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Motherson Sumi – Consistently Strong Performance – Buy

September 6, 2012

Motherson Sumi a JV of Sehgal family and Sumitomo Wiring Systems has gone from being a wiring harness manufacturer to a broad based auto parts major.

Motherson’s acquisition of Visiocorp in 2009 has helped deliver a step change in scale. The 2011 acquisition of Peguform presents a larger challenge with a higher capital outlay straining the balance sheet. However, the Euro1.6bn revenue base of the business creates headroom for profit growth from margin expansion given that the business margins are depressed at sub 2% in 2HFY12.

Motherson Sumi has grown revenue, EBITDA and net profit at over a 30% CAGR over the past decade. Revenue growth has leapfrogged in recent years from acquisitions. During this period, the company’s management team has delivered on two five year plans with not just P&L but also ROCE targets and managed multiple acquisitions.

Outlook
Motherson is expected to more than double earnings over FY12-14 as the Peguform acquisition begins to contribute to the bottom line while progress continues in the other businesses and forex losses fall. While the macro environment and gearing are overhangs, Diversifying product base and Focus on long term targets and returns is a major positive. EPS is expected to be Rs 9.5 for FY 2013 and Rs 18 for FY 2014. One can take exposure to the stock with a target price of Rs 234.

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