The Hindu Business Line : Motherson Sumi Systems: Buy

MOTHERSON Sumi Systems joins the long list of auto-ancillary companies that have reported a sharp growth in earnings for the quarter ended September 2003. For the latest quarter, the company posted a 26 per cent growth in turnover to Rs 103.92 crore. It derives close to 92 per cent of its revenues from the automotive segment and the balance from the non-automotive market.

The company has a major exposure to the passenger car and commercial vehicles segment. In the automobile sector, Maruti Udyog and Tata Motors are among the top six clients of Motherson Sumi, and the production growth logged by them has been the key driver of turnover for Motherson Sumi. Besides, the recent export thrust has also played a role in pushing up the turnover.

The raw material cost rose 37 per cent with the price of metals, of copper, in particular, going up. Yet, the company managed to improve the operating profit margin to 22.4 per cent from 21.2 per cent in the corresponding previous quarter. The focus on cost cutting and operational efficiency helped the company in this.

The increase in turnover and the improvement in profitability translated into a sharp jump in net profit which, at Rs 11.8 crore, grew 65 per cent for the quarter ended September 2003. Apart from these factors, the appreciation of the euro, in which a significant portion of the company's exports are denominated, strengthened the bottomline.

For the first half of this fiscal, the turnover rose 29 per cent to Rs 200.4 crore. The post-tax earning almost doubled to Rs 21.81 crore from Rs 10.6 crore in the corresponding previous period.

The company is likely to sustain the growth momentum, what with the continued rise in automobile production, of cars and commercial vehicles in particular. The pick-up in exports is a major positive development.

The wiring harness division continues to be the largest contributor to earnings. However, the recent growth in contribution from the plastomer division indicates that it would turn out to be the critical driver of revenues. This division manufactures a wide range of injection-moulded components, assemblies and blow-moulded components. The commissioning of overseas branches should help the company improve exports which already account for a chunk of the turnover.

And, it has also been growing at a rapid pace in the past few years. The bagging of a $125-million Ford order is another positive factor from an investment perspective.

Besides, the efforts taken to broad base the product portfolio is another positive development. In a bid to reduce the dependence on the automobile sector, the company has started supplying wiring harness to such sectors as office automation products, domestic appliances and electrical equipment.

While Motherson Sumi faces competition from global players such as Delphi and Tyco Electronics, the company still retains the dominant position in the industry.

The fully integrated nature of operation lends competitive edge to Motherson Sumi. It has also integrated backwards to produce almost all critical inputs.

Taking into account these factors, the company appears well positioned to record a steady growth in earnings in the future.

A strong presence in the industry, a diversified product portfolio, and improved business prospects are positive features from an investment perspective. Long-term investors could contemplate equity exposure in this company.

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