Buy Motherson Sumi Systems Ltd.
Price Rs135.50
Target Price Rs160.00
Stronger volume boosts Dec Q
- Raising PO to Rs160 at 13.5x FY12e on stronger sales
Motherson Sumi Dec09 quarter EBITDA at Rs1.8bn is 35% higher than our estimate owing to higher sales and margin. PAT for Dec09 quarter at Rs749mn is 83% higher than our estimate owing to higher EBITDA and FX gain.
We have raised FY10e EPS from Rs2.4/sh to Rs4.2/sh and have raised FY11e EPS by 7% to Rs9.3/sh driven by expectations of higher sales in global automotive mirror business. We have raised PO by 19% to Rs160. Our PO is now based on a PE of 13.5xFY12e instead of 15.5x FY11e.
EBITDA up 179% led by domestic recovery & Viseocorp
In Q3FY10 Motherson earned an EBITDA of Rs1.8bn including (1) Rs1.1bn from wiring harness, plastic parts etc for automobile; and (2) Rs728mn from global automotive mirror unit (erstwhile Viseocorp acquired in Mar 2009). Total EBITDA growth was driven by (1) 58% growth in sales within India contributing to 29% of sales; (2) expansion of EBITDA margin of non-mirror business by 480bp y-o-y to 16.7%; and (3) expansion of EBITDA margin of mirror business from 4.6% in Q2FY10 to 6.5% in Q3FY10. Robust growth demand growth for cars in India and cost savings from mirror business restructuring helped achieve better margin.
Margin expansion is key growth driver in FY11e
We expect Motherson’s FY11E EPS to grow by 122% to Rs9.3/sh driven by increase in EBITDA margin to 10.6% in FY11E compared to 8.8% in FY10E (8% in 9MFY10). EBITDA margin is likely to rise primarily owing to increase in EBITDA margin of Viseocorp to 8.3% compared to 6.5% in Q3FY10. Key driver of growth from FY12e onwards is likely to be execution of Euro500mn worth contracts for automotive mirrors acquired in Aug2009.
Price objective basis & risk
Motherson Sumi (XMSUF)
Our PO of Rs160 is based on 13.5x FY12E EPS of Rs11.8. We expect the stock to trade at average one year forward PE of auto sector. Our positive outlook on the company is supported by robust track record and high valuation enjoyed by the company in the past. Risks are (1) the possibility of sharp decline in demand for auto parts and (2) possible conflict of interest among joint venture partners given similar lines of businesses.
Analyst Certification
I, Sanjaya Satapathy, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 67.17 | 06/02/10 |
| EPS (Rs) | 1.96 | Mar, 09 |
| Sales (Rs crore) | 452.95 | Dec, 09 |
| Face Value (Rs) | 1 | |
| Net profit margin (%) | 5.21 | Mar, 09 |
| Last bonus | 1:2 | 26/05/07 |
| Last dividend (%) | 135 | 30/06/09 |
| Return on average equity | 17.95 | Mar, 09 |
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