Edelweiss - Motherson Sumi Systems Limited -(CMP INR 105, Market cap INR 24.5 bn , Not Rated) -Visit Note

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Sunil

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Mar 15, 2007, 11:45:56 AM3/15/07

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We met the management of Motherson Sumi Systems Ltd (MSSL). Key takeaways

Business Overview

MSSL is the flagship company of Sumi Motherson Group. MSSL is the largest manufacturer of wiring harnesses in India with a market share of ~65% in domestic passenger car market (FY06). Apart from catering to the automotive industry(~ 87% of sales comes from the automotive industry), MSSL also supplies wiring harnesses to material handling, earth moving and farm equipment, white goods & electronics, elevators, office automation and medical equipment industries. MSSL also act as a supply partner by providing complete solution to its customer right from product design to mass supplies. Besides, the wiring harness division, MSSL also has polymer processing division through which it supplies plastic components, assemblies and modules to the auto-car manufacturers. Some of its key clients include Honda Siel, Piaggio, Maruti, Hyundai, Electrolux, Yamaha –Spain , Air International and Woco to name a few. MSSL's wiring harness business contributes 69% of revenues in FY06 (consolidated).Besides this 67% of sales came from India operations in FY06 (consolidated). MSSL has 14 plants across 7 locations for manufacturing of wiring harness & wires in India, of which 3 are EOUs. Globally, MSSL is present with 20 wire harness manufacturing facilities and 14 component moulding facilities. It has presence at 40 locations across Asia, Middle East, Europe and Australia.

Joint Ventures and Subsidiaries

Source: Company (as on FY06)

Group Support

Source: Company (as on FY06)

A look at the above two table highlights the company's focused effort to establish itself into a full system solution provider, increasing content per car through JV's, subsidiaries and support from the group companies. All these alliances help MSSL to build expertise in various areas and gives access to clients across the globe.

MSSL was involved right from the design stage and has thus developed 113 tools and 168 components for Ford "Fiesta" in FY06 thus establishing itself as full system solution supplier.

FCCB

MSSL had issued zero coupon FCCBs of INR 2.6 bn with maturity of 5 years from 7^th July 2005 with a conversion price of INR 111.45 per share. The proceeds of the FCCB would be utilized for capacity expansions in India, overseas acquisition and investments. For FY07, MSSL intends to do a capex of INR 175mn.

Financials

Outlook

MSSL intends to become a full systems solutions provider with USD 1 Bn in revenues by 2010.They plan to grow through organic & inorganic route. Through the inorganic route MSSL intends to acquire distressed assets with customer contracts in Europe. Another focus is to transfer all the manpower oriented manufacturing to Sharjah and India. MSSL is focused on maintaining 40% ROCE going ahead & 40% of consolidated profits as dividend payout. By 2010, MSSL expects the global business to contribute ~60% of revenues from the current 33 % (FY06) and not more than 20% of revenues should come from a single customer from the current 23% (FY06). A quick look at the company's vision set for 2005 and the targets achieved enhances our confidence in the company's ability to achieve its target by 2010.

Source: Company

Valuation

At CMP of INR 105, the stock trades at ~27x its annualized (standalone) FY07E EPS of INR 3.8.