Motherson Sumi Systems Ltd (MSSL) is one of the world’s fastest growing specialised automotive component manufacturing company for OEMs. The company is a joint venture between the Samvadhana Motherson Group and Sumitomo Wiring Systems of Japan having established in 1986 in the country. It is the largest auto ancillary company in India providing customers with innovative and value added products across the scale. The Indian auto-components industry has experienced a healthy growth rate over the last few years and important factors attributable to this include a buoyant end-user market, improved consumer sentiment and adequate liquidity in the financial system. The auto-components industry accounts for almost 7% of India’s Gross Domestic Product and employs over 19 million people in the country, both directly and indirectly. A stable government framework, increased purchasing power, large domestic market, and an ever increasing development in infrastructure have made India a favourable destination for auto industry investment. The cumulative Foreign Direct Investment inflows into the Indian automobile industry during the period April 2000-March 2016 were recorded at US$15.07 billion, as per data by the Department of Industrial Policy and Promotion. The Indian auto-component industry can be broadly classified into the organised and unorganised sectors where the latter caters mainly to the Original Equipment Manufacturers (OEMs) and consists of high-value precision instruments. The unorganised sector comprises primarily of low-valued products and caters mostly to the after new purchase category. Over the last decade, the automotive component industry has scaled three times to US$39 billion in 2016, while exports have grown even faster to US$10.8 billion. This has been driven by strong growth in the domestic market and increasing exports of several Indian suppliers. The rapidly globalising world is opening up newer avenues for the transportation industry, especially as it makes a shift towards electric, electronic and hybrid cars, which are deemed more efficient, safe and reliable modes of transportation. Over the next decade, this will lead to newer verticals and opportunities for auto-component manufacturers, who would need to adapt to the change via systematic research and development.
At the current market price of Rs 300, the Motherson stock P/E ratio is 24.17 times FY17 earnings, while earning per share for the same period is seen at Rs 13.50. On the other hand, net sales and profit of the company are expected to grow at a CAGR of over 15% during the next few years and Price to Book Value of the stock is expected to be at 7.46 times for FY17 earnings. Motherson has posted revenue in excess of Rs 100,000 million for the second consecutive quarter of the current financial year as growth has been fuelled by strong performance across major product divisions and geographies. It continues to consolidate operational improvements in its performance, which is reflected in healthy growth of profits. The SMRP BV division has also commenced in full capacity and execution of large orders are taking shape at some of the new facilities. The reduction in net debt by the company provides additional headroom to prepare for growth. The Indian auto-component industry is set to become the third largest in the world by 2025 and is well positioned to benefit from the globalisation of the sector as exports potential could be increased by up to four times to US$40 billion by 2020. Hence, the Motherson stock is a good fundamental buy for medium term at the current market price of Rs 300 for 25% price appreciation in the near term.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.