Motherson Sumi

Investors with a long-term perspective can consider exposure to the Motherson Sumi stock. At the current market price of Rs 80, the stock trades at a price-earnings multiple of about 15 (estimated FY-10 earnings). Though this valuation may seem expensive when compared to other auto component players, the company’s market leadership position in the wiring harness segment and focus on the supply of higher margin assemblies and modules justifies the premium valuation the company enjoys.

This, along with the foray into the non-auto segment provides visibility to the company’s earnings prospects in the next few years.
Higher volumes, better realisations expected

Motherson Sumi has around 65 per cent share in the domestic market in supplying wiring harness, high tension cords, wires and fuses to auto makers such as Maruti, Hyundai, Honda, Toyota, M&M and General Motors.

The steady demand for passenger cars, despite a slowdown in the two-wheelers and commercial vehicles segment, capacity expansion and the planned introduction of models by Maruti and Hyundai, augur well for the company as it would lead to strong volume growth in the next few years.

0Both carmakers have also made India the global manufacturing hub for small cars. Besides, with Nissan and Volkswagen foraying into the Indian market, the company is likely to supply to them as well, given the existing relationship of its collaborator, Sumitomo Wiring Systems (SWS), with these companies.

The company will also benefit from the trend of automakers introducing new safety and comfort features, as these features demand more complex wiring harnesses. This value-addition, in turn, may lead to better realisations for the company.

Apart from supplying domestically, the company has strong export sales, supplying wiring harness to motorcycle (30 per cent market share), tractor and off-road vehicle manufacturers in Europe. It also serves as a sourcing base for its collaborators.

Supplies to SWS are expected to further strengthen in the coming years as Motherson Sumi has already entered into a joint venture with SWS-Sharjah to service SWS’s European clients. The group is also hoping to locate about 85 per cent of its wiring harness production outside of Japan from 2008 and, India, as a preferred low-cost destination, may benefit from this.
Likely margin boost from polymers

In a bid to expand its product portfolio, the company also supplies injection and blow moulded components and assemblies and integrated modules such as door trims to auto makers. The increasing use of plastic content in cars so as to reduce costs and weight will translate into good business for this division. This bodes well for margin expansion as well, as supply of assemblies and modules bring in higher margins than components. The polymers division now accounts for about 25 per cent of the revenues.
More content per car

The company has a policy of increasing its content supplied per car by entering into joint ventures (JVs) with leading Tier-I suppliers. For the manufacture of rubber parts, the company is in a JV with WOCO of Germany. About 10 per cent of the revenues now come from the supply of rubber components.

Similarly, the company, last year entered into a JV with Calsonic Kansei, a global component manufacturer specialising in climate control systems and power-train cooling modules.

This JV will initially manufacture automotive AC units for Japanese car manufacturers in India. Production is slated to start in 2009.

Such a growth strategy will give the company access to latest technology, expand its clientele and bring more business from existing clients. This strategy is in sync with the company’s plans to emerge as a complete, full systems solutions provider.
Diversification moves

To further shield itself from any slowdown in the auto sector, the company has entered into a joint venture with Balda AG of Germany to manufacture components for mobile handsets in India.

The company is also manufacturing Aerobin, a garbage disposal machine for the Australian market. This diversification primarily arises from the company’s core capacity to manufacture plastic components. But the contribution to revenues from these forays remains to be seen.
Financials

For the quarter-ended June 2008, net sales grew by 15 per cent to Rs 346 crore compared to the same period a year ago. While domestic sales grew by 10 per cent, exports rose by 32 per cent.

Being the market leader, the company has been able to pass on input cost increase to its customers, keeping the impact on profits minimal. But what has actually pulled down the net profits from about Rs 30 crore in the June 2007 quarter to Rs 12.7 crore in the current quarter is a forex loss of Rs 25 crore on account of restatement of liabilities.