We initiate coverage of Motherson Sumi Systems shares with an 'overweight' rating. Motherson Sumi Systems has been receiving new orders across segments /geographies and steadily improving profitability at global subsidiaries, despite an uncertain macro environment. We expect gearing ratios to moderate from hereon, given that Motherson Sumi Systems Ltd will fund capex from internal accruals.
After acquisition by Motherson Sumi Systems, the European subsidiaries, SMR & SMP, have steadily improved profitability. Over the current quarter, both subsidiaries reported record margins. We expect consolidated margins to expand ~190bp over FY13-15E.
Motherson Sumi Systems reported healthy revenue growth across segments, despite an uncertain macro environment. The recently acquired SMP has received new orders worth euro 2.4 billion. At SMR, revenues have risen 19% after acquisition in 2009 as the company has set up new plants. While the India demand environment is challenging, the auto parts company continues to grow ahead of the market.
Our European strategy team highlights that PMIs are picking up and car sales are potentially bottoming out. Motherson Sumi Systems will benefit from any improvement in sentiment, given its sizeable exposure to Europe. We expect earnings to grow at a 40% CAGR over FY13-15E and set a March 2014 target price of Rs 245, as we value the company at 13.5x forward P/E. Prolonged weakness in the key Indian/European markets, and any further acquisitions by the MSSL group could stretch gearing ratios.