Investment of Auto Ancillary Sector

Introduction
Indian auto component industry is growing at a very fast rate and is one of the fastest
growing industries. Its success can be marked to the unprecedented growth of Auto sector.
Indian auto industry has a large number of global and Indian auto-companies and is highly
competitive. Indian auto component sector exports grew by 16.7% from USD 9.7 bn (`526.9
bn) in FY13to USD 10.2 bn (`614.9 bn) in FY14. Low labour costs, high quality
consciousness among Indian vendors and availability of cheap skilled labours have spurred
the growth of auto component exports from India. Indian auto component industry can be
broadly segmented into six major segments

Engine & Engine Parts

Transmission & Steering Parts
Equipments
Electrical Parts
Suspension & Braking Parts
Others

Some of the major Indian players in this sector are Bosch, MSSL, Exide Industries, Bharat
Forge, Apollo tyres, Amara Raja Batteries etc.

Objective
We will analyse one of the companies in this sector and see how it is performing financially.
This would allow us to determine the future scope for investment in this company. The
company we decided upon is MSSL (Motherson Sumi Systems Ltd.).

Methodology
We did some secondary research and got the financial report of MSSL as well as some other
rival companies of the FY15. We analysed the balance sheet and profit loss statement of
these companies and found out various financial ratios that helped us in determining the
financial health of these companies. To analyse the financial performance of the company
we focused on following parameters

Present Scenarios/Investment Rationale

Valuation
Return on Equity
Return on Capital Employed
Earnings/EBITDA
Sales growth
Current ratio
Quick Ratio

Analysis
Investment Rationale
Opportunities abound - MSSL currently derives ~75% of its consolidated revenues
from India and Europe, however these two geographies account for just ~25% of the
global 75 mn car market. The management's recent comments indicate that the next
target geography for them is the US and China which would mean that the addition of
these geographies will significantly increase the companys exposure to the global
car market. Setting up of plants in Mexico/China for SMR and SMP and recent
acquisition of the North American firm Stoneridge's wiring harness business are the
initial foundations which would possible yield fruitful results in the coming quarters.
Stoneridges wiring harness business provides synergy benefits - MSSLs
latest acquisition of the North American company Stoneridges wiring harness
business would enable it to have an access to the CV segment where it has a
miniscule presence. The acquisition will help the company in further solidifying its
footprint in the American market. With MSSLs capability of turning around
acquisitions and expertise in wiring harness business, we see strong traction in
revenues and profitability for the wiring harness division.
Inorganic route has been a critical part of MSSL growth strategy - One of the
key drivers for the 47.8% 10year CAGR in consolidated revenues has been the
sound acquisition strategy of the company. MSSLs strategy is to acquire assets with
high growth potential with their existing customer contracts and relationships. Further,
it improves and stabilizes its business through enhanced quality and delivery
parameters and engineering support, coupled with its management knowhow and
experience.
Valuation
MSSLs performance remained healthy in Q4FY15 in terms of revenue as well as
profitability. The company has recently acquired the wiring harness business of Stoneridge
having a turnover of ~USD 300 mn and is in the process of acquiring Scherer & Trier. These
are by far the largest acquisitions for the core business of wiring harnesses, which will
provide the company market recognition in North America & Europe and are, expected to
provide further headroom to growth. Meanwhile, the management has indicated of improving
its return on capital employed (ROCE) to 40% on consolidated basis by FY20.

Return on Equity
ROE is a good measure of the effectiveness of a companys management. It tests their
effectiveness to turn a profit on the money that its stakeholders have entrusted it with. MSSL
has a ROE of 24.60% which is considerably good. Also the other rival companies have a
lesser ROE than MSSL.
Return on Capital Employed
ROCE is also a good measure of financial health of a company. The present ROCE of MSSL
is 21% which is pretty good. It has come down a little bit from the last year but is still a good
number.

PBDIT Margin
PBDIT (Profit before depreciation, interest and taxes) margin gives you the earnings stability
of the company. A good PBDIT margin suggests that company is managing its expenses
well. MSSL has a PBDIT margin of 19.28% which in auto component sector is a good figure
to have.

Sales growth
Sales growth give you an idea about how are things looking up for the company. If the
growth in sales is high but is lower than the industry/sector growth rate than that firm with
even a good growth rate is not doing good and a firm is performing very well if it is having a
lower growth rate but is well above the industry/sector growth rate. So, the growth rate
should be compared with the overall sector growth rate. MSSL growth rate is about 10%
which is at par with the sector growth rate (9%) of auto ancillary sector.
Current Ratio
Current ratio is the ratio of current assets to current liabilities. The current ratio indicates a
companys ability to meet short term debt obligations. The acceptable current ratio varies
from industry to industry but the highly common acceptable current ratio is 1.5-2. MSSL has
a current ratio of 1.07 which suggests that it less liquid.
Quick Ratio
Quick ratio = (Current Assets - Inventories) / Current Liabilities. It is also known as acid test
ratio as it measures the ability of a company to meet its short term debt obligations with its
liquid assets. The quick ratio of MSSL is 0.72 which is very low which is a bad sign for its
investors and partners.

Conclusion
By analysing the above mentioned parameters, it is safe to assume that most of the factors
are in favour of MSSL. The only major problem is the low liquidity (low current and quick
ratio), other than that it is doing pretty good and investing in it would be a good and safe
option. If we see the investment rationale, it looks that they are trying to address the
problems with good deals and decisions.
So, I would conclude by saying that it is a good option to invest in Motherson Sumi Systems
Ltd.

Recommendations

MSSL has a very low current ratio and quick ratio which is not a good sign for the
investors and the partners. Low current and quick ratio suggests that its liquidity is
very low and will be unable to currently payback its current liabilities. So, it would be
well advised to increase its current assets by increasing Cash or account receivables
which in turn will increase the corresponding ratios.
MSSL growth rate is at par with the sector growth rate so it should look to increase its
operating revenue so that the growth rate can be higher. By acquiring Stoneridge,
they are trying to tackle this problem by increasing its sales from North America
region.
They need to increase their ROCE also and they have a target of 40% ROCE till
2020 and it would be great if they do that.

References
http://www.moneycontrol.com/financials/mothersonsumisystems
http://www.fundsindia.com/blog
https://en.wikipedia.org/wiki/Main_Page