Motherson is one of the world’s largest manufacturers of components for the automotive and transport industries. Motherson Sumi Systems was established in 1986 and is a part of the Motherson Group. It is a joint venture between Samvardhana Motherson International Ltd of India and Sumitomo Wiring Systems Ltd. (SWS) of Japan.
The company’s shares have 52 weeks price band of INR 162-48 and a total market capitalization of INR 181 billion which makes it a Large-Cap company. The shares have a P/E ratio of 13 and a dividend yield of 3.91%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ☆ ☆)
The company operates in the automobile ancillary and manufacturing sector where market dominance comes from Scale, distribution reach, innovation capabilities and Clientele. Motherson Sumi has strong relationships with Auto Manufacturers across the world and has developed 9 core business divisions serving a diverse clientele. In 1986, a joint venture with Sumitomo Wiring Systems, Ltd., a global leader in the manufacture of wiring harnesses, harness components, and other electric wire resulted in Motherson entering this segment. The joint venture is one of the oldest in India and has provided Motherson with a robust technology base and support in building a culture of excellence.
In addition, the division has three joint venture partners in China, for the manufacturing of wiring harnesses: Hefei Jianghuai Automobile Co. Ltd., Hubei Zhengao Auto Accessories Group Co. Ltd., and Jiangsu Huakai Wire Harness Ltd. This overall gives a wide presence and distribution capacity to over 22+ countries with 77+ manufacturing facilities across the globe. Thus the company has good economic moat. Therefore this category gets 3 stars in Motherson Sumi fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ★)
The company is a specialised full-system solutions provider and caters to a diverse range of customers in the automotive and other industries across Asia, Europe, North America, South America, Australia and Africa. It has a growing presence in wiring harnesses, rearview mirrors, cockpits, bumpers, interior trim as well as a broad range of other polymer, elastomer and metal-based parts and systems. It also offers proximity to its customers, supporting them in their product requirements across the globe.
Globally the company caters to some of the largest corporations like Tata Motors, Mercedes-Benz, Kia, General Motors, Audi, Volkswagen, Porsche, Opel, Ford, BMW, Renault etc. The revenue breakup is such that around 22% sales comes from Germany, 15.8% comes from USA, 10.6% comes from India, 7.2% China and the rest from other 20+ countries across the world. This overall shows a well diversified business model for the company.
Mr Vivek Chaand Sehgal is the Chairman of the Motherson Group and represents the promoter’s interest in the company. He owns a one-third stake in flagship Motherson Sumi Systems which is currently India’s largest auto components maker. Overall the management of the company has been stable and have shown an interest in creating shareholder’s wealth. Therefore this category gets 5 stars in Motherson Sumi fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has seen a CAGR growth of 28.37% over the last 10 years. The operating and net income margin has however seen a slower CAGR growth over the same period. The working capital has remained positive and the Cap-Ex has also remained stable over the years. This overall indicates good growth for the company. Therefore this category gets 4 stars in Motherson Sumi fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The gross margin has improved over the years as the company witnessed economies of scale. The other margins along with return on assets have also remained stable over the years without any significant improvement. The margins are expected to take a temporary hit due to low absorption of fixed costs amidst Covid-19 outbreak and disrupted supply chains. Therefore this category gets 3 stars in Motherson Sumi fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
The net income margin has been stable and the Cap-Ex as a percentage of sales has remained flat. The free cash flow as a percentage of net income has also been positive and declining over the years. The free and operating cash flow growth, however, has been fluctuating with Cap-Ex cycle of the company. This overall shows a stable cash flow position. Therefore this category gets 3 stars in Motherson Sumi fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
The company has some long term debt in its capital structure and hence the financial leverage and debt to equity ratios have been flat. The company has stable profitability with good financing options and hence there is no concern to the solvency of the company. The current and quick ratio is also just above the minimum threshold which shows good liquidity of assets. Therefore this category gets 4 stars in Motherson Sumi fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has improved linearly with scale for the company. The inventory days have declined from 73 days to 45 days. The payables period have increased and with receivables, days has declined. The cash conversion cycle has become negative which shows good efficiency for the company. Therefore this category gets 4 stars in Motherson Sumi fundamental analysis.
8. Valuation Ratios (★ ★ ☆ ☆ ☆)
The company has seen declining valuation multiples over the years due to auto industry cycles and increasing competition. The company, however, expanded into new markets and product offerings which have better margins. However, there may not be any significant appreciation in share prices in the near future to the Covid-19 outbreak and its severe impact on the auto sector. Therefore this category gets 2 stars in Motherson Sumi fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The leverage ratio has declined over the years and the asset turnover has been stable. The interest burden ratio has remained high due to the low volume of interest-bearing debt in the capital structure of the company. The operating margin has seen a slight decline and the tax efficiency has been stable. Overall the Return on Equity has been stable and positive over the years. Therefore this category gets 3 stars in Motherson Sumi fundamental analysis.
10. Future Prospects (★ ★ ★ ☆ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The effect of Covid-19 will be disrupted supply chains, low absorption of fixed costs, labour crunch and production loss. The management can defer some Cap-Ex to maintain the cash position of the company.
- The management is expecting India to bounce back faster due to the low systemic inventory, good pent-up demand, increased savings, and also the shift to private transportation. The support form the government is through sharing of employee cost during the lockdown as well as grants or loans.
- There were many M&A opportunities for the company amidst the lockdown, but due to ample liquidity thrown by the Indian government, the target companies have got a lifeline.
- The Management plans a target of $ 34 billion in Cap-Ex in the coming 5 years. The agenda includes diversifying the group even further and go beyond Autos for Aerospace, Defense and Healthcare.
Overall the company has stable fundamentals but will suffer from the trickle-down effect from the Auto sector slowdown. This, however, is only expected to remain for the short term. Therefore this category gets 3 stars in Motherson Sumi fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
MOTHERSON SUMI SHARES (3.4/5)
Therefore it is a 3-star stock
★ ★ ★ ☆ ☆
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|Motherson Sumi Shares|
|Economic Moat||★ ★ ★ ☆ ☆|
|Business & Management||★ ★ ★ ★ ★|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ★ ★ ☆|
|Valuation Ratios||★ ★ ☆ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ★ ☆ ☆|
|Overall Fundamental Rating||★ ★ ★ ☆ ☆|
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