Motherson Sumi Systems - Annual Report Analysis - Prabhudas Lilladher

With over 120 manufacturing locations spread across 25 countries, Motherson Sumi Systems (MSSL) has established a strong presence globally across various product lines of the automotive component industry such as wiring harnesses, polymer processing, rear-view vision systems and integrated modules. With the acquisition of Peguform, the management is confident of reaching revenue of US$5bn in 2015 as against US$2.9bn currently. We expect better times ahead for MSSL, with the execution of new order book at Samvardhana Motherson Reflectec (SMR) and improvement in margins at Peguform over the next one year. Maintain 'Accumulate' with a TP of Rs218.

- Contribution of Polymer segment increased to 39% of MSSL's turnover: With the acquisition of Germany-based 'Peguform Group' which specializes in polymer interior and exterior systems for the global automotive market, the polymer division of the company transformed into a major global player catering to Tier-1 requirements. With 49 moulding facilities across the globe in India, Brazil, China, Germany, Portugal, South Africa, Spain and Czech Republic, the contribution of polymer division rose to 39% of MSSL's consolidated revenues in FY12. Currently, it is amongst the largest plastic component and module suppliers to the automotive industry across Europe and India.

- Samvardhana Motherson Peguform's (SMP's) top-line last year was €1.67bn with debt on its books at €204.5m: With annual sales of €1.67bn, SMP is now the largest subsidiary of MSSL on a full-year basis. Peguform's capex was at €32m for five months (Nov'11 to Mar'12). Debt on the books of Peguform is at €392m i.e. Rs27bn including €193m debt taken for acquisition by MSSL and Samvardhana Motherson Finance as of March 31, 2012. SMP's fixed assets stood at €328m, whereas total assets were at €819m. We have built in revenues at €2.0bn and EBITDA margin of 4.0% for Peguform in FY13E.

Revenue potential of €150m from SMR's second plant at Hungary: SMR has shown consistent improvement in performance and has recorded the highest ever annual sales of €860m, registering a growth in sales of 14%. SMR has started commercial production and supplies from its second plant in Hungary to support German OEMs. The plant has an installed capacity of 6m mirrors per annum and sale potential of €150m per annum. SMR is setting up new facilities in Brazil, Thailand, China and Pune (India) for mirror manufacturing and vertical integration, where production will commence in the coming year.

- Consolidated debt is at Rs46bn, with Rs4.7bn maturing in FY13E: Led by SMP's debt of Rs27bn (incl. acquisition debt of Rs13bn) and SMR's debt of Rs10bn, the overall debt increased by Rs34bn in FY12E. Out of the total debt of Rs46bn, Rs4.7bn is maturing in FY13E.

- Gross block increased by Rs56bn to Rs93bn: Capex on a consolidated basis stood at Rs11.6bn, whereas additions on account of acquisitions (mainly Peguform) stood at Rs44bn. Capex is likely to be in the range of Rs7-8bn in FY13E, with SMP's capex pegged at Rs3.8bn (~€55m), SMR's capex at Rs2bn (~€30m) and standalone capex likely to be at Rs2bn.

- SMR's and SMP's new orders of €1.3bn each to improve visibility: MSSL has won orders to the tune of €1.3bn (US$1.6bn) for Peguform; this is a very positive development as Peguform's quarterly run-rate is €470m. At SMR, similar kind of order to the tune of €1.35bn has been won. Both the above orders would be executed from FY15 onwards.

- Adequate disclosures on SMP's business model and financials - A positive: In our view, adequate disclosures on SMP's business model and financials in the Annual Report are likely to be welcomed by the investors. Further, any sustainable improvement in Peguform's performance would be a key catalyst for its stock price performance and would lead to a re-rating in the stock.

- Valuations attractive; Maintain 'Accumulate': We expect better times ahead for MSSL, with the execution of new order book at SMR and improvement in margins at Peguform over the next one year. At the CMP, the stock is trading at 11.7x FY13E and 10.1x FY14E earnings, which in our view, is attractive, given the 35.0% CAGR in earnings for FY12-FY14E. Hence, we maintain our 'Accumulate' call on the stock, with a target price of Rs218, based on 12.0x FY14E P/E.

Source : Equity Bulls

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