Motherson Sumi – Global Ancillary Growth

Dear Investors,
as part of our initiative to reward investors, JainMatrix Investments is proud to present its report,
Motherson Sumi – Global Auto Ancillary Growth !!
The entire report dated Feb 2014 is published here, for the first time in public, for your benefit.
Readers may note that the share has appreciated by 79% in 6 months since my Buy call. Another blockbuster report from JainMatrix Investments !!

Click Links below to access this report.

Happy Investing,
Punit Jain

JainMatrix Investments

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  • Report Date: 25 Feb’14
  • Market Price: 220
  • Large Cap – Mkt Cap 19,460 crores
  • Advice: Buy with a Mar’16 target of 451, a 104% appreciation

Motherson Sumi Systems is an Indian auto ancillary firm that is growing rapidly through global acquisitions. It cut its teeth as a Maruti Suzuki vendor, then expanded capabilities, product lines and customer base. In recent years it bought undervalued global plants and rapidly turned them around, and now has operations in 25 countries, supplying to all major auto firms. Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years. The current high debt should be reduced soon to comfortable levels. MSS is a BUY at current levels.

Description and Profile

  • Motherson Sumi Systems (MSS) is a Noida UP based Auto Ancillary firm operating in 25 countries.
  • FY13 consolidated Revenues were Rs 25,200 cr, EBITDA 1,798 cr and…

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Motherson Sumi Systems – Global Auto Ancillary Growth

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  • Report Date: 25 Feb’14
  • Market Price: 220
  • Large Cap – Mkt Cap 19,460 crores
  • Advice: Buy with a Mar’16 target of 451, a 104% appreciation

Motherson Sumi Systems is an Indian auto ancillary firm that is growing rapidly through global acquisitions. It cut its teeth as a Maruti Suzuki vendor, then expanded capabilities, product lines and customer base. In recent years it bought undervalued global plants and rapidly turned them around, and now has operations in 25 countries, supplying to all major auto firms. Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years. The current high debt should be reduced soon to comfortable levels. MSS is a BUY at current levels.

Description and Profile

  • Motherson Sumi Systems (MSS) is a Noida UP based Auto Ancillary firm operating in 25 countries.
  • FY13 consolidated Revenues were Rs 25,200 cr, EBITDA 1,798 cr and Net Profit 451 cr.
  • The flagship of the Samvardhana Motherson group, MSS consolidates business with Samvardhana Motherson Peguform (SMP) and Samvardhana Motherson Reflectec (SMR), owns 51% of both. MSS is a JV with Sumitomo Wiring Systems (Japan), and has JVs with Japanese, German and U.K. firms.
  • Vivek Chand Sehgal is the Vice Chairman of MSS. The shareholding pattern in % is: Promoters is 65.6% (Indian 40 & Foreign 25.6) FIIs 17.2, DIIs 7.8, Individuals (Retail/HNI) 5.8, and Others 3.6%.

Business Notes

Business Segments

Fig 1 – Business Segments

  • MSS is a major supplier of components, modules and systems to the auto industry globally. These include Polymer Components, Mirrors, Wiring Harness and Rubber & Metal products. Fig 1.
  • The diversified customer base includes most dominant Auto firms. Fig 2.

Customers

Fig 2 – Excellent Customer Base

  • The company offers products in both automotive and non-automotive segments. However non-automotive is very small at about 2%.
  • In non-automotive segment, the company is the largest supplier to industrial forklifts and material handling manufacturers. It also manufactures and assembles water purifier for HUL in India.

Strategies and Events

  • MSS has strong customer relationships and is focused on increasing its Content Per Car. It is mostly the OEM supplier, and this simplifies the Auto company’s vendor management process.
  • Revenues from overseas operations in MSS consolidated grew to 83% (FY13) from 66% (FY11). MSS expanded its global operations and acquired undervalued assets, with 9 acquisitions in 10 years.
  • Post-acquisition of loss making auto ancilliary assets, the MSS management was extremely focused on a plant by plant turnaround, which has been the main reason for MSS success.
  • But the international focus hasn’t hurt the company’s local operations, which are growing fast and setting up new plants. MSS is a key supplier to Hyundai, Maruti Suzuki, M&M and Tata Motors. The domestic auto sector slump did not affect it as exports posted a 25% growth.
  • MSS has an excellent de-risking strategy – the growth should happen such that no Single Customer, Single Country or Single Commodity should constitute more than 15% of the turnover.
  • According to the plan of MSS, by 2015 the company will become a $5b company, increase the global presence to 27 countries, and achieve a ROCE of 40%. It is already close to achieving many of these targets.
  • In May’12, an IPO of Samvardhana Motherson Finance, a group firm, was withdrawn due to poor investor response. MSS is the only India listed firm from this group.

Stock Evaluation, Performance and Returns

The price history of MSS is mapped here.

  • After the 2008 economic slowdown MSS share price fell to a low of 25. It has been on a steady recovery path to a recent Feb 2014 price of 231.
  • In 5 years, the share price has appreciated at 50% CAGR, providing excellent returns to investors.
  • Three bonus issues in the last 7 years (and 4 in last 10) have also accelerated the returns.

Financials

Fig 3 – Quarterly Sales, Margins and EPS

  • Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years.
  • The quarterly financials of MSS Fig 3, reveal periodic surges in revenues, due to new acquisitions. In 2009, Visiocorp became a part of MSS (renamed SMR). In 2011, Peguform was acquired (SMP).
  • Margins are on recovery path, along with a massive growth in volumes, reflecting in the adjusted EPS.
  • MSS has been investing heavily in its operations, Fig 4, even so it is enjoying good Cash flow from Operation, and a positive Free Cash Flow.
  • Dividends have steadily increased over the last 6 years. Including bonuses, it is up almost 3.5 times.

Cash Flow

Fig 4 – Cash Flow & Dividend – Standalone

Price and PE_1

 Fig 5 – Price and PE movements

  • The Price and PE chart, Fig 5, reveals the variations in PE values along with the steady share price appreciation. In the last 5 years, the PE ratio has been in a range of 15-35 times, while this historical average is 25 times.
  • Today it is at 29 times, on the upper half of this range.
  • In the Price and EPS chart, Fig 6, we can see a sharp surge in EPS over the last 2 years. The share price has also been in line with this. The EPS growing within a channel represented by two lines.

EPS_1

Fig 6 – Price and EPS movements

  • Total debt is Rs 4071 cr, and D/E high at 1.78. However this is a spike, required to acquire firms, and is expected to be reduced to manageable levels in the next 1-2 years.
  • Return on Capital Employed is 17.4% while Return on Net Worth is 19.4%. These are good ratios.
  • PE is 29.6 currently, and PEG based on PE and EPS growth is at 0.98 – indicates a fairly valued stock.

Benchmarking

In the benchmarking exercise we compare MSS with industry plays like Bharat Forge, Bosch and Exide.

Benchmarking

Fig 7 – Industry Benchmarking

  • With its acquisitions in the recent past, MSS leads in terms of revenue growth. The cost of acquisitions reflects in the high debt.
  • With good cash management, the revenue growth should soon reflect on the profits and debt reduction. Good inventory turnover means factory assets are being well utilized.

Financial Estimate

The business financials are projected in Fig 8.

Projections

Fig 8 – Financial Projections

  • In the next 2-3 years, MSS will consolidate its acquisitions, steady the new operations, grow business volumes and repay debt from cash flows.
  • The recent revenues jumps will soon translate into profit increases.
  • MSS forex revenues is a plus as the INR over 2-3 years will be stable or may even depreciate a little.

Risks

  • Current expectations are that the domestic market’s current slowdown will end in 1-2 quarters, but if it extends for a longer period, domestic investments will be affected.
  • Foreign Exchange volatility. MSS has 83% of revenues in non INR currencies. A significant portion of debt is also in Forex. We can see large unpredictable quarterly gains and losses due to this.
  • Economic environment needs to be stable in key markets of USA, UK, Europe, China and India.
  • Complex corporate structure of group with many cross holdings, JVs and subsidiaries across firms.

Opinion, Outlook and Recommendation

  • The global automobile market recovered significantly in 2013 from the impact of the global financial crisis, buoyed by economic recovery and pent-up demand in the U.S. and Asia.
  • The automobile sector in India has many unique advantages – good local small car demand and production, export momentum, presence of many global names and design skills. Clearly the auto ancilliary industry also incorporates all of these.
  • MSS is a visible, dynamic player in auto ancillaries. They started as a vendor for Maruti Suzuki, and built capability, corporate maturity and finally global growth from this strong base.
  • By all indications, MSS is a successful Indian auto ancillary firm that has made bold moves to grow internationally, acquire technologies, listen to their customers and manage manufacturing well.
  • While the PE at 29.6 appears high, we expect profits growth to exceed this over the next 2-3 years
  • MSS is a buy with a Mar 2016 price target of 451, a 104% appreciation from today (25 Feb’14).

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Disclaimer

This document has been prepared by JainMatrix Investments (JM) of Bangalore, India, and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior written permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

SMFL IPO: Complex Auto Conglomerate, Retail can Avoid

  • Date: May 3, 2012
  • Offering:  IPO is of Price Range Rs 113-118, available from May 2-4
  • Description: SMFL is a mid sized Auto ancilliary firm with a complex Private Equity style business model
  • Opinion: Retail investors need to avoid the IPO

SMFL – Description and Profile

  • Samvardhana Motherson Finance is into Auto components design/ manufacture. It is the holding company of the Samvardhana Motherson Group, started in 1975 by Chairman & ED V.C. Sehgal. Group turnover is 13,500 crores, and SMFL revenue 8,300 cr. (FY11).
  • The group is growing organic/ inorganically into an integrated autocomp supplier.
  • In Dec’11, SMFL had 18 Subsidiaries, 19 JVs and 86 other Consolidated Entities. Top holdings, along with SMFL stake and the Revenue contribution are:
    • Motherson Sumi Systems (Listed) – MSSL – 36.12 % stake, 51.2% revenues
    • Samvardhana Motherson Reflectec (SMR) – 63% stake, 33.7% revenues
    • Samvardhana Motherson Peguform (49% stake) contributed 10%.
  • The products suite includes wiring harness, polymer processing, rear-view vision systems, dropdown cabins, metalworking and elastomers. Mfg locations number 120 including 48 abroad.
  • Customers include the Volkswagen Group, BMW, Daimler, Renault Nissan, Ford India, Volvo Car, Maruti Suzuki, Tata Motors, Honda Siel, Toyoto-Kirloskar, etc. They are spread over 25 countries, and in FY12, 76.6% of income was from abroad.
  • About 4% of revenues are from non-auto industry like mfg of cabins for off-highway vehicles, refrigeration systems, and IT and engineering/ design services.

To understand this IPO offer, let us first review the listed group company, MSSL for its business and share performance. See Fig 1.

Motherson Sumi Systems – Financial Snapshot

A 5-year view of the share price of Motherson Sumi Systems in Fig1 shows us:

Motherson Sumi Systems Stock Price, JainMatrix Investments

Fig 1 – Motherson Sumi Systems Stock Price

  • Share price has risen 19% per annum over 5 years. Current market cap is 6700 cr.
Motherson Sumi, JainMatrix Investments

Fig 2 – Motherson Sumi, JainMatrix Investments

  • Revenues appreciated – Fig2 – by 41% CAGR, due to both acquisitions and organic growth. P/E has been in the 12-24 times range. EPS has grown, except for FY12.
  • The FY12 loss was on account of currency fluctuations and acquisition expenses.
  • In short, MSSL has been a good investment over the last 5 years.

SMFL – Financial Snapshot

Samvardhana Motherson Finance, JainMatrix Investments

Fig 3 – Samvardhana Motherson Finance, JainMatrix Investments

  • We can see, while revenues have grown rapidly, profitability has been lumpy.

IPO Offering Outline and Valuations:

  • The offer is of 14.7 crore shares in price range Rs 113-118, from May 2-4
  • The 25% dilution will get Rs 1665 cr. at upper end, for a 6930-cr market cap.
  • With the firm showing losses in FY12, the PE valuation is meaningless. The Price to Book ratio is 3.7, which is 40% lower than that of MSSL, and in the range of Bharat Forge (3.8) and Exide (3.3).
  • ICRA graded the IPO 4/5, indicating above-average fundamentals

Why Is SMFL going for an IPO?

  • The money raised will be used for the following:
    • Pre & repayment of debt availed by SMFL and subsidiaries – Rs 338 cr
    • Investments in SM Polymers (JV) & SM Holding (Subsidiary) – Rs 627 cr
    • Investments in Rear View Vision systems business – Rs 156 cr
    • General corporate purpose – Rs 222 cr
    • Reduction in holdings, by Promoter firm Radha Rani Holdings – Rs 321 cr.
  • The recent acquisition of Peguform has pushed up debt. D/E is at 2.7 times from 0.7 times in previous years. The IPO proceeds will be used to reduce this.
  • SMFL will meet the new listing norms as promoters will have < 75% stake.

Industry Overview

  • India is developing as an important Auto demand & supply center. For small and fuel efficient cars, India leads with R&D and mfg excellence from firms like Maruti, Hyundai and Tata Motors – JLR.
  • Firms like Bharat Forge, Exide, Amtek and the SMG are the Ancillaries support firms in this space. As per CRISIL Research there are over 46 Indian firms of turnover > 500 cr.
  • CRISIL Research projects domestic autocomp mfg. at 14-16% CAGR from 2011-16.
  • Quick calculations give the SMG a rough Market share of 7.4% with SMFL at 4.5% of the Indian autocomp market.

Key Strengths of SMFL and IPO offer

  • Motherson group is an established firm in the autocomp space. The first generation entrepreneur promoter has strong industry experience.
  • MSSL is a listed entity since many years, and has provided good return to investors.
  • The Autocomp sector is cyclical in nature, but is now coming out of a trough, and the outlook over the next few years looks positive
  • Multiple technologies, partnerships and mfg facilities provide a big growth opportunity.
  • SMFL has already raised Rs 222 cr. through issue of shares to four anchor investors – the Govt. of Singapore, Royal Bank of Scotland, US-based IVY Pacific Opportunities Fund and Birla Sun Life.

Key Weaknesses/ Issues/ Challenges of SMFL and IPO offer

  • SMFL is a holding company with a very complex clutch of JVs and subsidiaries. While we can sense the opportunity in the sector, a Valuation of the group and projection of growth is very difficult.
  • Future prospects of the group are embedded within multiple firms, and will be unlocked only on internal exploitation of synergies, successful integration of acquisitions and coordinated marketing.
  • Current revenue concentration is Europe centric (50%) with a poor economic outlook there.
  • The current plunge in profits is another sign of this risky M&A model
  • Will this firm transition from a Family business to a professionally managed one? As SMFL grows from mid cap to large, this may be required to manage a complex global business.

Opinion, Outlook and Recommendation

  • The IPO was subscribed only 9% till EOD 3rd May. This is not a good sign, and the firm may struggle to attain the numbers on the final day. Also there may be no pop on listing.
  • The business model of SMFL is like that of Private Equity, with multiple acquisitions and integrations. Profitability is currently 1-2 years away.
  • Retail investors should not enter into such businesses as this is a high risk model, with very unsteady financials and long gestation investments.
  • Retail investors interested in the group can either enter MSSL, or watch the SMFL listed stock for 4-6 quarters and enter once the business stabilises.

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