Motherson Sumi Systems Ltd has gained 121% this year, outperforming the BSE Auto index that has gained 39%, despite high interest rates and the slowdown that has hit the auto sector.
Will Motherson continue to remain the contrarian play in the sector?
Analysts have upgraded earnings estimates for Motherson Sumi to 11% for FY13 and 15% for FY14, from 6% in FY12, encouraged by strong domestic growth and recovery in the company’s subsidiaries. Barclays, in a note dated 7 December, said Motherson will be a key beneficiary of rising car production in India (from three million units estimated in FY13 to eight million in FY20), new orders and increased sourcing from within the group.
Motherson Sumi is increasingly focusing on content per car and is expected to benefit as consumers are shifting to the premium compact and sport utility vehicle segment. Vivek Chaand Sehgal, chairman of the Samvardhana Motherson Group of which Motherson Sumi is the flagship firm, in an interview to CNBC-TV18 on 10 December said, “The market share is not of much relevance to a company like ours because we are supplying more content per car. Even if the numbers may go down for a month, the content of the car is always increasing and hence we always have a superior result than the market or our peers.”
Stand-alone business revenue will continue to grow by 20-23% in FY13-15. In the September quarter, net sales grew 22% to Rs.947 crore and net profit doubled to Rs.107 crore, helped by forex gains and despite passenger vehicle production falling by 4% year-on-year. Margins are expected to remain stable at around 16.5% after a slight drop to 15.1% in the September quarter, thanks to lower commodity prices and pricing.
The stand-alone business accounts for 60% of the consolidated revenue, the rest coming from subsidiaries.
At the consolidated level, Motherson’s subsidiary Samvardhana Motherson Reflectec (earlier called Visiocorp), which manufactures rear-view mirrors, will continue to clock decent 21% and 14% growth in FY13 and F14, respectively, with margins stable at around 6%, said analysts.
But there are concerns at the Peguform subsidiary that supplies internal modules and bumpers. Revenue at Peguform, which was acquired in November 2011, slumped 10% to Rs.2,954 crore sequentially. Profit after tax was reported at Rs.54 crore against a loss in the previous quarter because of weak demand from Europe. But the management said they were successful in putting on track four units that were making losses and that two other units will become cash positive in the coming quarters. Net sales at Peguform will grow around 14% in FY14-15 and margins will improve to 7.5% by FY15 from 4% in FY13, buoyed by a full ramp-up of the European plants, reduction of cost overheads and new business from Volkswagen, said analysts.
Also, overall cash flows are expected to be higher as the capacity addition cycle tapers off, which will lead to deleveraging in consolidated balance sheet. The debt-to-equity ratio is expected to come down to 1 in FY14 from 1.5 in FY13, according to the Barclays note. The stock is currently trading at 15 times one-year forward multiple and further upside hinges upon continuous strong performance in the domestic market, greater synergies and a quick turnaround at the Peguform subsidiary.