Motherson Sumi: Ambitious target, revenue growth key

The company is looking at improving its revenues over threefold to $18 billion; strong order book provides comfort

Motherson Sumi announced a fresh five year target of achieving a turnover of $18 billion from the current $5.5 billion by the year 2020. Among other targets, it has maintained the dividend ratio and return on capital employed (ROCE) at 40 per cent. Given the $18 billion target, the company’s revenues will have to grow at about 27 per cent annually over the next five years to achieve its 2020 goal.

The company has cumulative orders to the tune of euro 12 billion and has indicated that about 65-70 per cent of the target revenue would come by way of organic growth while the rest may come from the acquisition route. About euro 4.2 billion of the overall order book was received over the last year and includes the euro 2.2 billion order from Daimler a fortnight ago. The order from Daimler is significant as it will allow the company to diversify its revenue base with share of Volkswagon, its biggest customer currently, reducing. The order for supply of interior and exterior systems for upcoming Mercedes Benz vehicles is an opportunity for the company to expand its presence in the US which it considers as a key market especially in the context of its $18 billion target.

Analysts such as Puneet Gulati of HSBC continue to be positive given that the company is well placed to benefit from the long term trends of higher share of luxury cars, improving role of auto component suppliers and increased profitability of interior and exterior component suppliers. HSBC expects earnings to grow 33 per cent annually in the period FY14-17 with return on equity of 41 per cent by FY17. To achieve its ROCE target of 40 per cent the company has to improve margins at its international operations. Analysts believe that the company’s margins at its Indian operations at about 21-22 per cent as well as those at SMR are near its peak. A large part of the improvement will thus need to come from revenue growth of its international operations which account for over 85 per cent of its consolidated revenues.

For the quarter, margins were sluggish at both the standalone entity as well as at SMR. While margins for the Indian entity came down 200 basis points year-on-year to 20.8 per cent, margins for SMR were flattish at 10.6 per cent, the same as last year. While the company has achieved a ROCE on the standalone level of 41 per cent at the consolidated level return ratio stands at 26 per cent. Its consolidated revenues were better than expectations of Rs 8,999 crore. Net profits at Rs 340 crore were also better than Bloomberg consensus estimates of Rs 286 crore. The stock, however, fell 4.69 per cent in line with overall market weakness as well as margins performance which were not up to Street’s expectations.

The company’s share price has doubled over the last twelve months and consensus one year target price is pegged at Rs 540. Given the current price of about Rs 487, there is just 10 per cent upside for investors from the current levels. Given the company’s track record of achieving targets and strong inorganic growth and returns ratios, investors can look at the stock on dips.