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| Clear view |
| Ram Prasad Sahu / Mumbai Nov 16, 2009, 00:00 IST |
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While Motherson Sumi’s prospects on the back of robust order flows are good, the recent spurt in its share price means that gains are factored in.
New orders received by its European subsidiary and improving growth prospects of the domestic passenger vehicle sector should ensure steady revenue stream over the next few years for auto components manufacturer, Motherson Sumi Systems (MSSL). The company manufactures wiring harnesses (used in vehicle lighting systems), plastic and metal components and rear view mirror systems (internal and external) at its 80 plants across the world. MSSL operates these plants through its 25 joint ventures and alliances. Its 51 per cent European subsidiary, Samvardhana Motherson Refletec (SMR) recently received two orders worth 700 million euros (Rs 4,760 crore) for the supply of mirrors.
Order flows
The company acquired the global rear view mirrors business of Visiocorp for $25 million in March, 2009 and was able to bag the large recent orders as earlier customers were hesitant to place orders with Visiocorp due to its financial condition. While the first order for Rs 3,400 crore won in August envisages the supply of rear view mirrors to car makers such as Volkswagen and BMW, the second order worth Rs 1,360 crore was announced in October and is of a similar nature.
The orders to be executed from 2011 and 2012 for a period of 5-7 years are expected to add about Rs 500 crore per year from 2010-11 to the revenues of the company. The financial troubles at Visiocorp had meant wafer thin margins, but MSSL has been able to improve it over the last few quarters.
Better margins
While revenues from the SMR business, which constitutes 60 per cent of MSSL’s turnover, grew 10 per cent, operating profit margins jumped 300 basis points (bps) to 4.63 per cent in the September 2009 quarter on a sequential basis. With financial restructuring, improving market penetration and cost control, the management expects this to increase to 8-10 per cent over the next one year. Though margins have improved, SMR made losses of Rs 44 crore and Rs 24 crore in June and September quarters, respectively. The company says that if the restructuring costs are not included (Rs 23 crore for the September), then SMR is making profits. With most restructuring done, SMR expects to post net profits in the current fiscal.
Riding on growth
More than 80-85 per cent of MSSL’s revenues come from the passenger vehicle business and with the growth in volumes experienced in the recent past and the planned launch of new small cars in the country, the company hopes to get a major chunk of the increased volumes. This is especially in segments where it dominates such as wiring harness and rear view mirrors business with domestic market shares of 65 per cent and 48 per cent, respectively.
The company is making investments in backward integration and expansion of its wiring harness business to include manufacture of wires, components and rubber parts. The company is expanding its polymer business to include large assemblies. The management believes that these expansions (current fiscal at Rs 300-Rs 400 crore) will help it present itself as an integrated full solutions provider rather than just a component supplier.
| ACQUISITION GAINS |
| in Rs crore |
SMR |
Consolidated |
| Q2, FY10 |
% chg |
Q2, FY10 |
% chg |
FY10E |
| Net sales |
973 |
10.3 |
1,587 |
13.0 |
6,300 |
| Domestic |
36 |
12.7 |
476 |
15.8 |
--- |
| Exports |
937 |
10.2 |
1,111 |
12.0 |
---- |
| Total* |
973 |
10.3 |
1,638 |
13.6 |
6,300 |
| Ebidta |
45 |
200.7 |
126 |
41.4 |
504 |
| Ebidta mar (%)** |
4.6 |
293.4 |
7.7 |
151.3 |
8.0 |
| PAT |
-24 |
------- |
15 |
36.4 |
208 |
| P/E (x) |
----- |
----- |
----- |
----- |
21.4 |
SMR: Samvardhana Motherson Reflectec
% change is q-o-q,* includes other operating income ,** % change in bps
Source: Company, E: analyst estimates |
Though there are many suppliers for the products it makes, the company believes that in its two major categories of wiring harness and rear view mirrors, the top three global majors (it has tie-ups or the relevant technologies) control more than 50 per cent share of the global market thus reducing the risk of a fall in orders due to new competition.
Outlook
Despite the concern on the exports front where the recovery is slow in segments such as the off-roaders which it supplies to overseas markets, MSSL expects the domestic passenger vehicle market to record growth rates of over 20 per cent. The turnaround in fortunes of the sector and the improved performance by the company is reflected in the September quarter results where MSSL recorded a 14 per cent growth in sales to Rs 1,587 crore and a 151 bps change in operating profit margins (OPM) to 7.7 per cent compared to the June 2009 quarter.
Expect revenues for the current fiscal to touch about Rs 6,000 crore with OPM at about 8 per cent. For MSSL, growth is likely to pick up faster in 2010-11 when the revenues from rear view mirrors business comes in and the company is able to put in place a supply arrangement, which will maximise captive consumption. The stock has jumped 17 per cent in the last one week (7 per cent of this came on Friday) and is currently trading close to its 52-week high of Rs 130. With the stock capturing most of the positive news flow, there is little upside from these levels with the scrip valued at 24 and 18 times its 2009-10 and 2010-11 estimated earnings, respectively.
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