Motherson Sumi: Expanding reach

The stock of Motherson Sumi was up two per cent on Tuesday, a day when Indian markets saw a sell-off, after the its subsidiary acquired assets of Germany-based Scherer & Trier for euro 36 million (Rs 286 crore). The acquisition, which does not entail taking on any liabilities, includes land and building, inventories and control of Mexican entities and will help the group consolidate its polymer business in Europe and in the US. The company's chief financial officer, G N Gauba, said the acquisition, which was complementary with its other plastic parts subsidiary SMP, should be earnings-accretive in the first year.

Scherer & Trier makes extrusion profiles, moulded parts of thermoplastics and hybrid components of metal and plastic at its plants in Germany and Mexico. The company has revenues of euro 240 million (Rs 1,900 crore) and was being run by an administrator largely with financing from customers. Daimler and Volkswagon are its biggest clients.

  The acquisition should help Sumi make inroads into the North American market, a smaller part of the consolidated revenues. While Europe makes up 70 per cent of revenues through subsidiaries SMP and SMR, the share of North America in the first half of FY15 has been 11 per cent. The firm forayed into North America, with the acquisition (its first in FY15) of wiring harness business of Stoneridge for $65.7 million (Rs 390 crore) in August. While its SMR (rear-view mirrors) business has invested in setting up a large facility in the US, the plastic parts business needs of the US market is expected to be catered to from plants in Mexico. SMP is setting up a new plant in the country, which is expected to start operations by FY17.

While the acquisition costs will be met from internal accruals, on the capital expenditure (capex) front, Sumi has indicated there is not much spending as of now and a large part of the capex will be in FY16, when its customers launch new product programmes. The company has a healthy order book at euro 8 billion for SMP and SMR to be executed over a five-year period and is looking to increase market share across product categories. It is looking to diversify its customer base with no single company contributing to more than 15 per cent of revenues. For the consolidated entity, Audi and Volkswagon are the largest customers with a share of 21-22 per cent.

While the India performance, especially on the operating profit level, was disappointing in the September quarter, analysts see it as a blip and expect performance to improve on a volume uptick. India operations are critical for the company as 65 per cent of earnings are due to the stand-alone operations. India contributes 16 per cent to revenues.

A recovery in the local market and an increase in capacities and expansion is expected to drive earnings growth. The stock is trading at 16 times its FY17 earnings estimates. Most analysts continue to have a buy rating.