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India I Equities Auto Components Sector Report 22 February 2011 India Auto Components Overseas sales

India I Equities

Auto Components

Sector Report

22 February 2011

India Auto Components

Overseas sales – Paving growth

2011 India Auto Components Overseas sales – Paving growth Overweight Nifty/Sensex: 5459 / 18212 Rohan Korde

Overweight

Nifty/Sensex: 5459 / 18212

Rohan Korde

+9122 6626 6733 rohankorde@rathi.com

Girish Solanki

+9122 6626 6712 girishsolanki@rathi.com

Nirav Bhatt

niravbhatt@rathi.com

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1.

Anand Rathi Research

India Equities

India I Equities A u t o C o m p o n e n

India I Equities

Auto Components

Sector Report

22 February 2011

India Auto Components

Overseas sales – Paving growth

The Indian auto components sector is primed to benefit from recovery in overseas sales and continuing growth in the domestic auto sector. Streamlining of costs and improving productivity have led to healthier financials; also, diversification in non-auto segment and wider exports coverage are new revenue drivers.

Overseas sales to strengthen. On the ongoing recovery in US and Europe, we expect a rise in auto demand from OEMs/ tier-1 suppliers, fueling overseas revenue for Indian auto-part players. We expect a 28.1% CAGR in standalone exports over FY11-13e for our auto-parts coverage vs. 19.7% for domestic sales.

Steady growth in domestic auto sector. After two years of swift growth, the Indian auto sector has now entered a steady growth phase. We expect a 13.7% CAGR in industry volumes over FY11- 13e, thereby providing firm support to auto components.

Improved efficiencies, de-risking. Auto-parts companies are benefiting from efforts to conserve cash, reduce costs and raise productivity. Also, de-risking via entry into the non-auto segment and prudent investments would lead to 21.5% sales CAGR in FY11-13e vs. 15% for the auto industry.

Stock picks. Our top picks: Motherson Sumi (diversified), Setco (replacement demand), Gabriel (demand growth), Bharat Forge (good business model), and Amtek Auto (overseas recovery, attractive valuations). Risks are demand slowdown, commodity cost pressures, delay in export ramp-up due to slowdown.

Overweight

Nifty/Sensex: 5459 / 18212

Rohan Korde

+9122 6626 6733 rohankorde@rathi.com

Girish Solanki

+9122 6626 6712 girishsolanki@rathi.com

Nirav Bhatt

niravbhatt@rathi.com

Auto sector vs Sensex 150 BSE Auto 140 130 120 110 Sensex 100 90 Feb-10
Auto sector vs Sensex
150
BSE Auto
140
130
120
110
Sensex
100
90
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11

Source: Bloomberg

Valuation matrix - India auto components

 

Amara Raja

Amtek

Banco

Balkrishna

Bharat

Exide

Gabriel

Mahindra

Motherson

NRB

Phillips

Setco

 

Auto*

Products

Inds

Forge*

Inds

India

Forgings*

Sumi*

Bearings*

Carbon

Auto*

Rating

Buy

Buy

Buy

Hold

Buy

Hold

Buy

Buy

Buy

Buy

Buy

Buy

Current price (` )

165

117

71

127

319

130

42

65

185

46

134

117

Target price (` )

210

225

103

144

396

149

62

137

221

68

246

182

M. Cap. (m US$)

313.0

545.1

113.8

274.7

1,649.1

2,464.1

71.1

133.2

1,591.9

97.1

97.0

45.8

EPS CAGR (FY11-13e, %)

22.7

23.7

26.4

8.5

49.1

19.5

41.8

239.6

32.8

18.7

14.9

29.3

PE (x)

7.8

6.0

6.2

7.7

16.1

15.3

7.5

11.8

15.1

7.3

3.0

5.8

EV/EBITDA (x)

4.4

3.6

3.3

5.5

7.1

8.9

3.5

4.2

7.0

4.0

2.9

3.5

RoE (%)

22.3

8.3

23.5

16.4

20.0

21.7

20.6

6.0

31.5

23.4

25.2

33.1

RoCE (%)

29.0

11.1

23.2

15.0

20.5

30.1

20.2

8.5

29.4

27.6

16.8

25.0

Asset Turnover (x)

2.2

0.6

1.1

1.2

1.3

1.7

0.5

2.0

3.5

0.8

2.7

0.7

Source: Company, Anand Rathi Research;

Note: Ratios are based upon FY12e earnings, * consolidated

Prices as on 18 February 2011

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1.

Anand Rathi Research

India Equities

22 February 2011

India Auto Components – Overseas sales – Paving growth

India Auto Components

Overseas sales – Paving growth

Investment Argument and Valuation

3

Overseas sales to strengthen

3

Steady domestic auto growth

3

Improved efficiencies, diversification

4

Valuation

5

Overseas sales to strengthen

7

Increased optimism among OEMS and suppliers

7

Auto components – Upbeat outlook

8

Strong pipeline of some European manufacturers could add to demand

8

India still a considerably attractive low-cost base

9

Quality no longer an issue

9

Steady domestic growth

Resilient domestic auto demand

Improved efficiencies

11

11

13

Steps taken in tough times would now help

13

Operating performance to sustain

13

Company Profiles

16

Motherson Sumi

17

Bharat Forge

31

Exide Industries

46

Amtek Auto

58

Amara Raja Batteries

74

Balkrishna Industries

85

Mahindra Forgings

98

NRB Bearings

113

Setco Auto

127

Banco Products

142

Gabriel

153

Phillips Carbon Black

169

22 February 2011

India Auto Components – Overseas sales – Paving growth

India Auto Components – Overseas sales – Paving growth Investment Argument and Valuation The Indian auto

Investment Argument and Valuation

The Indian auto components sector is primed to benefit from continuing growth in the domestic auto sector and recovery in overseas sales. Streamlining of costs and improving productivity have led to healthier financials; also, the non-auto segment and wider exports coverage are new revenue drivers. Our top picks are Motherson Sumi Systems, Bharat Forge, Gabriel India, Amtek Auto and Setco Auto.

Overseas sales to strengthen

A steady revival in auto-component exports and overseas revenue

improvement from end-FY10, despite overseas demand (excluding incentive schemes) not significantly improving, has been a notable feature

of FY11. Ahead, we expect the nascent recovery in export demand to gather

steam as auto demand in the US/EU picks up, after having hit bottom through CY08 to CY10.

We expect the recovery to benefit dually – first, by driving exports and second, by improving growth in overseas subsidiaries. We expect our auto- parts universe to see a 28.1% standalone exports CAGR over FY11-13e vs. 19.7% CAGR for domestic sales.

Moreover, with skilled manpower readily available, India continues to retain its edge as a low-cost manufacturing base. A key area where India scores over China is in the better protection afforded to intellectual property rights (IPRs).

Fig 1 – India among the lowest labour-cost countries

60 50 40 30 20 10 0 Indonesia Philippines India Thailand Mexico China Romania Argentina
60
50
40
30
20
10
0
Indonesia
Philippines
India
Thailand
Mexico
China
Romania
Argentina
Malaysia
Hungary
Source: globalproduction.com,
Note: on a scale of 1 to 100;m
as of CY09
Indonesia
Philippines
India
Thailand
Mexico
China
Romania
Argentina
Malaysia
Hungary

Steady domestic auto growth

After two years of rapid growth, the Indian auto sector has now entered a sturdy growth phase. We expect industry volumes to see a 13.7% CAGR over FY11-13e, providing a firm backbone to the sector.

Likely key growth drivers are:

1. Sustained two-wheeler demand: We expect two-wheeler demand in India to continue to swell, while penetration and expansion into new areas globally would boost export growth. In the two-wheeler sector, we expect a 13.7% volume CAGR over FY11-13e.

22 February 2011

India Auto Components – Overseas sales – Paving growth

2. India, a global small-car hub: India has emerged as a small-car- manufacturing hub as all major global auto companies have set up manufacturing bases here (VW, Skoda and Nissan among the latest) with the dual aim of capturing local demand and benefiting from the low-cost manufacturing facilities here. Hence, they are likely to use India as an export base. We expect a 13% CAGR over FY11-13e in India’s passenger vehicle sales.

3. Replacement demand: Replacement demand would continue to fuel non-cyclical demand for auto-component companies, especially for batteries and tyres. The replacement demand trajectory would follow an increasing trend due to the robust 14% CAGR in India’s auto sales over

FY02-11e.

Fig 2 – Auto sector: volume CAGR over FY02-11

(%)

25.0 20.0 15.0 10.0 5.0 0.0 PV LCV M&HCV 2wh 3wh Total
25.0
20.0
15.0
10.0
5.0
0.0
PV
LCV
M&HCV
2wh
3wh
Total

Source: SIAM

Improved efficiencies, diversification

Lower demand in 2HFY09 and spiralling raw material costs just prior to this period led to companies rapidly adopting measures to conserve cash, reduce costs and improve productivity. These steps helped auto-component companies survive the downturn; this augurs well for enhanced profitability ahead. Hence, as compared to a revenue CAGR of 21.5% over FY11-13e, we expect a higher profit CAGR of 28.4%.

Given the cyclical trends in the auto industry, players are diversifying/de- risking their business models; Bharat Forge, Amtek Auto, Rico Auto and MSSL have already taken such measures in the past two years. We expect this to be an even more widespread trend.

We believe that diversified companies would be better performers. Diversifying into the non-auto sub-segment, upgrading to non- commoditised products and broadening the product range would lead to companies emerging stronger.

Also, de-risking via entry into the non-auto segment and prudent investments would lead to 21.5% revenue CAGR in FY11-13e vs. 15% for the auto industry.

22 February 2011

India Auto Components – Overseas sales – Paving growth

Fig 3 – Improvement in companies’ RoE (FY09-13e)

(%)

40

35 30 25 20 15 10 5 0 -5 -10 Balkrishna Inds Bharat Forge* Gabriel
35
30
25
20
15
10
5
0
-5
-10
Balkrishna Inds
Bharat Forge*
Gabriel India
Motherson Sumi*
NRB Bearings*
Setco Auto*
Source: Company, Anand Rathi Research, Note: * consolidated
FY09
FY10
FY11
FY12
FY13

Valuation

The auto-components sector trades at PE of 11.4x FY12e and 9x FY13e earnings (compared with 11.4x FY12e and 10.2x FY13e EPS for the automobile sector, distorted mainly by Tata Motor’ cheap valuations). We expect revenue CAGR of 21.5% over FY11-13e, and a higher profit CAGR of 28.4% for our coverage

Valuations of companies in our coverage universe are still at a discount to their past averages. We expect the discount to reduce and surpass past averages as the auto-components sector sustains a high-growth phase over FY11-13e despite external factors.

Company valuations

Motherson Sumi (Buy; TP: `221): We have a Buy rating on MSS, with a target of ` 221 (18x target PE, on par with its past six-year average). At the current price, the stock trades at a PE of 15.1x FY12e EPS.

Bharat Forge (Buy; TP: `396): We value the stock at 20x FY12e PE. Our target price is ` 396. At present valuations, BFL trades at 16.1x FY12e EPS. We believe that current valuations do not reflect the significant upside that would accrue from FY13 from the joint ventures with NTPC, Areva, etc., commencing full-scale operations.

Exide Industries (Hold; TP: `149): We value the standalone business at one-year forward PE of 16x. We value Exide’s stake in ING Vysya Life Insurance at ` 12. Our target price is ` 149 (from ` 128). We retain our Hold.

Amtek Auto (Buy; TP: `225): We cut our target price from ` 254 to ` 225 (10x FY12e EPS, and ` 29 as value of 38% stake in Amtek India). We value Amtek Auto at 10x FY12e earnings, a 50% discount to the target PE multiple for Bharat Forge. Our current EPS estimate excludes Amtek India, and on considering the recent dilution and change in estimates. At the current market price, the stock trades at attractive valuations of 6x FY12e EPS.

Amara Raja Batteries (Buy; TP: `210): We value ARB at 10x FY12e EPS (a 40% discount to the target multiple for market leader Exide Industries). At the ruling market price, the stock trades at 9.5x FY11e and 7.8x FY12e earnings.

22 February 2011

India Auto Components – Overseas sales – Paving growth

Balkrishna Industries (Hold; TP: `144): We value the stock at ` 144 (8.25x FY12e standalone EPS of ` 16.5 and ` 8 as value of its paper business). At the CMP, the upside is not too compelling. We initiate coverage with a Hold.

Mahindra Forgings (Buy; TP: `137): We value MFL at ` 137 (25x FY12e EPS of ` 5.5). Future re-rating is likely on: i) proven ability to sustain consolidated profitability and ii) likely restructuring of MFL as part of Mahindra Systech. We initiate coverage with a Buy.

NRB Bearings (Buy, TP `68): At our target price of ` 68, the stock would trade at 11x 12-month-forward earnings. NRB’s one-year- forward PBV in the past five years has ranged between 0.7x and 3.8x. At ` 46, NRB trades at PE of 8.9x and 7.3x FY11e and FY12e earnings, respectively, and EV/EBITDA of 4.8x and 4x.

Setco Auto (Buy, TP `182): At our target price, the stock would trade at 9x 12-month forward earnings and EV/EBITDA of 5.1x. The target PE is in line with the three-year average.

Banco Products (Buy, TP `103): We value the stock at ` 103, based on 9x FY12e EPS of ` 11.5. It trades at an attractive 6.2x FY12e standalone PE. After a disappointing FY11, we expect the PE multiple to be re-rated, given stable growth ahead. We initiate with a Buy.

Gabriel (Buy, TP `62): At our target price, the stock would trade at 11x FY12e earnings and an EV/EBITDA of 4.8x. The target multiple is at a slight discount to the stock’s five-year average.

Phillips Carbon Black (Buy, TP `246): At our revised target of ` 246, the stock trades at FY12e PE of 5.6x and EV/EBITDA of 4x. We value PCB at FY12e P/BV of 1.25x.

Risks

Rising commodity costs may squeeze margins, particularly in domestic operations.

Increasing fuel prices and interest rates may arrest auto demand due to higher costs of acquisition and ownership.

Slower-than-expected recovery in Europe and US auto demand would delay the growth trajectory for export-oriented companies.

Fig 4 – Auto component sector: Valuation matrix

 

Amara Raja

Amtek

Banco

Balkrishna

Bharat

Exide

Gabriel

Mahindra

Motherson

NRB

Phillips

Setco

 

Auto*

Products

Inds

Forge*

Inds

India

Forgings*

Sumi*

Bearings*

Carbon

Auto*

Rating

Buy

Buy

Buy

Hold

Buy

Hold

Buy

Buy

Buy

Buy

Buy

Buy

Current price (Rs)

165

117

71

127

319

130

42

65

185

46

134

117

Target price (Rs)

210

225

103

144

396

149

62

137

221

68

246

182

M.Cap. (m US$)

313.0

545.1

113.8

274.7

1,649.1

2,464.1

71.1

133.2

1,591.9

97.1

97.0

45.8

EPS CAGR (FY11-13e, %)

22.7

23.7

26.4

8.5

49.1

19.5

41.8

239.6

32.8

18.7

14.9

29.3

PE (x)

7.8

6.0

6.2

7.7

16.1

15.3

7.5

11.8

15.1

7.3

3.0

5.8

EV/EBITDA (x)

4.4

3.6

3.3

5.5

7.1

8.9

3.5

4.2

7.0

4.0

2.9

3.5

RoE (%)

22.3

8.3

23.5

16.4

20.0

21.7

20.6

6.0

31.5

23.4

25.2

33.1

RoCE (%)

29.0

11.1

23.2

15.0

20.5

30.1

20.2

8.5

29.4

27.6

16.8

25.0

Asset Turnover (x)

2.2

0.6

1.1

1.2

1.3

1.7

0.5

2.0

3.5

0.8

2.7

0.7

Source: Anand Rathi Research; Note: Ratios are based upon FY12e earnings, * consolidated

Prices as on 18 February 2011

22 February 2011

India Auto Components – Overseas sales – Paving growth

India Auto Components – Overseas sales – Paving growth Overseas sales to strengthen Despite the few

Overseas sales to strengthen

Despite the few short-term growth catalysts in Europe and the US and withdrawal of incentive schemes, we expect increased optimism among OEMs/suppliers regarding long-term growth prospects. This, along with market share gains, would drive overseas revenue for most Indian auto-parts companies. We expect our auto-parts universe to see a 28.1% standalone exports CAGR over FY10-13e vs. 19.7% CAGR for domestic sales.

Increased optimism among OEMS and suppliers

After a decent demand trend in ’10, export growth for auto components would be further underpinned by a cyclical recovery in the US in the next two years and continued optimism among European OEMs/suppliers.

In Jan ’11, CSM, a widely followed auto-production forecaster, raised its CY11 European production expectations for vehicles to 19m (Dec ’10:

18.6m, May ’10: 17.3m) and for CY12 to 19.7m (Dec ’10: 19.5m May ’10:

18.4m), suggesting a 10% and 7% increase in estimates respectively since May and a 2% and 1% increase respectively since December. For North America, mainly the US, CSM expects vehicle production for CY11 to increase to 12.9m (May’10: 12.7m) and for CY12 to 13.9m (May’10: 13.5m), implying a 2% and 4% increase in estimates respectively since May ’10.

Although we do not see significant short-term growth catalysts in Europe, given the withdrawal of scrappage/incentive schemes by the UK, France, Germany and Italy, we continue to believe that CSM’s estimates are conservative. The revision of CSM’s estimates reiterates our view that European and US auto volumes are expected to be better in CY11 and CY12, demonstrating CAGRs of more than 5% for Europe and ~13% for North America over FY09-12e.

Direct exports constitute 22.9% of the sector’s standalone revenue; total overseas revenue drives this share to nearly 50% for some big auto- component players (like Bharat Forge, Motherson Sumi and Amtek Auto and Mahindra Forgings). We are upbeat on auto-component exports and overseas revenues, due to the upswing in auto demand, as well as the on- going inventory restocking by European and US OEMs.

Fig 5 – CSM global light vehicle production summary

by Region (‘000s)

CY10

CY11e

CY12e

CY13e

CY14e

CY15e

CY16e

CY17e

CAGR

CAGR

 

CY10-13 %

CY11-13 %

Europe

18,732

19,042

19,715

20,776

21,956

22,753

23,334

23,867

3.5

2.9

Greater China

14,791

16,268

18,139

19,689

20,997

22,003

22,919

23,775

10.0

6.6

Japan/Korea

13,162

12,793

13,524

13,965

13,966

14,180

14,181

14,046

2.0

3.0

Middle East/Africa

2,105

2,159

2,406

2,334

2,409

2,486

2,573

2,665

3.5

2.6

North America

11,943

12,944

13,919

14,743

15,493

16,078

16,147

16,265

7.3

4.4

South America

4,140

4,376

4,623

5,055

5,332

5,595

5,786

6,006

6.9

4.9

South Asia

6,709

7,653

8,614

9,525

10,129

10,802

11,515

12,101

12.4

7.6

Grand Total

71,582

75,237

80,940

86,087

90,280

93,897

96,453

98,725

6.3

4.6

Source: CSM Auto

22 February 2011

India Auto Components – Overseas sales – Paving growth

Fig 6: Direction of India’s exports

Source : ACMA

Australia

South America 1% Oceania 3% 0% Middle East 7% Africa 7% North America 21%
South America
1%
Oceania
3%
0%
Middle East
7%
Africa
7%
North America
21%

Asia

22%

Europe

39%

In Europe, people still need a car. Prospects for auto component manufacturers look upbeat

Auto components – Upbeat outlook

In the base-case scenario for Western-Europe car demand, anecdotal

evidence suggests that there are ~200m cars in the region. Of this, an average 6% is scrapped annually, leading to replacement demand of ~12m vehicles. This includes fleet rental car demand. This generates certain cyclical demand of ~12m vehicles annually.

The European population is expected to increase by 10m in the next 10 years. On average, one car per two individuals would create demand of ~5m cars, translating to structural demand of 0.5m cars a year. Apart from certain sovereign-debt concerns, European GDP growth is now showing a positive trend, and unemployment, after peaking in ’09, is on the decline.

The above structural growth along with eased macro concerns would prove an important demand catalyst, implying that West European car demand would see further green shoots. Western Europe has a substantial positive impact as the region constitutes ~70% of the total European car-demand pie.

A steady revival in auto-component exports and overseas revenue

improvement from end-FY10, despite overseas demand (excluding incentive

schemes) not significantly improving has been a notable feature of FY11. Ahead, we expect the nascent recovery in export demand to gather steam as auto demand in the US/EU picks up, after having hit bottom through CY08

to CY10.

We expect the recovery to benefit dually – firstly by driving exports and secondly by improving growth in overseas subsidiaries. We expect our auto- parts universe to see a 28.1% standalone exports CAGR over FY11-13e vs. 19.7% CAGR for domestic sales.

Fig 7 – Eurostat GDP growth estimates

Eurostat estimates for real GDP growth

CY08

CY09

CY10

CY11e

CY12e

European Union (27 countries)

0.5

-4.2

1.8

1.7

2.0

Euro area (16 countries)

0.4

-4.1

1.7

1.5

1.8

United States

0.0

-2.6

2.7

2.1

2.5

Source: Eurostat Data

Strong pipeline of some European manufacturers could add to demand

European OEMs such as Peugeot (20% of product pipeline up for renewal

in CY11), BMW (three new models) and Volkswagen have a healthy

22 February 2011

India Auto Components – Overseas sales – Paving growth

pipeline. We expect the India auto-components segment to benefit as a result, winning new long-term contracts to supply components for some of these platforms. Indian auto component companies could also benefit by supplying to foreign manufacturers Faurecia, Delphi and Magna, which in turn supply components to these new platforms.

India still a considerably attractive low-cost base

India is one of the hottest three destinations for automobile-component manufacturing, on parameters such as lower wage rates, access to cheaper raw materials, availability of engineers and design capabilities, than other low-cost locations. This gives auto-ancillary manufacturers an edge in costs while competing with rivals, who supply to European manufacturers. This helps protect margins. The key cons now are the higher costs of electricity (which has come down over time) and the high transit time to other auto hubs (a location disadvantage). India’s advantages lead to a minimum 20% lower cost, versus the US and other developed nations.

Quality no longer an issue

Indian auto-ancillary product offerings are now benchmarked to stringent global standards. This transformation is partly due to technology tie-ups with global automotive manufacturers, leading to transfer of sophisticated technology, in turn helping produce high-end products, meeting requirements of tier-I manufacturers Daimler, BMW, VW and Volvo.

A JD Power survey shows that problems per 1,000 products supplied by Indian manufacturers have reduced 50% from 1997 levels. Auto component companies maintained high standards even while handling huge orders.

As a result global auto-component manufacturers Delphi, Bosch and Visteon have operations in India. Ford, Toyota and General Motors have also set up their international purchasing offices in India.

Fig 8 – Labour costs sustain

Rank

Country

Index

1

Indonesia

14.0

2

Philippines

17.2

3

India

18.7

4

Thailand

20.2

5

Mexico

23.2

6

China

29.2

7

Romania

33.8

8

Argentina

35.9

9

Malaysia

38.3

10

Slovakia

50.3

11

Russia

53.3

12

Hungary

54.8

13

Poland

56.1

14

Hong Kong

59.8

15

Turkey

64.9

16

Brazil

65.8

17

Czech

70.5

18

South Africa

74.6

19

Taiwan

76.3

20

Singapore

80.4

21

Slovenia

86.2

22

South Korea

100.0

Note: Hourly wage cost in major agglomerations, Index hourly wage cost, South Korea = 100 Source: Global Production, Mar ’08

22 February 2011

India Auto Components – Overseas sales – Paving growth

Fig 9 – Automotive specialization: Global

Rank

Country

Index

1

Argentina

4.51

2

Mexico

3.71

3

Slovakia

3.62

4

Czech

3.23

5

Poland

3.12

6

Hungary

3.08

7

Brazil

2.88

8

Turkey

2.85

9

Slovenia

2.61

10

South Africa

2.51

11

South Korea

1.95

12

Thailand

1.25

13

Romania

0.97

14

Russia

0.68

15

India

0.49

16

Indonesia

0.38

17

Taiwan

0.22

18

Philippines

0.21

19

China

0.14

20

Malaysia

0.07

21

Singapore

0.05

22

Israel

0.05

23

Saudi Arabia

0.04

24

Hong Kong

0.01

25

Pakistan

0.01

Note: Measures the country's specialization in exporting automotive products on a scale of 0 to 5 Source: Global Production, Mar ’08

22 February 2011

India Auto Components – Overseas sales – Paving growth

India Auto Components – Overseas sales – Paving growth Steady domestic growth After two years of

Steady domestic growth

After two years of swift growth, the Indian auto sector has now entered a steady growth phase. We expect an industry volume CAGR of 13.7% over FY11-13e, which would strengthen the sector base.

Resilient domestic auto demand

India’s auto demand has proved resilient despite the challenging FY08-10 environment. This was mainly owing to:

continuance of the stimulus package through FY10 and its success;

lower interest rates; and

release of pent-up demand.

Fig 10 – Auto OEM demand

Fig 11 – FY11-13e auto sales growth CAGR

(m units) (%) 16% 30.0 30.0 25.0 15% 25.0 20.0 20.0 14% 15.0 15.0 13%
(m units)
(%)
16%
30.0
30.0
25.0
15%
25.0
20.0
20.0
14%
15.0
15.0
13%
10.0
10.0
5.0
12%
5.0
0.0
11%
0.0
-5.0
10%
PV
LCV
M&HCV
2wh
3wh
Total Auto
volumes
Total Auto volumes
yoy change (%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11e
FY12e
FY13e
FY14e

Source: SIAM, Anand Rathi Research

Source: SIAM, Anand Rathi Research

The likely key growth drivers for the auto segment are:

1. Sustained two-wheeler demand: We expect two-wheeler demand in India to continue, while penetration and expansion into new areas globally would boost export growth. In the two-wheeler sector, we expect a 13.7% volume CAGR over FY11-13e.

2. Turning into a global small-car hub: India has emerged as a small car manufacturing hub as global giants General Motors (plant of 225,000- unit capacity annually set up at Talegaon near Pune), Volkswagen (plant at Pune), Nissan (plant at Chennai) and Renault (in partnership with Nissan) have joined the existing India old-hands Suzuki and Hyundai. These companies would not only cater to domestic demand but also use India as an export base in the long run. We expect a 13.7% CAGR over FY11-13e in India’s passenger vehicle sales.

3. Replacement demand: would continue to fuel non-cyclical demand for auto-component companies, especially for batteries and tyres. The replacement demand trajectory would follow an increasing trend due to the robust 14% CAGR in India’s auto sales over FY02-11, particularly in batteries and tyres, continue to fuel non-cyclical demand for auto- component companies. Direct replacement demand would occur from upgradation of mode of transport, new entrants and additional vehicle purchases.

22 February 2011

India Auto Components – Overseas sales – Paving growth

4. CV demand in mid-cycle: M&HCV sales have reached mid-cycle, with good demand growth expected on infrastructure development, GDP growth, and the healthy domestic economy.

Replacement demand to be an important growth driver

The automobile sector has seen robust growth in the past few years, with a volume CAGR of 14% over FY02-11. The healthier growth rate portrays durability in India’s auto demand over the long-term, even after factoring in cyclical slumps. This high built-up base of automobiles would translate into replacement demand for tyres, batteries, etc., every 3-4 years, thereby bolstering demand for tyres.

Replacement demand constitutes almost two-thirds of tyre and battery sales annually. These are non-cyclical segments that would contribute towards steady company revenue, both in an economic downturn and during a high- growth phase.

Fig 12 – Volume CAGR: (FY02-11)

(%) 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 PV LCV M&HCV 2wh 3wh Total
(%)
24.0
22.0
20.0
18.0
16.0
14.0
12.0
10.0
PV
LCV
M&HCV
2wh
3wh
Total

Source: Company

but speed-breakers ahead

While demand growth is likely to be sustained, it would not be entirely smooth sailing as speed-breakers are now visible.

Key factors that may constrain growth are:

Rise in interest rates – would raise the cost of ownership for vehicles, thereby potentially constraining demand growth.

Rise in commodity costs – would necessitate further increase in vehicle prices, thereby increasing the cost of acquisition.

Regulatory changes – Increase in excise duty rates to pre-stimulus levels (0% to 2% up) would result in passing on of this cost increase to end- users.

22 February 2011

India Auto Components – Overseas sales – Paving growth

India Auto Components – Overseas sales – Paving growth Improved efficiencies Auto-parts companies are benefiting

Improved efficiencies

Auto-parts companies are benefiting from efforts to conserve cash, reduce costs and improve productivity. Also, de-risking via entry into the non-auto segment and prudent investments would lead to 21.5% sales CAGR in FY11-13e vs. 15% for the auto industry.

Steps taken in tough times would now help

Lower demand in 2HFY09 and spiraling raw material costs just prior to this period led companies to rapidly adopt measures to conserve cash, reduce costs and improve productivity. Even as these steps helped them survive the downturn, they augur well for enhanced profitability ahead.

Another step that gained traction during this period was the need to diversify/de-risk business models to account for cyclical trends. Bharat Forge and MSS had already taken such steps; we expect this to be even more widespread.

We believe that ‘diversified’ companies would be better performers. Diversifying into non-automobile segments, upgrading to non- commoditized products and a broad product range are some of the characteristics of companies that would emerge stronger despite the slowdown.

Operating performance to sustain

A pick-up in demand and lower channel inventories have led to greater capacity utilization and short-term capacity constraints in certain segments. While higher commodity costs would lower EBITDA margins from the peak, we expect them to sustain at FY11 levels.

Hence, we expect a 21.5% sales CAGR in FY11-13e vs. 15% for the auto industry. Similarly, the profit CAGR at 28.4% would be higher than that for the auto industry (17.6%).

Fig 13 – EBITDA margin trend (FY09-13e)

(%)

17

16 15 14 13 12 Auto components universe Source: Company, Anand Rathi Research FY09 FY10
16
15
14
13
12
Auto components universe
Source: Company, Anand Rathi Research
FY09
FY10
FY11e
FY12e
FY13e

22 February 2011

India Auto Components – Overseas sales – Paving growth

Fig 14: Auto-components sector investments

(`m) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 FY04 FY05 FY06 FY07 FY08
(`m)
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10e

Source: ACMA

Fig 15 – Auto-components sector, improved RoE

(%)

35 30 25 20 15 10 5 0 -5 -10 Balkrishna Inds Bharat Forge* Gabriel
35
30
25
20
15
10
5
0
-5
-10
Balkrishna Inds
Bharat Forge*
Gabriel India
Motherson Sumi*
NRB Bearings*
Setco Auto*
Source: Company, Anand Rathi Research * consolidated
FY09
FY10
FY11e
FY12e
FY13e

Fig 16 – … and higher asset turnover

(x)

4.0

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Balkrishna Inds Bharat Forge* Exide Inds Mahindra
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Balkrishna Inds
Bharat Forge*
Exide Inds
Mahindra Forgings*
Motherson Sumi*
Phillips Carbon
Source: Company, Anand Rathi Research * consolidated
FY09
FY10
FY11e
FY12e
FY13e

22 February 2011

India Auto Components – Overseas sales – Paving growth

Fig 17 – Earnings and revenue growth (FY07-12e)

Adj. earnings

( ` m) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Auto components universe
(
` m)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Auto components universe
FY09
FY10
FY11e
FY12e
FY13e

Source: Company, Anand Rathi Research

Revenue

( ` m) 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Auto
(
` m)
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Auto components universe
FY09
FY10
FY11e
FY12e
FY13e

22 February 2011

India Auto Components – Overseas sales – Paving growth

Company Profiles

India I Equities Auto Components Update Change in Estimates  Target  Reco  22

India I Equities

Auto Components

Update

Change in Estimates Target Reco

22 February 20011

Motherson Sumi Systems

Good performance to continue; Buy

Motherson Sumi Systems is expected to continue on its steady growth path, boosted by robust domestic demand and new order implementation at Samvardhana Motherson Reflectec in FY12 and subsequent operating leverage from FY13. We re-iterate our Buy on the stock, with a target price of `221.

Benefits of good domestic car growth. Motherson Sumi has benefited from revved-up growth in domestic passenger cars. Domestic car volumes have risen at a healthy ~31.3%, ytd FY11, and are expected to register a 13% CAGR over FY11e-13e. With a 65% share, MSS dominates the market in passenger-car-wiring harnesses. Further, as it is well-established with upcoming models being launched in India, MSS would register higher-than-industry growth.

Steady at SMR. Samvardhana Motherson Reflectec, the rearview- mirror business, has turned around faster than expected after its acquisition by MSS. In ytd FY11, an appreciating rupee capped revenue growth at SMR, but the outlook is robust on new order implementation commencing in FY12 and subsequent operating leverage from FY13.

Valuation and risks. We have a Buy rating on MSS, with a target of ` 221 (18x target PE, on par with its past six-year average). At the current price, the stock trades at a PE of 15.1x FY12e EPS. Risks: slowdown in European demand or delay in new model launches there, currency risk, and the complicated company structure.

Key Financials - Consolidated

Year end 31 March

FY09

FY10

FY11e

FY12e

FY13e

Sales (` m)

26,397

68,509

82,774

102,551

121,913

Net profit (` m)

1,310

1,880

3,373

4,741

5,947

Diluted EPS (` )

3.4

4.9

8.7

12.2

15.3

Growth (%)

-24.6

43.5

79.4

40.6

25.4

PE (x)

55.4

38.6

21.5

15.1

12.2

PBV (x)

8.5

6.0

5.0

4.0

3.1

RoE (%)

28.2

20.0

27.7

31.5

31.9

RoCE (%)

12.4

15.1

24.9

29.4

31.6

Dividend yield (%)

0.7

1.0

1.2

1.3

1.5

Net gearing (%)

61.2

51.0

48.4

47.2

42.5

Source: Company, Anand Rathi Research

Prices as on 18 February 2011

Rating: Buy Target Price: ` 221 Share Price: ` 185

Rohan Korde

Rating: Buy Target Price: ` 221 Share Price: ` 185 Rohan Korde

+9122 6626 6733 rohankorde@rathi.com

Nirav Bhatt

niravbhatt@rathi.com

Key data

MSS IN /MOSS.BO

52-week high/low

` 209/` 120

Sensex/Nifty

18212 / 5459

3-m average volume

US$0.8m

Market cap

` 72.6bn/US$1.6bn

Shares outstanding

387.5m

Free float

34.8%

Promoters

65.2%

Foreign Institutions

9.1%

Domestic Institutions

9.5%

Public

16.2%

Motherson Sumi vs Sensex 200 MSS 190 180 170 160 Sensex 150 140 130 120
Motherson Sumi vs Sensex
200
MSS
190
180
170
160
Sensex
150
140
130
120
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11

Source: Bloomberg

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1.

Anand Rathi Research

India Equities

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Quick Glance – Financials and Valuations

Fig 1 – Consolidated Income Statement (`m)

Year end 31 March

FY09

FY10

FY11e

FY12e

FY13e

Net sales

26,397

68,509

82,774

102,551

121,913

Sales growth (%)

28.6

159.5

20.8

23.9

18.9

- Op. expenses

23,120

63,056

74,323

91,779

108,732

EBIDTA

3,278

5,454

8,451

10,772

13,181

EBITDA margins (%)

12.4

8.0

10.2

10.5

10.8

- Interest

354

573

645

645

645

- Depreciation

979

2,601

2,471

2,594

2,854

+ Other income

50

463

139

156

176

- Tax

348

1,094

1,728

1,922

2,465

Rep PAT before MI

2,212

2,334

4,031

5,767

7,394

Adjusted PAT

1,310

1,880

3,373

4,741

5,947

Adj PAT growth (%)

-24.6

43.5

79.4

40.6

25.4

FDEPS (` /share)

3.4

4.9

8.7

12.2

15.3

CEPS (` /share)

9.0

13.2

16.8

21.6

26.4

DPS (` /share)

1.4

1.8

2.3

2.5

2.8

Source: Company, Anand Rathi Research

Fig 2 – Consolidated Balance Sheet (`m)

Year to 31 March

FY09

FY10

FY11e

FY12e

FY13e

Share capital

356

375

388

388

388

Reserves & surplus

7,476

11,275

14,173

17,943

22,822

Shareholders’ fund

7,831

11,649

14,560

18,330

23,210

Debt

8,951

8,179

7,979

7,979

7,979

Deferred tax / others

1,880

2,049

2,049

2,049

2,049

Capital employed

18,662

21,878

24,589

28,359

33,238

Fixed assets

15,412

16,356

17,077

19,482

21,628

Investments

81

471

471

471

471

Working capital

402

1,620

3,134

4,162

5,166

Cash

2,766

3,431

3,906

4,244

5,973

Capital deployed

18,662

21,878

24,589

28,359

33,238

No. of shares (m)

356

375

388

388

388

Net Debt/Equity (%)

79.0

40.8

28.0

20.4

8.6

W C turn (days)

26

19

19

19

19

Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (`m)

Year end 31 March

FY09

FY10

FY11e

FY12e

FY13e

Op. pr/(loss) bef. tax

2,299

2,853

5,980

8,178

10,327

+ Depreciation

979

2,601

2,471

2,594

2,854

Cash profit

3,278

5,454

8,451

10,772

13,181

+ Incr/(Decr) in WC

2,531

-970

-1,514

-1,027

-1,004

+ Others

2,146

-23

-1,304

-1,766

-2,289

Operating cash flow

7,956

4,460

5,633

7,979

9,888

+ Capex

-10,077

-3,545

-3,192

-5,000

-5,000

Free cash flow

-2,122

915

2,441

2,979

4,888

+ Dividend

-480

-674

-872

-969

-1,066

+ Chg in net worth

740

2,158

-248

-1,028

-1,449

+ Debt raised

4,060

-772

-200

0

0

+ Misc. items

-386

-963

-645

-645

-645

Net cash flow

1,813

664

476

337

1,729

+ Opening cash

954

2,766

3,431

3,906

4,244

Closing cash

2,766

3,431

3,906

4,244

5,973

Source: Company, Anand Rathi Research

Fig 4 – Consolidated PE Band 350 300 250 200 150 Motherson Sumi 100 50
Fig 4 – Consolidated PE Band
350
300
250
200
150
Motherson Sumi
100
50
0
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11

Source: Company, Anand Rathi Research

30x

26x

22x

18x

14x

10x

Fig 5 – Consolidated PB Band 350 6x 300 5x 250 4x 200 3x 150
Fig 5 – Consolidated PB Band
350
6x
300
5x
250
4x
200
3x
150
Motherson Sumi
2x
100
50
1x
0
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11

Source: Company, Anand Rathi Research

Fig 6 – MSSL vs. BSE Sensex 220 BSE Auto 200 180 MSS 160 140
Fig 6 – MSSL vs. BSE Sensex
220
BSE Auto
200
180
MSS
160
140
120
100
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11

Source: Bloomberg

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Motherson Sumi Systems – Good performance to continue; Buy Investment Argument and Valuation Motherson Sumi Systems

Investment Argument and Valuation

Motherson Sumi Systems is expected to continue on its steady growth path, boosted by robust domestic demand and new order implementation at SMR in FY12, and subsequent operating leverage from FY13. We re-iterate our Buy on the stock, with a target price of

`221.

Benefits of good domestic car growth

MSS is a key vendor to almost all passenger-car and two-wheeler OEMs and caters to a wide spectrum of the vehicular industry. It has benefited from revved-up growth in domestic passenger cars.

Domestic car volumes have risen at a healthy ~31.3% in ytd FY11, and are expected to register a 13% CAGR over FY11e-13e. With a 65% share, MSS dominates the market in passenger-car-wiring harnesses. Further, as it is well-established with upcoming models being launched in India, MSS would register higher-than-industry growth.

Steady at SMR

On acquiring Samvardhana Motherson Reflectec, the rearview-mirror business, MSS is one of the largest manufacturers of automobile rearview mirrors in the world, with a market share of ~22%. SMR has raised MSS’s ability to supply high-level assemblies. Post-acquisition, the latter has been able to turn around operations at Samvardhana faster than expected, and the rapid pace of improvement in operations is expected to be sustained.

In ytd FY11, an appreciating rupee capped revenue growth at SMR, but the outlook is robust regarding new order implementation commencing in FY12 and the subsequent operating leverage from FY13.

Valuation and risks

We have a Buy rating with a target price of ` 221 (18x target PE, on par with its past six-year average). At the current price, the stock trades at a PE of 15.1x FY12e EPS. The company is securely entrenched in its product segments, with a well-charted five-year plan. In the past, the stock has traded at a premium to the rest of the sector.

Risks

Currency fluctuations: As a considerable proportion of its revenue arises from overseas ventures, MSS is highly exposed to risks posed by currency fluctuations.

Complicated structure: Its numerous subsidiaries and joint ventures make for a complex company structure.

Commodity pressure: With commodity prices on an upward trend, any delay in passing on these costs could affect the short-term operating performance.

Slowdown in demand from Europe: Any slowdown in demand growth from Europe or delay in launching new models would cloud prospects for MSS’ overseas businesses.

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Motherson Sumi Systems – Good performance to continue; Buy Benefits of good domestic car growth Motherson

Benefits of good domestic car growth

Motherson Sumi Systems has benefited from revved-up growth in domestic passenger cars. Domestic car volumes have risen at a healthy ~31.3% in ytd FY11, and are expected to register a 13% CAGR over FY11e-13e. With a 65% share, MSS dominates the market in passenger-car-wiring harnesses. Further, as it is well-established, with models being launched in India, MSS would register higher- than-industry growth.

Leader in the wiring-harness sub-segment

India’s leading passenger-car-wiring harness manufacturer, MSS has a domestic market share of over 65%. It is a key vendor to almost all passenger-car and two-wheeler OEMs and sells to a wide spectrum of the vehicular industry. (It also operates in the non-automobile segment, with customers in earth-moving and material-handling sub-segments; and supplies material-handing markets in Europe.) It has more than 25 manufacturing facilities in India, Sharjah, Ireland and the UK to ensure timely supplies to OEMs in India as well as in Europe.

The company provides complete in-house design services, which results in quicker development. It benefits from having carried out backward integration for critical inputs for wiring harnesses such as wires, connectors, terminals, fuses and fuse-boxes.

It has a technology partnership with Sumitomo of Japan, a leader in wiring harnesses worldwide. It has also tied up with Kyungshin Industrial of South Korea, the wiring-harness supplier to Hyundai Motors in Korea.

The wiring-harness business is the second most important business segment for MSS, till FY08 bringing in 73% of its revenue (standalone; and 66% consolidated). However, on acquiring Visiocorp’s rearview-mirror business, the share of the wiring-harness revenues diminished significantly from FY10. Revenue from its consolidated-wiring-harness sub-segment has seen a robust 27.5% CAGR over FY04-10.

Revenue growth has arisen from revved-up growth domestically in passenger cars, its strong presence in Europe’s two-wheeler and material- handling-equipment markets, faster growth in exports and capacity expansion by key customers Hyundai and Nissan.

Fig 7 – MSS’ wiring harness business growth (FY04-FY10)

(` m) 20,000 16,000 12,000 8,000 4,000 0 Standalone Consolidated FY04 FY05 FY06 FY07 FY08
(` m)
20,000
16,000
12,000
8,000
4,000
0
Standalone
Consolidated
FY04
FY05
FY06
FY07
FY08
FY09
FY10

Source: Company

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Outlook

Even though auto volumes in 2HFY09 slowed considerably, MSS retained its market share in wiring harnesses. Subsequently, as volume growth strongly recovered in India, good revenue growth followed. New model launches from Ford and Nissan would continue to drive MSS’ revenue growth. Domestic car volumes in India have risen at a healthy 31.3% ytd in FY11. Over FY11e-13e, they are expected to touch a 13% CAGR. As the company is well established with upcoming models being launched in India it would register higher-than-industry growth.

A recovery in auto demand, globally, in CY10/11 would significantly boost MSS’ overseas revenue. Moving up the value chain to manufacture progressively more complex products and modules, and capitalising on SMR’s overseas relationships to supply more content per car in the medium term would further enhance volumes and realizations for MSS’s wiring-harness division.

Other business segments

Apart from the wiring harness and mirror sub-segments, MSS’ other business segments are plastic and polymer components, and rubber components. After acquiring SMR, these divisions now constitute a smaller share of MSS’ revenue.

Fig 8 – MSS’ revenue mix (%)

Metal working, IT, design, & manufacturing support, 1 1 Others, 4 Elastomer Wiring harness, processing,
Metal working,
IT, design, &
manufacturing
support, 1
1
Others, 4
Elastomer
Wiring harness,
processing, 2
28
Polymer
tooling, 9
Mirrors &

Source: Company

modules, 53

Fig 9 – MSS’ polymer business growth (FY04-FY10)

(` m)

6,000 5,000 4,000 3,000 2,000 1,000 0 Standalone Consolidated FY04 FY05 FY06 FY07 FY08 FY09
6,000
5,000
4,000
3,000
2,000
1,000
0
Standalone
Consolidated
FY04
FY05
FY06
FY07
FY08
FY09
FY10

Source: Company

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Fig 10 – MSS: Growth, rubber components and other products (FY04-10)

(` m)

2,500 2,000 1,500 1,000 500 0 Standalone Consolidated FY04 FY05 FY06 FY07 FY08 FY09 FY10
2,500
2,000
1,500
1,000
500
0
Standalone
Consolidated
FY04
FY05
FY06
FY07
FY08
FY09
FY10

Source: Company

Tie-ups with global leaders hold the technological edge

MSS has technology tie-ups/joint ventures with globally leading companies Magna, Sumitomo, Kyungshin Industrial, Continental, Calsonic. Its JVs/tie-ups served the multiple purposes of securing technology, penetrating overseas markets and venturing into new product categories in India. At present, MSS has 24 joint ventures with various partners.

Its recent joint venture with Calsonic Kansei has commenced operations, currently supplying to Ritz, Micra. The JV supplies HVAC systems as complete assemblies. (This includes other components such as audio systems, etc., in addition to ACs.)

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Motherson Sumi Systems – Good performance to continue; Buy Steady at SMR Samvardhana Motherson Reflectec, the

Steady at SMR

Samvardhana Motherson Reflectec, the rearview-mirror business, has turned around faster than expected after its acquisition by MSS. In YTD FY11, an appreciating rupee capped revenue growth at SMR, but the outlook is robust for new order implementation commencing in FY12 and subsequent operating leverage in FY13.

Samvardhana Motherson Reflectec, the rearview-mirror business, is one of the largest manufacturers of passenger car rearview mirrors in the world, with a ~22% market share globally, and ~53% in India. Samvardhana has enhanced MSS’ ability to supply high-level assemblies. After the acquisition, MSS has been able to turn around operations at Samvardhana faster than initially expected.

In ytd FY11, an appreciating rupee capped revenue growth at SMR, but the outlook is robust for new order implementation commencing in FY12 and subsequent operating leverage in FY13.

Benefits of the acquisition

With the SMR acquisition, the MSS Group is now one of the largest manufacturers of automobile rearview mirrors in the world. Also, SMR has raised to a higher level MSS’ ability to supply high-level assemblies. Some of the key benefits to MSS from this acquisition are:

The MSS Group is now the largest manufacturer of passenger car mirrors in India.

SMR supplies products to nearly every OEM, nearly 400 individual products. It is a technology leader with 300 patents and a history of innovation.

SMR is a market leader in exterior rearview mirror systems and brings with it cutting-edge technology, covering the complete range of mirrors from low-end entry segments to high-end luxury segments.

The acquisition was made at favourable valuations. Therefore, substantial value-unlocking potential exists under normal conditions in the near future.

Since MSS had been in the business in India for over 13 years in partnership with the erstwhile Visiocorp, it built up certain competencies.

The acquisition brings with it synergies. “Mirrors” is a synergistic product and brings re-sourcing value into the already existing lines of wiring harness (€28m annual buying), polymer processing and elastomers.

The acquisition has opened up new markets such as China, Mexico, the USA, Japan, Spain, France and Hungary.

Since SMR is an established tier-I supplier globally, the acquisition has propelled MSS into the worldwide tier-I league.

There is good potential for MSS to supply more components to SMR’s customers, thereby increasing the content supplied per car.

22 February 2011

Motherson Sumi Systems – Good performance to continue; Buy

Fig 11 – Market share of SMR

Others

47%

India

MSS 53%
MSS
53%

Source: Company

Global

MSS 22%
MSS
22%

Others

78%

SMR: 3Q performance

SMR’s performance continued to steadily improve. Full recovery, however, was affected by the unfavorable exchange rate. In 3Q, revenue was flat yoy, but was up 8% qoq. Sales in India grew 74.1% yoy, while sales outside India fell 2.7% yoy, the effect of the exchange rate. EBITDA margin was 6% (-50bps, both yoy and qoq). Net profit attributable to MSS was ` 134m (+47.7% yoy and 95.9% qoq).

Fig 12 – SMR: Quarterly performance (`m)

 

3QFY10

2QFY11

3QFY11

yoy chg (%)

qoq chg (%)

Net Sales

11,206

10,403

11,231

0.2

8.0