Stock Review: Motherson Sumi

 

But At Current Price Stock Looks Expensive Against Average P/E Of 26 For Auto Part Cos

 

AUTO ancillary firm Motherson Sumi System Limited's (MSSL) stock has performed in line with the ET Auto Ancillary index. During the past six months, the stock has gained 14%, outperforming the 4% return of the benchmark Sensex.

   MSSL's stock movement reflects its robust financial performance and going by its June quarter numbers, the stock may be able to outperform the broader market. MSSL posted robust consolidated net profit growth during the quarter ended June 2010 backed by strong performance of its overseas subsidiary, besides revenue growth from domestic market.

   The company's consolidated sales increased 32% to Rs 1,858 crore led by over 50% growth in domestic sales as automobile demand zoomed. Overseas business that supplies rear view mirrors to carmakers also saw double-digit growth in revenues, which is a positive factor despite developed economies still struggling to come out of slowdown.

   With latest sales figures for automobiles in the month of July showing high growth, there is reasonable visibility for strong revenues in the quarter ending September 30. However, what is of concern for its future topline growth is the tapering rate of growth on a sequential basis. MSSL reported 4% decline in the revenues compared to the previous quarter. This is in sharp contrast to 8% sequential rise in sales in the March 10 quarter.

   The company is yet to take a big hit in margins due to rising commodity prices. MSSL's operating margins improved 500 basis points (bps) over the year-ago period due to lower increase in raw material cost, besides control in other operating expenses.

   MSSL is a leader in wire harnessing products with over 50% share in domestic market. The acquisition of Visiocorp's rear-view mirror business in March 2009 has catapulted it to the position of the largest global player in that segment.
   MSSL has further chalked out plans to invest Rs 400-500 crore to expand production capacity for harnessing wire in passenger cars.

   A part of its earnings growth has already been captured in its valuations. The stock's last traded market price of Rs 169 is 29 times its trailing twelve months of earnings. This is expensive when compared with the average P/E of 26 for the auto ancillary sector.

   Given this background, the extent of earnings growth in coming quarter will depend on the volume growth for auto sales and trend in commodity prices.