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For 2QFY2011, Motherson Sumi Systems (MSSL) reported substantial jump in its
top line and bottom line, which was above our expectations. Growth was largely
due to yoy expansion in margins. We marginally revise our margin estimates to
factor in better performance in 2QFY2011. Thus, we recommend Accumulate on
the stock on every correction.
Mixed-bag results: MSSL registered 19.4% yoy growth in net sales to `1,958cr
(`1,639cr) on a consolidated basis, marginally above our expectation. On the
operating front, MSSL reported a 411bp yoy increase in EBITDA margins to
10.6%, 79bp above our expectation of 9.9%. Favourable foreign currency
movement supported margins to a certain extent. Thus, net profit came in above
our expectation at `86cr, largely on account of better-than-expected operating
margin performance.
Outlook and valuation: We estimate MSSL to post consolidated EPS of `8.7 for
FY2011E and `11.6 for FY2012E. At the CMP of `183, the stock is trading 21x
FY2011E and 15.8x FY2012E consolidated earnings (fully diluted). We maintain
Accumulate on the stock with a Target Price of `195, at which level the stock
would trade at 16.8x FY2012E earnings. We are valuing the company at 5%
premium to its historical average of 16x due to estimated higher business RoEs in
FY2011–12E. We believe the new business from OEs like Nissan and Toyota and
recovery in the overseas operations will help MSSL to deliver better performance
going forward, which would result in the stock generating higher returns over the
next 2–3 years. Moreover, MSSL’s consistent and strong execution track record
implies further scope of re-rating.
Consolidated results mixed-bag; lower-than-expected performance of SMR arrests
growth: For 2QFY2011, MSSL registered 19.4% yoy growth in net sales to
`1,958cr (`1,639cr), which was marginally above our expectation by 1%. Sales
growth was largely aided by the ~60% yoy jump in domestic market revenue at
`761cr and ~4% yoy increase in revenue from outside India at `1,156cr.
However, the sequential decline in SMR revenue arrested revenue growth during
the quarter.
Operating profit margin up 411bp: On the operating front, MSSL reported a
411bp yoy increase in EBITDA margin to 10.6%, better than our expectation of
9.9%. Operating margin came in better due to favourable currency impact.
Excluding the currency impact, EBITDA margin was broadly in line with our
estimate at 9.8%. However, lower-than-expected margins of SMR at 6.5% (7.2% in
1QFY2011) arrested overall growth for the quarter. Staff and other expenditure,
however, fell by 50bp qoq and 312bp yoy in 2QFY2011, aided by better
operating leverage. Overall, the company recorded 94.4% yoy jump in
operating profit.
Thus, net profit for the quarter came in above our expectation at `86cr (`15cr in
2QFY2010), largely on account of better-than-expected performance in operating
margin.
Standalone performance: On a standalone basis too, the company reported
robust top-line growth of 67.2% yoy to `669cr (`400cr), and an 118% yoy increase
in operating profit.
OPM, excluding the exchange differences, stood higher at 16.3% (12.5%).
Raw-material and staff costs registered a decline on a yoy basis, along with other
expenditure declining by about 75bp yoy. MSSL reported net profit of `65.9cr
during 2QFY2011 (`29.5cr profit in 2QFY2010). Further, higher tax provision of
27.5% (22.9%) restricted net profit growth in 2QFY2011.
Segment-wise performance - Standalone
The auto segment reported 81.5% yoy increase in sales to `614cr (`338cr), while
non-auto sales jumped by 26.1% yoy to `61cr (`49cr) in 2QFY2011. Margin
expansion in the dominant auto segment further aided growth at the EBIT level.
The auto segment’s EBIT increased by 134% yoy to `79cr (`34cr), while the
non-auto segment’s EBIT spiked to `8cr (`7.4cr), registering growth of 8.1% yoy
during the quarter.
SMR reported qoq decline in sales: SMR posted a 6.8% yoy increase in net sales,
with OPM of 6.5% (4.6%) and net profit of `6.9cr (loss of `10.5cr in 2QFY2010).
Conference call – Key highlights
Management remains optimistic about the domestic business, while
maintaining that the overseas market (especially Europe and US) is picking up
and would be reflected in numbers going forward.
Domestic consolidated revenues were up 60% during the quarter with 62%
increase in wiring harness business and ~58% growth in the polymer
business. The growth in the revenues is mainly volume driven (~60% growth in
volumes).
SMR exhibited a seasonal performance in 2QFY2011 (due to holidays in
European countries). Management has indicated that SMR performance is
expected to revive from FY2011 with execution of new orders. Currently, 46%
of SMR revenue is derived from Europe, 35–40% from Asia and rest from U.S.
The company continues to focus on its strategy to increase the content per car
and diversify its product portfolio along with its longstanding relationship with
existing and new clients.
Capital expenditure plans for FY2011 is around `500cr, with `250cr incurred
until 1HFY2011.
The company maintains its target of achieving 8–10% EBITDA margin for
FY2011 on the SMR front. The company stands by its resolve to improve
EBITDA and to generate RoCE of ~40% by FY2015.
Investment arguments
Maintaining leadership position: MSSL is a leader in wire harnessing,
controlling over 65% of the domestic passenger vehicle (PV) market and
around 48% market share in the domestic rear view mirror market. The
company is now focusing on supply of higher level assemblies and modules
(the company is a key supplier for the recently launched Ford Figo), where
margins are comparatively higher. MSSL is also increasing its content per car
in a bid to diversify its product portfolio. The company is laying emphasis on
its global product plan (GPP) where it is looking at setting up joint ventures
with leading Tier-I suppliers to upgrade its technology base and bolster its
clientele as well.
SMR turns positive at PAT level in FY2010: During FY2009, MSSL acquired a
global company in the business of rear view mirrors from Visiocorp PLC, now
known as Samvardhana Motherson Reflectec (SMR). Post the recent
acquisition, the company now controls around 25% of the global rear view
mirror market. SMR has shown a substantial expansion in margins in the last
2–3 quarters and has bagged potential orders of about Euro700mn to be
supplied over the life of the new models that would be launched in 2011.
MSSL is gradually progressing towards achieving its target of around 8%
EBITDA in FY2011E, at the SMR front. The company stands by its resolve to
improve EBITDA and generate good RoCE.
Outlook and valuation
We expect MSSL’s consolidated net sales to register a CAGR of 16.4% over
FY2010–12E, aided by its strong order book position. We marginally revise our
margin estimates to factor in better performance in 2QFY2011.
At the CMP of `183, the stock is trading 21x FY2011E and 15.8x FY2012E
consolidated earnings (fully diluted). We maintain Accumulate on the stock with a
Target Price of `195, at which level the stock would trade at 16.8x FY2012E
earnings. We are valuing the company at 5% premium to its historical average of
16x due to estimated higher business RoEs in FY2011–12E. We believe the new
business from OEs like Nissan and Toyota and recovery in the overseas operations
will help the company to deliver better performance going forward, which would
result the stock in generating higher returns over the next 2–3 years. Moreover, the
company’s consistent and strong execution track record implies further scope of
re-rating. Thus, we recommend Accumulate on the stock on every correction.
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