Reflecting Growth - Motherson Sumi Systems

There are very few companies who challenge themselves by setting ambitious targets and then go ahead and achieve them. Motherson Sumi Systems (Motherson), an auto ancillary player, is one such firm. Whether it is attaining the aim of becoming a billion dollar company with 60 per cent of sales outside India, contribution from a single customer not exceeding 20 per cent, maintaining a ROCE of 40 per cent and a shifting dividend policy of 40 per cent to its consolidated profits by 2010, the company has done it all. Putting in place its own five-year plan, the firm has continued to set higher benchmarks for itself and has now drawn up an ambitious vision for 2015.

Established in 1986, Motherson is one of the largest auto ancillary players in India today. The company operates through four segments, namely wire harness, polymer components, mirrors and rubber/metal components. The company derives 95 per cent of its total revenues from the auto sector while the balance 5 per cent is from non-automotive revenues. The game-changing factor for Motherson came in March 2009 when the company went ahead and acquired Visiocorp now renamed as Samvardhana Motherson Reflectec (Samvardhana) for a cash consideration of Euro 25 million (funded through internal accruals) and allotment of 5 per cent consideration shares having face value of Euro 1.5 million. Explains Pankaj Mital, COO, Motherson, “Visiocorp acquisition was done at the behest of our customers and we were the only company that were in discussion with the hedge funds who owned the company. It was a distress sale and in a distress sale it is only negotiation that happens.”

It should be noted that Visiocorp (now called Samvardhana) is one of the top three manufacturers of rear view mirrors in the world. On a standalone basis, the company’s revenues for FY10 stood at Rs 1758 crore while on a consolidated basis, the total revenues were a massive Rs 6702 crore.As far as the revenue break-up is concerned, on a consolidated basis 62 per cent is derived from the mirror division, 27 per cent is wiring harness, 8 per cent is the polymer component and the balance 3 per cent is rubber/metal components.

There are various reasons why we believe Motherson will do well in the coming years. Firstly, the acquisition of Visiocorp or now Samvardhana was the turning point for Motherson as it truly put the company on the global map and transformed it to a Tier I supplier to the global auto industry. This also means the company would enjoy better pricing power, leading to better margins. In FY10, Samvardhana contributed an overall revenue of Rs 4158 crore to Motherson’s total topline. What’s more, Samvardhan’s revenues are fairly de-risked with 45-46 per cent of revenues coming from Europe, 35-40 per cent from Asia and 15-20 per cent from the US and Americas. [PAGE BREAK]

The firm has an installed capacity of 40 million mirrors per annum and commands a global market share of 22 per cent. Thirdly, the company has an envious list of clients that includes almost all the global big daddies of the auto industry including the likes of Audi, BMW, Bentley, Ferrari, Mercedes-Benz, Ford, GMC, Porsche and Rolls-Royce, amongst others. What’s more to Motherson is that with Samvardhana turning into profits in first year post-acquisition, its contribution to consolidated profits will only increase going forward. Mital adds, “Factors such as huge existing orders from the car makers, new additions to the order book, continuous strengthening of the automobile markets globally and new product development, all this will fuel Samvardhana growth going forward.” The best part is the continued support given by Samvardhana’s clients. This could be seen from the new orders worth Euro 800 million from various global OEMs, including the likes of Volkswagen and BMW. These orders would be for the supply of rear view mirrors over the life of their new models, which would be launched from FY11 onwards.

The other benefit Samvardhana will bring to Motherson is open access to its market globally. This will allow Motherson to position its other products worldwide, thus enabling it to become a one-stop solution for clients. Mital explains, “Samvardhana acquisition does give us a very big edge as we now have facilities much closer where the global car markers, enabling better support to customers globally and facilitating much faster growth for other products of the group.” Another factor that goes in Motherson’s favour is the strong growth witnessed in the Indian automobile industry, which rose by 32 per cent in H1FY11. This growth momentum should create ample demand for Motherson’s products. The revival of the global auto industry will also provide a fillip to Motherson’s international expansion. Mital says, “Europe and the US auto markets are performing pretty well according to our expectations. The demand is there and even after the withdrawal of the various schemes launched by the government, the market has stabilised and stood on its own.”

Currently, 70 per cent of the consolidated revenues are from the overseas market. That apart, the company is consistently undergoing capacity expansions to strengthen its growth further. Mital explains, “This year capex is around Rs 500 crore, of which Rs 300 crore is in India and  Rs 200 crore would be overseas. This capex is across various divisions and being an OEM supplier we have to be well prepared taking into consideration their future requirements.” During FY10, several new facilities were commissioned at Noida, Pune, Lucknow, Pathrej and Chennai. They should give a good boost to the firm’s revenues from FY11 onwards. Additionally, Motherson isn’t averse to growing inorganically and has been consistently acquiring businesses (around 8 so far) since 2002. [PAGE BREAK]

They have given the company access to additional markets and increased their geographic presence. On the financial front, for H1FY11 Motherson’s revenue increased 25 per cent to Rs 3862.51 crore (Rs 3081.27 crore), while profits rose 459.51 per cent to Rs 145.53 crore (Rs 26.01 crore) during the same period. For FY11, we expect Motherson to post overall revenues of around Rs 7650-7750 crore, while profits are slated to be approximately Rs 280-290 crore. At these estimates, Motherson is available at a P/E of 24x while on the EV/EBIDTA basis, it is available at 9x. Though there is no similar listed peer for comparing Motherson’s valuations, these look a bit steep when compared to the broader market and hence it limits a good upside for the scrip from current levels. Having said that we believe one can still buy the scrip at current levels with one year target of Rs 230.