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Enam on Motherson Sumi Systems

March 14, 2008

ENAM Securities continues to rate Motherson Sumi Systems [MSSL] as an OUTPERFORMER but with realistic returns expectations. MSSL has dominated the domestic wiring harness market with a ~65% market share. Long standing relationships with most OEMs and backward integration for critical components will ensure MSSL’s dominance. Increasing complexity of cars to leading to greater value addition, and higher realizations for MSSL.

Sumitomo wiring systems (SWS) has identified India as a “focused frontier” where they expect growth. India/ Sharjah likely to emerge as a significant sourcing base for Sumitomo over the next 3-4 years.

MSSL has invested significantly in Polymer & Rubber components (now accounts for ~35% of revenues) to increase its supply of “content per car”. MSSL has built capabilities in design, tooling, testing and logistics to leverage this trend and now offers one-stop solutions. MSSL is globalising its operations – MSSL expects that> 50% of its customers by 2010 will be outside India, mainly in Europe.

Valuations:
Expect earnings to grow at a CAGR of ~36% through FY07 – FY10E through increased supply of “content per car”. MSSL to trade at a premium to its peers on account of management track record and strong commitment of its partner – Sumitomo. Also we expect an increased contribution from new businesses by FY10. The stock trades at 16.6x and 12.2x FY09E and FY10E FDEPS of Rs 6.1 and Rs 8.3 respectively.

ENAM sets a Target price of Rs 125 is based on 15x FY10 EPS and we re-iterate sector Outperformer.

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