We expect Motherson Sumi to record a 44% earnings CAGR over FY14-17, improving its ROCE from 20% to 31% by FY17, driven largely by a turnaround at its European subsidiaries Samvardhana Motherson Peguform (SMP) and Samvardhana Motherson Reflectec (SMR), which stand to benefit from an improved product portfolio, insourcing synergies within the group, opportunities for cross selling and customer penetration and topped by a continued pursuit of operational efficiencies.
Our target price of R370 is based on a Gordon-growth derived target PE of 17.5x on FY16e EPS of R21.1. We use an average ROE of FY13-17e of 33% and a long-term growth of 8%. Under our research model, for stocks without a volatility indicator, the neutral band is 5 percentage points above and below the hurdle rate for India stocks of 11%. Our target price implies a potential return of 25.5% (including a 2% forecast dividend yield), which is above the neutral band of our model; therefore, we reiterate an overweight rating on the scrip. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Key downside risks include slower pick-up in auto volumes and weaker turnaround of SMP. The company will aim for more than quadrupling the revenue by 2020 while maintaining its 40% pre-tax ROCE target. Any acquisitions will be driven by customers allowing them to get continued business on good terms. Company ranks very highly on the core parameters which OEMS prefer, which results in lot of opportunities being offered to them.
-HSBC Global Research
