September 21, 2012 Motherson Sumi Systems Limited An emerging global auto-ancillary giant

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1 Motherson Sumi Systems Limited An emerging global auto-ancillary giant September 21, 2012

2 Recommendation CMP (Rs.) Sector Stock Details BSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo (Rs) Avg. Volume BSE (Monthly) Face Value (Rs) Dividend (FY 12) Shares o/s (Crs) BUY Rs.220 Auto-ancillary MSS IN /129 97, % Relative Performance 1Mth 6Mth 1Yr MSS(%) NIFTY(%) Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 INDUSIND BANK Shareholding Pattern as of 30 June 2012 NSE S&P CNX NIFTY INDEX Promoters Holding 65.6% Institutional (Incl. FII) 22.2% Corporate Bodies 5.7% Public & others 6.5% Vishal Jajoo Sr. Research Analyst ( ) id: Snapshot With 124 manufacturing facilities spread across 25 countries, Motherson Sumi Systems Limited (MSSL) is emerging as a one-stop-shop for OEMs. Investment Rationale Strong performance from acquisitions: The management of MSSL has an impeccable track record with regard to turning around acquisitions (Visiocorp, now SMR) in the past. We are confident of the fact that the management will replicate the same performance in case of SMP also, going forward ( initial signs of improvement seen with EBITDA margin improving from 1.6 per cent to 4.2 per cent on a q-o-q basis) Moving towards vision 2015: MSSL is gradually inching towards vision 2015 and has performed on all parameters except RoCE. We expect the RoCE to improve over the next 2-year period on the back of signification traction from the acquired company, Peguform (now SMP). Growth not at the cost of equity: MSSL has grown its revenues at a CAGR of more than 35 per cent over the last decade but the corresponding equity dilution during this period stands at ~10 per cent only. Investor-friendly policies: MSSL not only has an excellent dividendpay-out ratio but also has a history of rewarding shareholders in terms of bonus issues at regular intervals. The present price is cumbonus (1:2, ex-date: October 3, 2012). Valuation & Recommendation We expect MSSL to post net sales of Rs crore in FY 13E with a PAT of Rs crore. This translates into an EPS of Rs.9.7. The company should post net sales of Rs crore in FY 14E. This, coupled with an improvement in overall margins should lead to a PAT figure of Rs crore, translating into an EPS of Rs.17. At the present price, the stock is available at less than 13x FY 14E earnings. We recommend a BUY with a target price of Rs.240 over the next six months. Particulars (Rs Cr) Net Sales Growth EBITDA PAT EPS P/E (x) FY' % FY' % FY' % FY'13E % FY'14E % (Source: Company, Nirmal Bang Research) 2 P a g e

3 INVESTMENT RATIONALE One-stop-shop for OEMS with improving product range Emerging as a dominant player in the auto-ancillary segment With 124 manufacturing facilities spread across 25 countries, Motherson Sumi Systems Limited (MSSL) is emerging as a one-stop-shop for OEMs. MSSL has established a strong presence globally across various product lines of the automotive component industry such as wiring harnesses, polymer processing, rear-view mirror systems and integrated modules. MSSL s consolidated sales grew 80 per cent in FY 12 with sales outside India growing 121 per cent y-o-y. The company s strong track record in deriving synergies out of acquisitions has paid-off well in the past. We expect this trend to continue in future also. Exhibit 1: New plants added during the year Business vertical Facilities added Wiring Harnesses 7 Wires 4 Rearview Mirrors 5 Polymers 4 Metal Machining 4 Total 24 (Source: Company, Nirmal Bang Research) Exhibit 2: Company strategy Particulars Access to new products Description With new acquisitions, the company is focusing on providing more products Access to new markets MSSL gets access to new markets (as well as customers) Increasing component The company is now supplying a wide range of auto components and accessories per car thereby focusing on improving revenues/car (Source: Nirmal Bang Research) Impeccable track record of the management The management of MSSL has an impeccable track record with regard to generating synergies out of acquisitions. The company had acquired Visiocorp (now SMR) during 2009 and turned around the same during the very first year of acquisition. Under the able management team at MSSL, Visiocorp registered a phenomenal improvement in margins from 1.6 per cent to 6 per cent plus levels. 3 P a g e

4 We expect this trend to continue going forward also with the benefits from the acquisition of Peguform (now SMP). SMP is a manufacturer of dashboards, door trims, bumpers and plastic modules and the company derives a significant portion of its revenues from the Volkswagen group. SMP registered a phenomenal improvement in EBITDA margins over the last two quarters. The EBITDA margins shot up from 1.6 per cent in Q4FY 12 to 4.2 per cent in Q1FY 13. We expect this improvement in margins to continue further, leading to an improvement in overall profits. SMR has close to 600 registered patents and 200 patents are pending. Remarkable progress with regard to deriving synergies out of acquisitions MSSL has completed nine acquisitions over the last decade with SMP being the largest in terms of value. The company features among the handful examples which have managed to do very well on the back of acquisitions. MSSL follows a differentiated strategy with regard to acquisitions MSSL s decisions with regard to acquisitions are influenced by the customers Rather than trying to derive benefits by shifting the manufacturing base to Indian operations and generating higher margins, the company focuses on the acquired entity itself SMR has a 20 per cent market share of global passenger cars in the rear view mirror segment. We expect the SMR and SMP to be significant growth drivers going forward in an otherwise lackluster market. Relatively much less impacted by the weakness in automobile sales figure MSSL s strategy of focusing on higher revenues per car has helped the company report excellent set of numbers in relatively weak market conditions. Considering the higher reliance on developed economies and the weak market conditions, the company has come up with excellent set of numbers on the back of relatively better set of sales being reported by the company s clients as well as focus on higher revenues per car. Effective utilization of resources MSSL s strategy has been to not just improve the earnings without diluting the capital significantly. This can be substantiated from the fact that the company s turnover has increased more than 30x over the last decade but the corresponding dilution in equity (by raising funds) is just 10 per cent during the corresponding period! The equity structure of the company since the public issue has been given below in a tabular form: 4 P a g e

5 Exhibit 3: Equity structure since listing Particulars Particulars Equity (Rs. crore) March 1994 Public issue 5.8 March 1996 Rights issue 6.9 August 2007 Rewarded shareholders thrice with bonus Issue in the ratio of 1:2 (refer exhibit 5 below) 35.2 June 2010 Shares issued against FCCB conversion 38.7 April 2012 Scheme of arrangement/amalgamation 39.2 (Source: Capitaline, Nirmal Bang Research) The company s efficiency can be gauged from the high return ratios that it earns from its investments. Barring the years in which the company has done big ticket acquisitions, the return ratios have eventually improved significantly. The company has set a five-year target to achieve an improvement in RoCE with strong focus on SMP. Brilliant track record in meeting the guidance The company has a brilliant track record in meeting the guidance. The management sets a fiveyear plan and has achieved/overachieved in the past two plans. The company is on track to meet the guidance of a turnover of USD5 billion by 2015 (present figure: USD2.9 billion). The marginal area of concern is the low RoCE (at 14 per cent) compared to 40 per cent. However, the management has more than two years to reach the targeted RoCE level and the sharp swing in the EBITDA margins of SMP would be a game-changer for the company going forward. Exhibit 4: Vision 2015 Particulars Target (FY 15) Achieved ( FY 12) Sales USD5 bn USD2.9 bn Countries of presence Dividend pay-out 40 per cent of consolidated 40 per cent of consolidated RoCE 40 per cent 14 per cent (Source: Company) Excellent wealth creator for investors The company has a consistent dividend pay-out policy. The dividend pay-out ratio averaged at 31.3 per cent since till date. The pay-out ratio for FY 12 stood at 40 per cent. The company has generated returns at a CAGR of 55.2 per cent over the last decade for its 5 P a g e

6 investors. MSSL has a track record of rewarding its shareholders in terms of bonus issues at regular intervals. A brief description of same has been given below in a tabular form: Exhibit 5: Bonus issue at regular intervals Particulars Bonus Ratio Equity (Rs. crore) December : November : February : August : (Source: Company, NB Research) At the present price, the stock is available cum-bonus in the ratio of 1:2(ex-date: October 3, 2012). Significant increase in FII holding in the stock There has been a consistent increase in FII holding in the stock over the last few years. This again substantiates the confidence which large funds, especially foreign ones, have in the company. Particulars March 2008 March 2009 March 2010 Mach 2011 March 2012 Present figure FII Holding (%) % (Source: Capitaline) COMPANY BACKGROUND Motherson Sumi Systems was incorporated in the year 1986 as a joint venture between Samvardhana Motherson Finance Limited ( SMFL, Sumitomo Wiring Systems and Sojitz Corporation, Japan. The company was incorporated with the objective of manufacturing integrated wiring harnesses, wires, high tension cords and components for integrated wiring harnesses including plastic and metal parts. Motherson Sumi is a world-class supplier of high performance components, modules and systems. The company is the largest supplier of EDS to the Indian automotive industry. It offers a range of products in the field of electrical distribution systems, plastic moulding, elastomers processing, tooling, metal machining, automotive rear view mirrors and integrated modules. The company also provides a range of services from design to manufacturing, supplies to logistics to its customers in India and abroad. 6 P a g e

7 RISKS & CONCERNS Prolonged slowdown in the automobile industry across the globe Automobile industry is a leading indicator of the economy. The same is yet to recover from the financial crisis of Yet, MSSL has performed well on the back of effectively utilization of resources, focusing on margins and turning around acquired entities inspite of the turbulent economic conditions. However, the company mainly caters to the OEM segment. A prolonged slowdown in the automobile segment across the globe does not augur well for the company. Integration issues in acquired entity The company s RoCE is subdued at 14 per cent and the management s target is to improve the same to 40 per cent by This requires effective utilization of existing resources leading to high focus on the margins. Considering the management s past track record of achieving what it had guided for, the expectations are high and any disappointment on that front shall not be taken by the market lightly. Managing the scale and the size of operations The company has grown more than 30x in revenue terms over the last decade. The product range, manufacturing facilities (124) and geographies (20 countries) have grown immensely over the last few years. Effectively managing the large scale of operations would be something that has to be monitored closely. VALUATION AND RECOMMENDATION We expect MSSL to post net sales of Rs crore in FY 13E with a PAT of Rs crore. This translates into an EPS of Rs.9.7. The company should post net sales of Rs crore in FY 14E. This, coupled with an improvement in overall margins should lead to a PAT figure of Rs crore, translating into an EPS of Rs.17. At the present price, the stock is available at less than 13x FY 14E earnings. We recommend a BUY with a target price of Rs.240 over the next six months. 7 P a g e

8 FINANCIALS Profit & Loss Account FY'10 FY'11 FY'12 FY'13E FY'14E Balance Sheet ( Rs. Cr.) FY'10 FY'11 FY'12 FY'13E FY'14E Net Sales Equity Capital Other Income Reserves & Surplus Total Income Networth Raw material expenses Secured loans Employee Expenses Unsecured loans Other expenses Total loan funds Total Expenses Total Liabilities PBIDT Net Block Depreciation Inventories Interest Sundry Debtors Profit before tax Cash & Bank Taxes Loans & Advances Minority Interest/others Current Assets Net Profit Less: Provisions & liabilities Quarterly results Jun.11 Sep.11 Dec.11 Mar.12 Jun Net Sales Total Assets Other Income Cash flow (Rs. Cr.) FY'10 FY'11 FY'12 FY'13E FY'14E Total Income Profit before tax ,054.9 Total Expenses Net cash from operations , ,627.0 PBIDT Net cash from investments (372.9) (805.4) (1,874.1) (809.0) -810 Interest Net cash from financing activities ,380.0 (509.0) -809 Note Depreciation Net change in cash (48.0) 8.0 Taxes Minority Interest PAT Profitability Ratios FY'10 FY'11 FY'12 FY'13E FY'14E Valuation Ratios FY'10 FY'11 FY'12 FY'13E FY'14E EBITDA margin 9.9% 11.3% 6.5% 6.8% 7.6% Marketcap/Sales PAT margin 3.7% 4.7% 1.7% 1.5% 2.4% EPS Growth Ratios FY'10 FY'11 FY'12E FY'13E FY'14E P/E Net Sales growth 158.2% 23.1% 79.1% 72.9% 7.9% EBITDA growth 71.1% 40.4% 2.2% 81.7% 20.3% PAT growth 149.3% 54.6% -33.7% 48.6% 76.6% 8 P a g e

9 Note Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 9 P a g e