successful integration of acquired businesses of Visiocorp (SMR) and Peguform (SMP) was in-sourcing from standalone entity. Conscious efforts were seen in FY13, with MSSL standalone supplying wiring harnesses worth Rs2,248mn (FY12-Rs1,465mn) to SMR. Management is hopeful of achieving similar synergies with SMP from H2 FY14 and is in discussion for in-sourcing in new deal wins. We note that SMP has ~65% of bought out components of which 50% are mainly wiring harnesses.

FY15E P/E of 11.8x attractive given FY13-15E PAT CAGR of 55%

We expect MSSL’s consolidated earnings to see earnings CAGR of 55% over FY13-15E. Higher debt is a concern but robust cash-flows will bring down the D/E ratio from 2.1x in FY13 to 1.1x in FY15E. At 11.8x FY15E P/E we find the risk reward favourable given 55% FY13-15E earnings CAGR, FY15E RoE of 34.1% and improving D/E ratio. We maintain our BUY recommendation with a 9-month price target of Rs255.