Motherson Sumi Systems: Buy from Jain Matrix

Motherson Sumi Systems is an Indian auto ancillary firm that is growing rapidly through global acquisitions. It cut its teeth as a Maruti Suzuki vendor, then expanded capabilities, product lines and customer base. In recent years it bought undervalued global plants and rapidly turned them around, and now has operations in 25 countries, supplying to all major auto firms. Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years. The current high debt should be reduced soon to comfortable levels. MSS is a BUY at current levels.

Description and Profile

• Motherson Sumi Systems (MSS) is a Noida UP based Auto Ancillary firm operating in 25 countries.
• FY13 consolidated Revenues were Rs 25,200 cr, EBITDA 1,798 cr and Net Profit 451 cr.
• The flagship of the Samvardhana Motherson group, MSS consolidates business with Samvardhana Motherson Peguform (SMP) and Samvardhana Motherson Reflectec (SMR), owns 51% of both. MSS is a JV with Sumitomo Wiring Systems (Japan), and has JVs with Japanese, German and U.K. firms.
• Vivek Chand Sehgal is the Vice Chairman of MSS. The shareholding pattern in % is: Promoters is 65.6% (Indian 40 & Foreign 25.6) FIIs 17.2, DIIs 7.8, Individuals (Retail/HNI) 5.8, and Others 3.6%.

Business Notes

Fig 1 – Business Segments

• MSS is a major supplier of components, modules and systems to the auto industry globally. These include Polymer Components, Mirrors, Wiring Harness and Rubber & Metal products. Fig 1.
• The diversified customer base includes most dominant Auto firms. Fig 2.

Fig 2 – Excellent Customer Base

• The company offers products in both automotive and non-automotive segments. However non-automotive is very small at about 2%.
• In non-automotive segment, the company is the largest supplier to industrial forklifts and material handling manufacturers. It also manufactures and assembles water purifier for HUL in India.

Strategies and Events

• MSS has strong customer relationships and is focused on increasing its Content Per Car. It is mostly the OEM supplier, and this simplifies the Auto company’s vendor management process.
• Revenues from overseas operations in MSS consolidated grew to 83% (FY13) from 66% (FY11). MSS expanded its global operations and acquired undervalued assets, with 9 acquisitions in 10 years.
• Post-acquisition of loss making auto ancilliary assets, the MSS management was extremely focused on a plant by plant turnaround, which has been the main reason for MSS success.
• But the international focus hasn’t hurt the company’s local operations, which are growing fast and setting up new plants. MSS is a key supplier to Hyundai, Maruti Suzuki, M&M and Tata Motors. The domestic auto sector slump did not affect it as exports posted a 25% growth.
• MSS has an excellent de-risking strategy – the growth should happen such that no Single Customer, Single Country or Single Commodity should constitute more than 15% of the turnover.
• According to the plan of MSS, by 2015 the company will become a $5b company, increase the global presence to 27 countries, and achieve a ROCE of 40%. It is already close to achieving many of these targets.
• In May’12, an IPO of Samvardhana Motherson Finance, a group firm, was withdrawn due to poor investor response. MSS is the only India listed firm from this group.

Stock Evaluation, Performance and Returns

The price history of MSS is mapped here.

• After the 2008 economic slowdown MSS share price fell to a low of 25. It has been on a steady recovery path to a recent Feb 2014 price of 231.
• In 5 years, the share price has appreciated at 50% CAGR, providing excellent returns to investors.
• Three bonus issues in the last 7 years (and 4 in last 10) have also accelerated the returns.

Fig 3 – Quarterly Sales, Margins and EPS

• Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years.
• The quarterly financials of MSS Fig 3, reveal periodic surges in revenues, due to new acquisitions. In 2009, Visiocorp became a part of MSS (renamed SMR). In 2011, Peguform was acquired (SMP).
• Margins are on recovery path, along with a massive growth in volumes, reflecting in the adjusted EPS.
• MSS has been investing heavily in its operations, Fig 4, even so it is enjoying good Cash flow from Operation, and a positive Free Cash Flow.
• Dividends have steadily increased over the last 6 years. Including bonuses, it is up almost 3.5 times.

Fig 4 – Cash Flow & Dividend – Standalone

 Fig 5 – Price and PE movements

• The Price and PE chart, Fig 5, reveals the variations in PE values along with the steady share price appreciation. In the last 5 years, the PE ratio has been in a range of 15-35 times, while this historical average is 25 times.
• Today it is at 29 times, on the upper half of this range.
• In the Price and EPS chart, Fig 6, we can see a sharp surge in EPS over the last 2 years. The share price has also been in line with this. The EPS growing within a channel represented by two lines.

Fig 6 – Price and EPS movements

• Total debt is Rs 4071 cr, and D/E high at 1.78. However this is a spike, required to acquire firms, and is expected to be reduced to manageable levels in the next 1-2 years.
• Return on Capital Employed is 17.4% while Return on Net Worth is 19.4%. These are good ratios.
• PE is 29.6 currently, and PEG based on PE and EPS growth is at 0.98 – indicates a fairly valued stock.

Benchmarking

In the benchmarking exercise we compare MSS with industry plays like Bharat Forge, Bosch and Exide.

Fig 7 – Industry Benchmarking

• With its acquisitions in the recent past, MSS leads in terms of revenue growth. The cost of acquisitions reflects in the high debt.
• With good cash management, the revenue growth should soon reflect on the profits and debt reduction. Good inventory turnover means factory assets are being well utilized.

Financial Estimate

The business financials are projected in Fig 8.

Fig 8 – Financial Projections

• In the next 2-3 years, MSS will consolidate its acquisitions, steady the new operations, grow business volumes and repay debt from cash flows.
• The recent revenues jumps will soon translate into profit increases.
• MSS forex revenues is a plus as the INR over 2-3 years will be stable or may even depreciate a little.

Risks

• Current expectations are that the domestic market’s current slowdown will end in 1-2 quarters, but if it extends for a longer period, domestic investments will be affected.
• Foreign Exchange volatility. MSS has 83% of revenues in non INR currencies. A significant portion of debt is also in Forex. We can see large unpredictable quarterly gains and losses due to this.
• Economic environment needs to be stable in key markets of USA, UK, Europe, China and India.
• Complex corporate structure of group with many cross holdings, JVs and subsidiaries across firms.

Opinion, Outlook and Recommendation

• The global automobile market recovered significantly in 2013 from the impact of the global financial crisis, buoyed by economic recovery and pent-up demand in the U.S. and Asia.
• The automobile sector in India has many unique advantages – good local small car demand and production, export momentum, presence of many global names and design skills. Clearly the auto ancilliary industry also incorporates all of these.
• MSS is a visible, dynamic player in auto ancillaries. They started as a vendor for Maruti Suzuki, and built capability, corporate maturity and finally global growth from this strong base.
• By all indications, MSS is a successful Indian auto ancillary firm that has made bold moves to grow internationally, acquire technologies, listen to their customers and manage manufacturing well.
• While the PE at 29.6 appears high, we expect profits growth to exceed this over the next 2-3 years
• MSS is a buy with a Mar 2016 price target of 451, a 104% appreciation from today (25 Feb’14).

Source: http://jainmatrix.com/2014/02/26/blockbuster/