Stock Review: MOTHERSON Sumi System (MSSL)

With a reasonable dividend payout and high return on equity, Motherson Sumi System's stock looks attractive. Long-term investors looking for consistent returns can buy this stock

 

MOTHERSON Sumi System (MSSL)'s strategy to expand in overseas market inorganically has started paying returns. The country's largest auto ancillary company by revenue, which is also a top player in the domestic wire harnessing products, has posted strong earnings growth for the quarter ended December 2010.

   The positive outlook for both domestic and global automobiles demand will also provide upside to its revenue generation potential in the near term.With a reasonable dividend payout and high return on equity in the past five years, the company's stock looks attractive for investors with a moderate risk appetite and aiming for consistent returns.

BUSINESS:

MSSL was established in 1986 as a joint venture with Japan's Sumitomo group and has evolved from a single product company to a diversified portfolio of auto components. Although its portfolio is dominated by wire harnessing products and rear view mirrors, the firm also makes polymer processing and precision metal.

   With the acquisition of Visiocorp in 2009, its overall business has become more closely linked with international auto demand. The company derives more than half of sales from overseas market, led by Europe and followed by the Asian and US markets.

   Although its revenues are pegged to fortunes of many European vehicle makers, no single customer has more than 20% of the total orderbook.

FINANCIALS:

The company's consolidated net sales grew at a compounded annual growth rate of 24% over the last three years, with net profit rising 16% in the same period. A large part of the growth in topline has come from the Visiocorp acquisition jointly by the company along with a promoter's private held firm Samavardhana Motherson Refectec (SMR).

   MSSL earned 20% return on its equity in each of the last three years, higher than its peer group. The company has also paid regular dividend to its shareholders with average payout ratio of 30-40% in the same period. For the quarter ended December'10, MSSL's revenue grew 16% to Rs 2,083 crore while net profits grew 42% to Rs 106 crore over the year ago. The growth in the topline was lower compared to past years due to moderate performance of its international operations, even as domestic sales grew at a faster clip.

GROWTH TRIGGERS:

The company is focusing on its strategy to increase supply of content per car by diversifying its related product portfolio in the auto ancillary segments in the coming years. This is to strengthen its leadership in the existing segments and also tap onto new business that will help it widen the basket of earnings in the coming year. MSSL also plans to invest Rs 500 crore in 2011 to expand capacities and meet the growing demand. The company expects to more than triple its revenue to $5 billion by 2015 with 70% business coming from overseas markets.

VALUATIONS:

At the last traded market price of Rs 185, the scrip is trading at 18 times its consolidated profit for the past 12 months. We expect company to close FY'12 with consolidated net profit of Rs 430 crore and grow it to Rs 600 crore for the year ending March 2013.

   This means MSSL scrip is trading around 13 times the estimated forward earnings for FY'13. A higher return on equity and consistent dividend payout ratio makes MSSL a reasonable bet with stable earnings. So an investor can buy this stock with a horizon of two years.

CONCERNS:

MSSL derives over half of its revenues from international market with majority coming from European vehicle makers. Although top European automakers have seen a revival in demand in US besides strong exports to Asia and other emerging markets, demand in continental Europe is not yet strong enough due to continuing economic slowdown in much of the market excluding Germany. Any dip in demand in the US and flagging exports of its European clients can lead to demand fluctuation besides currency movement risk to consolidated earnings.