The Motherson Sumi stock has gained seven per cent since the beginning of the month, owing to a ‘Buy’ recommendation from brokerages and the management's statement that it expected a strong operational performance through the next couple of years.
While the company has delivered on its revenue and returns targets in the past, how it fares in the future would depend on its ability to integrate and improve the operations of automobile parts maker Peguform, which it acquired in November 2011. Though the company has improved operating profit margins of its 2009 acquisition Visiocorp (from 1.7 per cent to six per cent) and the company’s Indian operations have a margin of 16 per cent, Peguform’s margins are sub-two per cent.
Also, given the majority of its volumes and revenues for its India business is accounted for by passenger vehicles, the slowdown in industry volumes could lead to a drop in orders for the company. The management, however, says the company has consistently grown faster than the market, and this, coupled with a diversified product and client base and higher content per car, should help it cushion the impact.
Given the revenue growth and expectations of margin improvement in its international business, most analysts are bullish on the stock (now at Rs 194; trading at 13.7 times its FY13 earnings estimate), with price targets of Rs 218-235.
Ambitious return ratio target
While the company is likely to achieve its $5-billion revenue target by FY15, compared with $2.9 billion in FY12, given its current revenue run rate of Rs 6,000 crore a quarter, achieving 40 per cent returns on invested/employed capital (RoCE) appears difficult. Though the company has achieved 35-40 per cent returns on a standalone basis, at a consolidated level, these dropped from 19.7 per cent in FY11 to 12 per cent in FY12, owing to the Peguform acquisition. While analysts believe the company is likely to record RoCE of 20-25 per cent, the company's chief financial officer G N Gauba says it is on track to recording RoCE of about 40 per cent by FY15 on the back of higher margins.
| ACQUIRE AND GROW | ||||
| In Rs crore | FY10 | FY11 | FY12 | FY13E |
| Net sales | 6,702.0 | 8,175.0 | 14,714.0 | 25,570.0 |
| Y-o-Y change (%) | 158.0 | 22.0 | 80.0 | 73.8 |
| Ebitda | 327.0 | 693.0 | 830.0 | 1,568.0 |
| Y-o-Y change (%) | 37.0 | 112.0 | 19.8 | 88.9 |
| Ebitda (%) | 4.9 | 8.5 | 5.6 | 6.1 |
| Y-o-Y change (%) | -422 | 28 | -284 | 49 |
| Net profit | 236.0 | 390.0 | 313.0 | 540.0 |
| Y-o-Y change (%) | 34.0 | 65.0 | -19.7 | 72.5 |
| E: Estimates Acquired Visiocorp in March 2009 and Peguform in November 2011 Source: Kotak Institutional Equities | ||||
Given the jump in revenue (largely due to acquisitions) and stable margins at a consolidated level, the company should see its net profits triple in three years. A Kotak Institutional Equities report states consolidated earnings per share would rise from Rs 8 in FY12 to Rs 24 in FY15, primarily led by higher revenues and margins.
Cash flows to improve
In a recent report, CLSA's Jaibir Sethi stated while risk reward for investors was favourable, the macroeconomic environment would be adverse. While the company's consolidated debt was Rs 4,000 crore in FY12, Kotak analysts peg its net debt at Rs 4,961 crore, with a debt to equity ratio of about two for FY13. Though its estimated operating profit of Rs 1,600-1,700 crore for the current financial year should take care of the interest payment and the incremental capital expenditure, a drop in orders or an increase in working capital requirements would be negative. Higher margins for its Peguform business, operating leverage and cost rationalisation are essential for the company to turn cash-flow positive in FY14, analysts say.
