Maintain ‘buy’ Motherson Sumi Systems, but reduce target price to Rs 340 (earlier Rs 355). We believe MSSL is a key beneficiary of increasing auto demand in India given its dominant position in India’s wiring harness market. We expect strong revenue growth and margin expansion in SMR and SMP businesses, driven by a strong order book. We, however, reduce our EPS for FY16 and FY17e 7% and 5%, respectively, as we now build in a more conservative margin improvement trajectory for the SMR and SMP businesses. We expect SMR/SMP ebitda margins (IFRS) to improve from 9.8% and 5.6% in FY15 to 11% and 7% by FY17 versus 12% and 8% previously.
We believe Motherson’s global business should continue to trade at the higher end of the space, given the strong medium term growth outlook and management’s strong ability to add value through acquisitions. We roll forward our price target by three months.
In our downside case, we assume SMR (mirrors) and SMP (polymers) business revenues to grow at 10% CAGR over FY16-18 and expect no ebitda margin improvement for these as well as the India business from FY15 levels. We get an EPS of Rs 10.58 and 12.5 for FY17e and FY18e respectively. Thus in our downside case the stock is trading at 23x FY17e P/E, which does not seem unreasonable for the 24% EPS CAGR over FY15-18e.