Motherson Sumi: Getting on the highway

Led by improvement in its European operations, Motherson Sumi is likely to benefit from higher revenue growth and margin performance

The Motherson Sumi scrip has been touching 52-week highs over the last week on expectations of good September quarter on the back of a steady domestic performance as well as improvement in its overseas subsidiaries.

With most auto companies are reeling under the impact of a domestic slowdown, companies such as Motherson Sumo with overseas revenues accounting for 80% of overall sales are finding favour with investors.

For analysts too the stock is a top pick in the auto ancillaries space. Since September, while the auto index has delivered a return of 16%, Motherson Sumi has been a major outperformer making investors richer to the tune of 37%. The other auto stock with a major international presence finding favour with investors has been Tata Motors which too has been touching new highs recently.

A large part of the growth and improvement in profitability for Motherson is expected to come from its overseas subsidiaries. Goldman Sachs analysts Sandeep Pandya and Sumeet Jain say that among key catalysts for the company will be an improvement in Ebidta margins of the companies European subsidiaries by 250 bps over FY13-15. Both the European subsidiaries (Peguform, Visiocorp) have Ebidta margins in the 5-8% range.

The improvement especially in Peguform will drive market confidence on margins and cash flow sustainbility, according to the research firm. Goldman Sachs has a 12-mont target price for the stock at Rs 294, which from the current levels is a return of 13%. While the company's execution of new orders from major customers such as BMW and Daimler as well as ramp up of new plants in Germany and Mexico are key, what could give a further fillip would be the recovery in auto volumes in Europe.

For the September quarter, analsyts expect consolidated revenues to grow 36% y-o-y to about Rs 7,000 crore led by Visicorp's revenues which are expected to grow by 50% over the year ago quarter. While consolidated margins are expected to grow by 100 bps to 8%, adjusted net profit is expected to move up by about 20% to Rs 150 crore.