Stock Review: Motherson Sumi Systems (MSSL)

 

 

Domestic mutual funds have taken a keen interest in Motherson Sumi Systems (MSSL), an auto ancillary company. In the last one year (August 2009-July 2010) their interest in the company has more than quadrupled from Rs.135 crore to Rs.568 crore. The number of funds owning this stock has also gone up commensurately: from just 12 funds (August 2009) that had invested in the company the number has now reached 47 (July 2010). Bharat Forge is a distant second with just 26 funds having invested in it.

 

The business

MSSL is the flagship company of the Samvardhana Motherson Group. It was formed through a joint venture between Samvardhana Motherson Finance Limited (SMFL) and Sumitomo Wiring Systems (SWS) of Japan. MSSL is the leader in wire harnessing products (electrical distribution systems) with over 65 per cent share (according to India Infoline) in the domestic market. It is also a leading supplier of plastic components and modules to auto companies.

MSSL acquired Visiocorp's rear-view mirror business in March 2009. This has enabled it to become one of the world's leading automotive mirror manufacturers, with clients ranging from global car manufacturers like BMW and GM to domestic manufacturers like Maruti and M&M, among others.

 

Expanding in the midst of a downturn

In 2008 when the auto sector took a beating, the auto ancillary was hit even worse. Many of the companies shelved their expansion plans. While its peers scaled down their expansion plans, MSSL took a step forward by acquiring Visiocorp for $31.6 million. Visiocorp was one of the largest manufacturers of rear view mirrors in the world with almost a 25 per cent market share. MSSL was able to buy the target company (Visiocorp) at a favourable valuation because the latter was on the verge of bankruptcy. After the acquisition MSSL's sales have doubled and it is expected to comfortably reach its $1 billion sales target by 2010.

 

Valuation

In the first quarter of FY11, MSSL's consolidated topline grew by 32 per cent year-on-year and its bottomline by 439 per cent y-o-y. But quarter-on-quarter (q-o-q) numbers were more subdued due to adverse currency movements and higher input costs. According to analysts, between FY09 and FY12E the company is expected to post a revenue growth of 50 per cent and profit growth of 36 per cent. The near term concern about MSSL is that Visiocorp's acquisition might keep margins depressed. But the in the longer run, as synergies kick in margins are expected to improve. Being a global player MSSL's bottomline will now depend not only on the business cycles of developed markets but also on currency fluctuations.

 

According to an analyst at Angel Broking, at the current price level of Rs.176 the stock is trading at 15.8 times FY12E earnings. Historically, the stock has traded at an average level of 16 times its earnings, but due to the fundamental change in its business (improved return on equity in FY11-12E), analysts estimate that the stock is likely to trade at a 5 per cent premium over its historic price level. This would translate into a price of Rs.188-190. Hence investors may invest in this stock at the current levels.