Motherson sumi : Recent opportunity to buy

Today, MSS posted some pretty decent results.

YoY revenue rose to Rs. 9037cr vs 7922cr

YoY net profit rose to Rs. 287cr vs 104cr

In retrospect, Rs. 230 proved to be a good support level. The trend seems to have changed from prior bearish trend.

Disclosure :- hold a trading position around 230

Mr Vivek chand sehgal has maintained at the vision of 2020

He informed that company has received the order intune of $3.87B.

now order book stands at $14B+

Also maintained the guideline of ROCE of 40%

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Some Multidisciplinary analysis.

Finance and Control systems(non linear variables):-
1.There was classic case of lollapollaza effect when the china stocks fell and Volkswagon issue causing the prices of MSL to fall.Both forces working in one direction and causing prices to fall.

Psychology:-
1.He is kind of fanatic by seeing what he has done for last 20 years.Every time meeting the audacious goal for every five years.
2.He is value creator which can be known from one incidence when they bought the US company in 2009 for ~ 200 million with billion dollar sales.
3. He posses few of the qualities of as mentioned in

  1. Outsiders book
    2.Prof Sanjay bakshi fanatic lecture.
    Focus, value creation.

Maths ,philosophy and Biology:-
Law of small numbers:-The consistency of the performance for last 20 years can give better picture how company is managed.
They are doing one thing for long time which gives natural advantage of survival.

Value/Price:-
1.I think the better metric to look at for company with high amount of debt is not P/E as it can give skewed picture due to interest it need to pay.In this company we are sure that they will be trying to meet Sales target of 3x in next five years, considering if they are able to meet it, we saying the P/S ratio to fall by 1/3.Currently it is 0.9 so we will seeing it around 0.3 which give considerable amount of safety if it tries to sale at current level or even at median P/S of 0.6.

Risk:-
1.I may suffer from confirmation bias as the models here are not fully tested and based on historical facts of things happened to other companies in last 10 years.
2. Definitely, I may also suffer single cause and single effect as just try to highlight only those which worked for the thesis but not where these qualities also lead to debacle.

Disc:- Invested when lollapollaza effect was in play.

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Motherson Sumi Systems Limited (NSE: MOTHERSUMI)

The company’s share price (as on January 22, 2016): Rs. 256.65 per share
Market Capitalization: Rs. 33,960 crores
52 week high –low: 395.85(06/08/2015) – 217.30(05/10/2015)

Market share:
 Market leader with over 65% market share of passenger car wiring harnesses in India.
 Samvardhana Motherson Reflectec has 22% share of global passenger car rear view mirror market and a 53% share in India.
 MSSL is currently the largest auto ancillary in India and also ranked 55th in global auto component suppliers.

Risks:
Volkswagen is a major customer of MSSL. Volkswagen was rocked by the emission scandal in 2015 and in January 2016, Volkswagen announced that its sales declined in 2015 for the first time since 2002.

Daimler’s new order
In April 2015, MSSL received an order worth of Rs. 15,400 crores from Daimler for future Mercedes-Benz vehicle generation. It is excepted to commence from 2018.

To support Daimler’s expansion activity, MSSL decided to invest in 2 new plants, which will be closer to Daimler’s vehicle assembly plant.

5 year plan by MSSL
MSSL also announced its new 5 - year plan, for which it has set the following key targets for its 2020 results:

Conclusion: Even though the company may have some glitch in 2016 due to Volkswagen‘s problems, the Company is a good fit for the long run.

I also think that there is some headwinds due to Volkswagen but I has been overdone and thus making it a good buy … Also there are many growth drivers for auto in India now and it can be the best proxy play keeping in mind the valuations now…

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Does anyone tracking Motherson sumi why it felt 11% yday. Is the fall due to Volkswagen issue?

It fell due to not meeting consensus estimates and considerable erosion in YOY profits. Also, the management highlighted 3-4 one-time reasons for the erosion - it seems that the management has been quoting such “one-time” reasons every quarter for not meeting market expectations.

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CONFERENCE CALL - from Capital Markets

Motherson Sumi Systems

Capex for first nine months has been around Rs 1500 crore

Motherson Sumi Systems (MSS) held a conference call on 09 February 2016 to discuss the first quarter earnings. The call was addressed by Vivek Chaand Sehgal, Chairman, Motherson Sumi, Mr GN Gauba, CFO , Mr Pankaj Mital, COO and the entire management team.

Key Points from the discussion:

Consolidated net profit rose 21% yoy to Rs 307.6 crore for quarter ended Dec 15. Consolidated revenue grew by 8% to Rs 9,860 crore during the quarter.

International sales accounted for almost 86% of the quarter’s revenue.

Motherson’s business is directly linked to customer’s performance. It does not sell anything in open market. So, the standalone business was affected a bit.

Capex for first nine months has been around Rs 1500 crore. Capex budget for the year has been Rs 2000 crore and the company is proceeding in line with that.

It is difficult to compute the losses arising out of Chennai floods.

At SMRPBV, revenue and operating profit growth continues to be strong, at 18% and 22% compared to year-ago quarter. Moreover, this growth comes despite the fact that SMRPBV has invested more in new plants than in the year-ago quarter.

SMR reported highest ever operating profit in a quarter and has crossed Euro 1 billion in revenues in less than 9 months period.

MSSL also announced update on 17 plants commissioned around the world, across its major product verticals, out of which 7 have been completed.

Motherson sumi EPS in screener is 9.17. But in economic times it is 4.71. is it because the stock split is yet to be adjusted in screener ?

Stand alone EPS is 4.71, while consolidated EPS is 9.17

CONFERENCE CALL - from Capital Markets

The current order book for SMRP BV stands at 13.5 billion euros

Motherson Sumi Systems (MSS) held a conference call on 17 May 2016 to discuss the FY 16 earnings. The call was addressed by VivekChaand Sehgal, Chairman, Motherson Sumi, Mr GN Gauba, CFO , and the entire management team.

Key Points from the discussion:

  • Consolidated net profit rose 48% yoyto Rs1273.74 crore for FY 15-16. Consolidated revenue grew by 10% to Rs 38,676.92 crore during the year.

  • During the fourth quarter ended March 2016, consolidated net profit rose 22% yoyto Rs413.7 crore. Pre-minority interest PAT rose 18% at Rs 580 crore. Consolidated revenue grew by 8% to Rs 10,235 crore during the quarter.

  • The company has a positive outlook on segmental margin of each business.

  • The SamvardhanaMothersonReflectec (SMR) business has touched 42% return on capital employed (ROCE). The aim is to maintain this level of growth going forward.

  • Rather than foucsing on EBITDA, the company continues to focus on ROCE.

  • As capacities in SMP become operational, there will be a big jump in revenues from there.

  • The company had incurred a capex of Rs 2000 crore in FY 16. Out of this, India business capex stood at Rs 200 crore. Capex for FY 17 will continue to remain at that range.

  • The company continues to have a robust order book.

  • Tax rate are expected to remain at similar levels like FY 16.

  • ROCE of SMP will be in range of 12-13%. In view of new capacities being built, this year it has been slightly less than last year.

  • For SMRP BV, the order book stands at 13.5 billion euros.

  • With demand and sales improving, situation is looking good in Europe and the world.

  • The company feels that markets in China are definitely picking up and utilization rates will go up there.

  • The company maintains its 2020 target for USD 18 billion revenues at 40% RoCE.

  • For 2020 the company expects more growth coming from North America and China.

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Fund raising through QIP and FCCB. Eyeing inorganic growth.

I bought Motherson Sumi soon after the Volkswagen scandal broke out and bet 3% of my portfolio to take advantage of what I thought was a high growth business trading at a valuation that was not considering the growth lying ahead coupled with excessive market reaction. What also added to my conviction was a detailed analysis from Prof Ashwath Damodharan on the valuation of Volkswagen. However I was also wary of the high market capitalization of the group and looked at this as a parking place until I found more secular growth stories.

Its been over 9 months since bet on this and I sold my shares sometime last week because of the below reasons:

  1. Management is know for inorganic growth and has been raising funds for the same.
  2. Group re-organisation which might result in the mergers of some of the subsidiaries into the parent and help the company realize better valuation. This is inline with the management strategy to raise cash either through debt or equity.
  3. The space in itself is undergoing a huge transformation and the markets where MS operates is very much part of it. This might turn out to be a boon or bane to MS, but at this point in time I am unable to bet which way it is going to go.
  4. Market Cap of 44K crores is something I am not comfortable with. I am a sucker for smaller market capitalization and now feel vindicated that the purpose of this investment (parking place) has been served.

SO I am interested in this after some strong recommendations from some fund managers I know. They value VC Sehgal as an intelligent fanatic who sets and achieves some really ambitious targets. The story has certainly been very impressive along with the growth and return numbers.

However I am still taking a very close look because of the some of the obvious flags personally.

  1. The fundamental competitiveness of the sector. Auto parts is a commodity business with very thin margins. It is kind of business where things can go wrong pretty quick if market conditions are adverse.

  2. Hyper growth which is largely inorganic. This makes me uncomfortable. We are basically betting on the promoter making some really good acquisitions which have traditionally been notorious for being hit and miss. Question is what makes these business sell out and what is the contribution from MS group that turns them around and makes them high returns business. Also this makes the business much more complex to understand and it keeps getting more difficult to keep track

  3. Not insignificant debt levels funding this hypergrowth - you know these are warning flags we have seen time and again in failing business

  4. Global nature of the business - Again a very hit and miss for Indian promoters who have sought to build global empires

  5. Overall bullishness - personally I become vary of promoters who are hyper aggressive. Quest for unbridled growth sometimes is not really good for business. When does the whole portfolio becomes unwieldy and difficult to manage.

These are enough flags to normally keep me away and while you can see this would be a very attractive to large funds who are looking for high growth companies that are sufficiently large (in market cap) to become a big part of their portfolio, small investors like us can stay away from it.

But this is definitely something I am interested in and I am studying but being the kind of investor I am I look for smaller companies on a consistent conservative path to growth (which is not hyper-funded). But maybe with time I will look at these growth stocks more closely.

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Motherson Sumi steps on the accelerator. Read Business Standard today. Both Qtrly and Annual results are very strong.20170523-BusinessStandard-Motherson.pdf (520.7 KB)

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I am not sure why people burn their fingers in small / mid cap or hyped companies and miss out on sure compounders. Many many years of growth ahead of it still we dabble in companies that become less than half of their stock price and never recover.

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Q4 Results Declared :

Revenue up 33% YOY
PAT up 7.5% YOY
Total Comprehensive income 1145 cr vs 527 last year

Margins are down but total comprehensive income is almost double due to Items that may be reclassified to profit or loss (376 crores)

How to interpret this result to. We should see PAT or consider Total comprehensive income to calculate growth and performance of the company

The presentations says:
Highlights
• Highest Ever Quarterly Revenues of INR 15,282 crores, up by 38%
• Q4 net profit* of INR 590 crores, up by 24%,
• Highest Ever Order book of INR 1.30 lac crores approx.

Not able to decipher correct net profit. Kindly guide.
Quarterly PAT *590 Crores 24% YoY
Annual PAT *1,939 crores 25% YoY

Dividend of Rs.2.25 declared.