Motherson Sumi – a global company with a great future
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Motherson Sumi, a good company to invest
Q1 results not good
Motherson Sumi has not produced good results for the Q1 ended 30.06.11 compared to Q4 ended 31.03.11. Revenue decreased from Rs.856 crore to Rs.751 crore. Net profit declined from Rs.114 crore to Rs.65 crore. Operating profit margin declined from 19.70% to 16.60%. Net profit margin declined from 13.40% to 8.72%. The shares of Motherson Sumi are traded in the stock markets at Rs.176.90 now. The share price has declined from a high of Rs.256 in July to the present level.
Acquisition of German company
Motherson Sumi is in the field of auto ancillaries with a global ambition. It gets a sizeable chunk of its revenue from Europe. It plans to buy a 80% stake in Germany’s auto component major Peguform Group from Cross Industries AG, an Austrian industrial holding company with operative and strategic concentration on the automobile sector. It will continue to hold the remaining 20% in the German company. This strategic acquisition will enable Motherson Sumi to hold 50% stake in Wethje Carbon Composition, which is a part of Cross Industries Motherson Sumi, is operating from Noida in Delhi. The acquisition will be effected through a joint venture in which Motherson Sumi will hold 51% stake and the remaining 49% will be held by Samvardhana Motherson Finance. The latter is the principal holding company of the Motherson group of companies. Samvardhana Motherson Finance has around 36% stake in Motherson Sumi. Peguform and Motherson Sumi will have synergies in the product range of door panels, plastic injection moulding, instrument panels and bumpers.
Acquisition of Viscicop
In 2009, Motherson Sumi acquired the rear view business of the company Visiocorp. Motherson Sumi is a joint venture between Samvardhana Motherson Group and the Japanese company Sumitomo Wiring Systems. Motherson Sumi is acquiring 80% stake in Peguform group at an investment of 141.50 million Euros. Out of this, Motherson Sumi will contribute 72.17 million Euros. Motherson Sumi will finance this transaction through overseas loans. The acquisition will be managed by India’s top private bank ICICI Bank.
Motherson Sumi will be benefited by this acquisition as the product range of Peguform complements the product range of Motherson Sumi’s polymer product range. Synergies can be derived in terms of customers served. Motherson group is world’s largest manufacturers of rear-view mirrors for passenger cars in the world. It is also one of the leading companies manufacturing automotive wiring harnesses. It also makes and supplies plastic components and modules to the automobile industry. It is also in the business of supplying rubber components for automotive and industrial applications, injection moulding tools and high-precision machined metal parts. Peguform supplies high quality exterior and interior products for the automotive and other related industries. Its product range includes bumper systems, plastic components for vehicle exteriors, vehicle cockpits, dashboards and vehicle interior trims. The German company has 17 factories and 5 module centres throughout the world. It employs about 7000 workers. Peguform supplies products to major customers like Volkswagen, Porsche, BMW, Peugeot Citroen, Renault Nissan, Daimler and General Motors. Peguform reported a sales turnover of 1.37 billion Euros in 2010 and operating profit of 66.87 million Euros.
Profit slumps on account of SMR
The group’s profit growth suffered on account of its overseas subsidiary Samvardhana Motherson Reflectec (SMR) reporting a 79% drop in its profits to Rs.3 crore though sales increased by 20% to Rs.1293 crore. Motherson Sumi’s domestic sales increased by 34% and exports grew by 15%. The management is attributing this decline in profits due to start-up costs involving setting up of three new SMR plants. It says that SMR’s profits will grow by the fourth quarter of the current year. The group is investing 50 million Euros in SMR. A new plant in Hungary is almost ready to start operations. Two more plants in Thailand and Brazil will start their operations by the end of the year. SMR has 15 plants worldwide. Motherson Sumi is investing Rs.650 crore this fiscal year. Part of this will be used for setting up four more plants. Three plants will come in the NCR region and the other one in South Africa.
Slowdown in Europe is a problem
There will be currency risks for the company in different geographical areas of operation. Therefore, Motherson Sumi has to be careful with hedging. For example in Q3 last year, its revenues have grown by 13% from its European operations whereas in the balance sheet expressed in Indian currency, the revenues were shown as flat. This was because of the appreciation of Indian rupee against Euro in that period. Another problem the company may face is the crisis of confidence in European countries because of the debt crisis. Already Greece, Portugal, Spain and Ireland have been deeply affected. Italy is waiting in the wings next. In fact the debt burden of Italy is much more than the combined debt of Portugal, Spain, Ireland and Greece. Austerity moves are driven in all European countries. There is even a talk of scrapping the Euro currency, which is seen as the major contributor of the present economic crisis afflicting the nations. But there is one plus point for Motherson Sumi. Europeans cannot live without cars. Therefore the company’s products will be in demand always. However, instead of changing their cars once in two or three years, Europeans may be forced to use the car for longer time because of the economic crisis and austerity moves. This may bring a decline in sales and profits of Motherson Sumi. To what extent it will affect the company is not clear right now. Perhaps Q2 and Q3 results may throw some light on this area.
In India also there are challenges for the auto industry and the company. Inflation, high interest rates and high commodity prices have affected the auto industry. But one positive point for the company is that a slump in the automobile industry need not necessarily mean a slump in auto ancillary industry also. Replacement market can guarantee an increase of sales and profit for the companies in auto ancillary industries like Motherson Sumi. There is another positive attitude by the company even in this difficult circumstance. Instead of trying to forecast the growth rate, the company is building its processes, systems and capacities, so as to cater to a spurt in demand as well as cut down on costs and squeeze when market conditions change. When demand revives both in Europe and India, Motherson Sumi will be the first to get the benefits.
Transparent dealing with customers
Motherson Sumi has also a transparent method of dealing with its customers. For example, copper is the major raw material in wiring harness. The company passes on the increase in cost of copper to the customers based on agreement and also reduces the cost if copper price comes down. This administrative procedure has insulated the company from wildly fluctuating commodity prices to a large extent. Similarly, as far as possible, the company supplies products to overseas customers from the nearby facility and in the same currency. This has insulated the company from currency fluctuations to a great extent. This is the natural way of hedging.
When Motherson Sumi took over Visiocorp two years back, they received orders for 700 million Euros for supplies spread across a few years beginning 2011. The company is preparing its facilities to cater to these new orders. For Hyundai, Motherson Sumi is the 100% supplier of wiring harness. For Ford Figo, Motherson Sumi is the largest supplier of plastic parts. For Maruti, Motherson Sumi supplies wiring harness, plastic parts and mirrors. For Tata Motors, Motherson Sumi supplies components for its commercial vehicles. But bookkeeping procedures prevent the company from showing these revenues fully in its account as supplies are effected through joint venture sometimes.
Rs.25000 crore ambition
Motherson Sumi has the ambition of reaching Rs.25000 crore turnover by 2015. The company supplies rear-view mirrors to one out of four vehicles in the world. The company has a 65% market share of wiring harness in India. 70% of its turnover comes from exports. The company has nearly 40000 workforce globally. A decade back, the company’s turnover was a meagre Rs.100 crore. Within five years, it leapfrogged into the Rs.1000 crore turnover league. In CAGR, the company ranks within the first ten companies in India. What is the reason for the success of the company? The company believes in proper planning. It also keeps a close rapport with its clients. It aligns its production facilities and schedule in tune with its customers’ requirements. It gauges the market pulse and acts accordingly. Even during slowdown, the company continues to build capacities to get ready for high growth when time and situation changes. The company also believes in properly focussed acquisitions to complement synergy. Way back in 2002, it acquired Wexford Electronics with a wiring harness facility, thus setting its foot in Ireland and Middle East. This company was acquired when it was under receivership. Motherson Sumi made the company profitable by shifting its production base from Ireland to Sharjah. In 2005, Motherson Sumi acquired the machining business of Reiner Parzision GmbH, Germany. This move sharpened the skills of the company in precision metal machining and enabled it to supply to European countries.
Motherson Sumi also bought the German company G&S Kunststofftechnik GmbH. This added capability in plastic injection moulding. Motherson Sumi acquired the assets of ASL Systems of Britain in 2006 to further consolidate its position in wiring harness. In the same year, Motherson Sumi acquired the assets of Huon Corporation of Australia for the manufacture of door trims. In 2007, it acquired 100% stake in FP Formagrau s.r.o. of Czech Republic through which it increased its injection moulding capacities. Motherson Sumi acquired the business of Empire of Australia from Huon Corporation.
While acquiring all these assets, Motherson Sumi made sure that its debt did not increase enormously. It financed most of these acquisitions through internal accruals and convertible bonds. Through acquisitions, Motherson Sumi also acquired high end technology. For example 600 patents are held by Visiocorp. Now they have become the property of Motherson Sumi. Rear-view mirrors are no more simple mirrors which are used by the drivers of vehicles to look the vehicles and traffic behind them. Original Equipment Manufacturers are increasingly using rear view mirrors with advanced features like blinkers, power folding, vision camera, antenna etc. The company is well placed with latest technology to cater to the requirements of these manufacturers the world over. The proof of the pudding is in the eating. The proof of the company’s strength is in the increased acceptance of its products by manufacturers world over. Even in research, the company is doing its bets. For example, the company’s R&D team is working to develop driver assist systems such as camera-based blind spot detection systems. Worldwide, Motherson Sumi faces competition in rear view mirrors from US-based Magna Donnelly (the market leader) and Spain-based Ficosa. Magna Donnelly has an Indian partner namely Lumax Automotive Systems. Ficosa has a joint venture with Tata Automotive Components. It is a tribute to Motherson Sumi that it is able to establish its strong presence worldwide in the midst of tough competition by winning over customers to its side. The policy of the company is to increase its capacity as soon as it reaches 80% capacity utilisation in order to cater to the future demand.
Acquire the shares at declines for medium and long term
Considering the futuristic look, high technology, good planning, positive attitude and customer confidence the company enjoys, it is worthwhile to acquire the shares of Motherson Sumi at the current price and also at every decline for medium to long term holding to get decent returns.
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