Overweight on Motherson Sumi shares, target price Rs 380, potential return 37%

Updated: Dec 13 2013, 20:46pm hrs
We initiate our coverage on Motherson Sumi Systems (MSSL) with an overweight rating and a target price of Rs 380 implying a potential return of 37%. The company trades at a FY14e PE of 16.8x and FY14e PB of 5.6x. We expect the earnings to grow at a CAGR of 47% over FY13-16e, resulting in an FY15e ROE of 38% owing to a turnaround and synergies as well as a low base of comparison resulting from recent acquisitions.

Motherson Sumi Systems Ltdis well positioned for Indian and global auto turnaround. With more than a 65% market share in Indias wiring harness market and 50% market share in Indias rear-view mirror market, MMSL is the best proxy to play the recovery in Indian passenger car market. About 58% of its revenue is generated from Europe which is poised for a recovery after a protracted slowdown. The recovery in Europes auto market will benefit MSSLs interiors and rear-view mirror business.

We expect SMP, its European subsidiary for interiors to become profitable, driven by better management, a focus on the growing premium segment, new orders and an expanding product base with support from existing customers, as well as the in-sourcing of child parts from its group and cross selling of products, thus, realising synergies.