Buy Motherson Sumi - Auto Ancillaries - Mirroring growth - Elara Capital

• Motherson Sumi
• Rating : Buy
• Target Price : INR240
• Upside : 30%
• CMP : INR185 (as on 18 November 2010)

Mirroring growth

Products, presence in high-growth markets to provide growth

Motherson Sumi Systems' (MSSL) core focus on providing more content per car and its presence in high geographies such as India and China provide the basis for our strong conviction on its growth objectives. The fact that the company has significantly outperformed the domestic passenger car industry growth for several years in a row in its standalone operations is a testimony to the company's focus on continuously expanding its product portfolio. And despite the acquisition of Europe based Visiocorp, the company still derives nearly 70% of its revenues outside Europe.

SMR acquisition provides scale, technology and global tier-I status

MSSL's acquisition of Visiocorp (now SMR – Samvardhana Motherson Refletec) offers it the scale - the SMR business is roughly twice the size of the company's standalone operations, technology – SMR has over 600 patents registered against its name in rear-view technology, and global tier-I status – SMR is a preferred supplier to almost all global majors. Bought at a cheap valuations of Euro80mn (equity plus debt), the company has managed to quickly turnaround the unit.

New products, preferred status to help overtake Indian industry

MSSL's endeavour to be a one-stop-shop for domestic OEMs by continuously adding new products coupled with its preferred supplier status should help the company to outgrow the domestic passenger car industry, which we believe is very close to its inflexion point.

Focus on growth without compromising profitability

One philosophy that has served the company well over a period of time is its obsession with ROCEs. All new JVs, businesses, product lines and acquisitions that it has invested in, have always gone in with strict benchmarks on the return on investments. The company's growth target for 2015 at USD5bn revenues (at 40% ROCE) highlights this fact.

Valuation

Unrelenting focus on profitable growth to drive value; Buy

The company has a history of setting up challenging five year targets at certain level of profitability and has not deterred from these despite the global turmoil and the big-ticket acquisition of Visiocorp. Based on the past performance and our conviction on the management's ability, we firmly believe that 2015 targets are attainable. At 14.6x FY12E, the stock appears attractive given the earnings CAGR of 60% over FY10-12E. We initiate coverage with a 'Buy' recommendation and a target price of INR240 (19x FY12E).

Source : Equity Bulls

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