Motherson Sumi Systems – 3QFY2011 Result Update -Angel Broking

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Motherson Sumi Systems – 3QFY2011 Result Update

Angel Broking recommends a Neutral on Motherson Sumi Systems.

For 3QFY2011, Motherson Sumi Systems (MSSL) reported better-than-expected

results with a substantial jump in its bottom line. Growth was largely led by strong

performance by the domestic markets and expansion in operating margins.

However, in view of the rising commodity cost pressures, we revise our earnings

estimates marginally downwards and recommend Neutral on the stock.

Operating performance beats expectations: MSSL registered 18.6% yoy and 10%

qoq growth in net sales to `2,153cr on a consolidated basis, better than our

expectations of `2,020cr. Sales growth was driven by growth in domestic revenue,

which grew by robust ~62% yoy. However, muted performance of Samvardhana

Motherson Reflectec (SMR) restricted the top-line growth to a certain extent.

On the operating front, MSSL reported a 62bp yoy increase in EBITDA margins to

11.6%, higher than our expectation of 10.5%, despite higher input cost pressures.

Thus, net profit came in ahead of our estimates at `106.4cr, largely on account of

better-than-expected operating margin performance.

Outlook and valuation: We believe the new business from OEs such as Nissan

and Toyota and recovery in the overseas operations will help MSSL to deliver

better volume and revenue growth going ahead. However, we expect the

company to face margin pressures on account of the commodity cost inflation.

Hence, we revise our earnings estimates marginally downwards. We estimate

MSSL to post consolidated EPS of `8.7 for FY2011E and `11.1 for FY2012E.

At `183, MSSL is trading at 20.9x FY2011E and 16.5x FY2012E consolidated

earnings (fully diluted). We recommend Neutral on the stock.

Consolidated results ahead of estimates; adverse currency movement affects SMR

performance in rupee terms: MSSL reported 18.6% yoy growth in net sales during

3QFY2011 to `2,153cr (`1,815cr), which was ahead of our expectation by 6.6%.

Sales growth was driven by growth in domestic revenue, which grew by robust

~62% yoy and 14% qoq to `863cr. However, a marginal decline in revenue

outside India and a muted performance by SMR in rupee terms arrested

revenue growth during the quarter. Noticeably, SMR revenue in euro terms

increased by ~13% yoy during the quarter.

EBITDA margin up 62bp: On the operating front, the company reported a 62bp

yoy increase in EBITDA margins to 11.6%; better than our expectations of

10.5%. Raw-material costs during the quarter increased by 112bp yoy and

accounted for 63.5% of net sales v/s 62.4% in 3QFY2011, while staff cost and

other expenditure declined by 113bp and 87bp yoy respectively, which

supported the expansion in operating margins. However, lower-than-expected

margins of SMR at 6.0% (6.5% in 2QFY2011) arrested overall growth for the

quarter. Overall, the company recorded a 25.3% yoy jump in operating profit.

Net profit up 42.1%; beats estimates: Net profit for the quarter came in above our

expectation at `106.4cr, largely on account of improved performance at the

operating level. Further, lower tax outgo helped the company to a certain extent.

Standalone performance: On a standalone basis, MSSL reported robust top-line

growth of 70.1% yoy to `770.6cr (`453cr) on the back of 76.8% and 37.9% yoy

growth in the domestic and overseas revenue. On the operating front, margins

declined substantially by 591bp on a yoy basis due to a 143bp yoy increase in

raw-material cost and a decrease in gains on exchange differences. MSSL reported

net profit of `77.6cr during 3QFY2011 (`60cr profit in 3QFY2010). Further,

higher tax provision of 30.3% (27.1%) restricted net profit growth in 3QFY2011.

Segment-wise performance – Standalone

During the quarter, the auto segment reported an 81.4% yoy increase in sales to

`716cr (`394cr). Non-auto sales jumped by 23% yoy to `62cr (`51cr). Margin

expansion in the dominant auto segment further aided growth at the EBIT level.

The auto segment’s EBIT increased by a significant 152.2% yoy to `102cr (`40cr).

SMR reported qoq decline in sales: SMR reported a 13% yoy increase in net sales

to €185mn in 3QFY2011; however, adverse currency movement impacted the

growth in rupee terms. For 3QFY2011, operating margins declined by 50bp to

6.0% (6.5%).

Conference call – Key highlights

�� Management remains optimistic about the domestic business and has

indicated that the overseas market, especially Europe and the US, is showing

signs of revival.

�� SMR exhibited a muted performance because of adverse foreign exchange

movement; however, management has indicated that SMR performance is

expected to revive from FY2012 with execution of new orders. Currently, 46%

of SMR revenue is derived from Europe, 35–40% from Asia and the rest

from the US.

�� The company continues to focus on its strategy to increase content per car and

diversify its product portfolio along with its longstanding relationships with

existing and new clients.

�� Capital expenditure plans of ~`500cr for FY2011 remain on track.

�� The company maintained its target of achieving 8–10% EBITDA margin on the

SMR front and RoE in excess of 20%.

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.

MSSL 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 high. 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.

�� 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 €800mn 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 believe the new business from OEs such as Nissan and Toyota and recovery in
the overseas operations will help MSSL to deliver better volume and revenue
growth going ahead. However, we expect the company to face margin pressures
on account of the commodity cost inflation. Hence, we revise our earnings
estimates marginally downwards.
We estimate MSSL to post consolidated EPS of `8.7 for FY2011E and `11.1 for
FY2012E. At `183, MSSL is trading at 20.9x FY2011E and 16.5x FY2012E
consolidated earnings (fully diluted). We recommend Neutral on the stock.