For 2QFY2016, Motherson Sumi Systems Ltd (MSS)’s results have come in ahead
of estimates. The top-line grew strongly by 15% yoy led by robust growth in SMP
and pick up in the standalone business. Given the healthy revenue growth and
soft commodity prices, the adj net profit grew at a faster pace of 27% yoy.
Top-line growth remains strong: MSS maintained its double digit top-line growth
momentum, reporting sales of Rs9,198cr for 2QFY2016, implying a growth of
15%. The growth was led by SMP, whose revenues grew 18% yoy to Rs4,399cr,
despite the depreciation in the Euro. Pick-up in order execution boosted growth.
(In Euro terms SMP grew 31% yoy). Standalone revenues grew 10% yoy to
Rs1,393cr led by recovery in the passenger vehicle industry. However, SMR’s
revenue growth moderated to 3% (at Rs2,424cr) impacted by the Euro
depreciation. But in Euro terms, SMR’s growth continued to remain strong
growing by 14%.
Operating leverage along with soft commodity prices boost profitability: Given the
robust double digit top-line growth and soft commodity prices, MSS’ operating
margins expanded 130bp yoy to reach 10.4%. Given the strong operating
performance, MSS’ net profit grew strongly by 27% yoy to Rs289.3cr.
Outlook and valuation: MSS continues to report improvement in its operating
performance, driven by its strategy of increasing the content per car, improvement
in utilization levels at the new plants and profitability improvement measures at
SMP. However, the emission scandal at MSS largest customer, Volkswagen
(Volkswagen currently accounts for ~40% of the topline) could have a near term
impact on the revenues as the brand takes a knock leading to loss of volumes.
The issue is likely to remain a key overhang on the stock, unless further clarity
emerges on the same. Nevertheless, we expect the company to sustain its strong
performance in the long term through increased internal sourcing by subsidiaries
and improvement in utilization levels at the plants led by execution of new orders
(new order book currently stands at Euro 12.5 billion which gives a strong
outlook). We expect MSS to register a strong revenue and net profit CAGR of
~14% and ~27% respectively over FY2015-17E. Thus, we assign Accumulate
rating on the stock with a target price of `313 (based on 25x FY2017 earnings).

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