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Friday, October 16, 2009

Motherson Sumi Systems Ltd:Future growth prospects and outlook

Scripscan:Motherson Sumi Systems Ltd

Story:Motherson Sumi has around 65 per cent share in the domestic market in supplying wiring harness, high tension cords, wires and fuses to auto makers such as Maruti, Hyundai, Honda, Toyota, M&M and General Motors.The steady demand for passenger cars, despite a slowdown in the two-wheelers and commercial vehicles segment, capacity expansion and the planned introduction of models by Maruti and Hyundai, augur well for the company as it would lead to strong volume growth in the next few years.Both carmakers have also made India the global manufacturing hub for small cars. Besides, with Nissan and Volkswagen foraying into the Indian market, the company is likely to supply to them as well, given the existing relationship of its collaborator, Sumitomo Wiring Systems (SWS), with these companies.The company will also benefit from the trend of automakers introducing new safety and comfort features, as these features demand more complex wiring harnesses. This value-addition, in turn, may lead to better realisations for the company.Apart from supplying domestically, the company has strong export sales, supplying wiring harness to motorcycle (30 per cent market share), tractor and off-road vehicle manufacturers in Europe. It also serves as a sourcing base for its collaborators.Supplies to SWS are expected to further strengthen in the coming years as Motherson Sumi has already entered into a joint venture with SWS-Sharjah to service SWS’s European clients. The group is also hoping to locate about 85 per cent of its wiring harness production outside of Japan from 2008 and, India, as a preferred low-cost destination, may benefit from this.Investors with a long-term perspective can consider exposure to the Motherson Sumi stock. At the current market price of Rs 100, the stock trades at a price-earnings multiple of about 15 (estimated FY-11 earnings). Though this valuation may seem expensive when compared to other auto component players, the company’s market leadership position in the wiring harness segment and focus on the supply of higher margin assemblies and modules justifies the premium valuation the company enjoys.This, along with the foray into the non-auto segment provides visibility to the company’s earnings prospects in the next few years.

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