Motherson poised to ride auto boom

The Indian automotive industry has beenwitnessing record sales for the last few months on the back of growing consumer confidence, higher disposable income and easier financing availability.

Auto component manufacturers such as Motherson Sumi Systems are expected to benefit from the revival in demand, entry of several global automotive players in India and rising exports.

Business: Motherson is India’s largest manufacturer of automotive wiring harnesses besides being a leading supplier of rear view mirrors, plastic components and modules. The company is a joint venture between Samvardhana Motherson Finance and Sumitomo Wiring Systems, the world’s third-largest wiring harness manufacturer with over 20% global share.

Motherson provides full system solutions to its customers from product design to tooling, moulding, manufacturing, assembly and supply of integrated modules such as IP (dashboard) and door trim modules.

Motherson has been a JV specialist with 25 partners in various countries. It has presence in 20 countries with manufacturing bases across Asia, Europe, North America and Australia. The company through its subsidiary Samvardhana Motherson Reflectec recently acquired Visiocorp Inc, one of the largest manufacturers of exterior rear view mirrors for passenger cars, at very attractive valuations.

The company derives majority of its revenues from overseas (70%) while domestic markets contribute the rest. Motherson serves industries in automotive, off-road vehicle, earthmoving, industrial and electronics fields.

Business divisions:

Wiring harnesses: The company derives almost 27% from this segment currently. The contribution has come down from 61% as in FY09 on account of higher sales of mirrors post acquisition of Visiocorp. It has over 65% market share in domestic passenger car market. It has a backward integration strategy for critical parts such as connectors, terminals, fuses and fuse boxes as these are manufactured in-house by its various subsidiaries.

Mirrors: This segment includes products such as exterior and interior mirrors and blind spot detection systems and contributes 62% to total sales. The company has over 30% global market share in exterior rear view mirrors while in the domestic market it has 48% share. This segment would be the revenue driver for the company once the restructuring is over, leading to better operational synergies.

Polymers: Motherson is one of the largest moulded parts, assemblies and module supplier to the Indian automotive and electronics industry. The products manufactured include injection moulded components and blow-moulded components with products such as cockpits, door trims, dashboards, bumpers, and clips. The polymers division contributes roughly 8% to overall revenues currently.

Rubber and metals: This division, which contributes around 3% to overall revenues produces rubber-moulded components such as boots, seals, gaskets and nozzles along with high precision machined metal components.

Investment rationale: The domestic automotive industry is expected to continue its robust growth story driven by favourable economic environment, rising disposable income and government’s increased focus to develop road infrastructure. Many global players are looking to expand operations in India which would benefit the company.

Motherson has a diversified portfolio and is also looking to increase its content per car. It is focusing on supply of higher level assemblies and modules, where margins are comparatively higher. The Visiocorp acquisition lifts Motherson to tier-1 status and arms it with superior technology as Visiocorp has more than 330 patents in its name. This buy is expected to be revenue accretive, providing access to more than 50 top global car manufacturers, opening up new markets and expansion in product offerings.

Concerns: Motherson derives a major proportion of its revenues from overseas markets and ventures making it highly vulnerable to currency fluctuation risks and delayed recovery in European markets, which may affect revenues significantly. Also, rising raw material prices and any delay in restructuring of Visiocorp would affect its margins. The company is also gripped in patent infringement dispute with Magma Mirrors which could impact its revenues hard if it loses the case.

Valuations: The company is likely to post more than twice its FY09 revenues in FY10 on account of Visiocorp buy. But still, the revenues are likely to grow at a CAGR of 17% over FY10E-FY12 driven by strong domestic demand and increased presence overseas.

On the margin front, Motherson is likely to report lower net profits this year due to increased contribution from overseas sales and restructuring cost incurred for the acquisition. However, post restructuring, better operational synergies would help company to achieve higher margins. At the current market price of Rs 136.25, the stock is trading at 29.28x and 17.09x its FY10E and FY11E earnings, respectively.

The stock is unlikely to outperform in the short term, but investors can keep an eye on the stock from medium- to long-term perspective considering strong topline growth.

Disclaimer: The writer does not hold any share in the company