Buy Motherson Sumi; target of Rs 400: Emkay

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Emkay Global Financial Services research report on Motherson Sumi Systems

Having already achieved its 2015 revenue target a year in advance, MSSL’s Annual Report clearly indicates a number of activities it is undertaking to improve its ROCE to its targeted 40% by 2015. The higher ROCE in our view will be driven by cost reduction from insourcing and vertical integration and also from higher plant utilizations. At SMR the utilization levels of new plants in Hungary, Brazil and Thailand have inched up. Its strategy of focusing on vertical integration of selective high potential items, like glass, actuators and wiring harnesses has started giving cost advantage and competitive edge to the business. At SMP, which was acquired more recently and hence required more action, the company focused on streamlining of operations, restructuring of manufacturing facilities in stress, rationalization of cost at other facilities, upgrading of facilities and focusing on removing inefficiencies from the system, integration of IT activities, sharing of best practices between all facilities, improving the operating cash flow, restructuring of management and identify opportunities for vertical Integration. In the wiring harness business, new plants established in previous year in Mexico andThailand have started contributing in revenue. At the group level, the company tries and sources raw-materials and inputs from within Motherson wherever possible.

Over the last five years, street's focus on near-term earnings have possibly lead to missing the bigger picture, where the company has emerged from becoming an Indian wiring harness maker of repute to add supply of rear view mirrors and polymer products to major European OEMs. By 2020, we expect MSSL to become a player with extended reach in Americas and Asia. We see a 30%+ earnings CAGR over FY14-FY18E. We recommend BUY. The stock is currently trading at 19.2x/15.2x FY16/FY17E earnings.

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