Sunday, August 9, 2015

Motherson Sumi Systems Limited - Annual Report Analysis - Part 4

Inorganic Growth - Merger & Acquisition

Over last decade, the Group has demonstrated strong capability of acquiring loss making companies and turning them into profit making. The inorganic growth and alliance with global leaders has enabled the company to expand its geographic reach and product portfolio.

MSSL started with wiring harness operations, and soon was a leading player in the wiring harnesses of passenger cars. After acquiring significant market share in wiring harness segment, the company ventured in to other products category such as mirror, polymer modules, rubber processing and eventually into precision machining. 

Further, each acquisition and growth is related to its core objective of increasing content per car strategy. Thereby, provide more value addition to OEMs and generate better profit margin for group.

Adequate due diligence at time of acquisition has enabled MSSL to acquire companies at best price and take advantage of business synergy post integration. 

List of acquisition over last decades are as follows:
Year
Company
Country
Product Line
2002
Wexford Electronix
Ireland
Wiring Harness
2005
Reiner Prazision Gm

Metal Machining Business
2005
G&S Kunststofftechnik
Germany
Plastic Molding Business
2006
ASL Systems
UK
Wiring Harness & Module Business
2006
F.P.Formagrau S.R.O
Czech Republic
Plastic Molding Business
2006
Huron Corp (Doortrim)
Australia
Doortrim Business
2007
Empire Rubber
Australia
Rubber Molding Business
2009
Visicorp Plc (SMR)
UK
Rearview Mirrors
2011
Peguform (SMP)
Germany
Polymer Processing
2011
Vacuform
South Africa
Polymer Processing
2014
Stoneridge Inc
US
Wiring Harness
Source: Annual Report, MSSL Press release, Investor Presentation

MSSL focus on cost control and capital efficiency has enabled it derive synergy from each of its acquisition , along with top line growth.

Management 

MSSL management has been declaring company's plan for next 5 years to provide insight into company's growth vision to its shareholders. So, the Management performance can be evaluated by analyzing 5 year plan set by company during 2005 and 2010. Each five year plan lays objective for revenue growth, Return on capital employed, sales from outside India, contribution per customer and dividend payout ratio. MSSL has achieved most of its target set forth in its five year plan during 2005 and 2010.

Analyzing the plan highlights that company has systematically improved its top line growth and at same time it has diversified its product and customer base. This highlights management's vision of growth and de-risking business model.  

Major highlights of 5 year plan set in 2015 to be achieved by 2020 are
  • Revenue target of $18 billion
  • Return on capital employed of 40%
  • Dividend payout ratio of 40%
  • No country, customer or component to contribute to more than 15x of its total revenue

Business Risk
  • Foreign currency fluctuation -  Almost 83% of its revenue for FY15 is generated from outside India. So, any adverse fluctuation in foreign currency would impact its revenue and profitability. Further, Europe contributes around 70% of its total revenue. The company would be negatively impacted is euro depreciates or rupee appreciates.
  • Price of raw material - If price of raw material fluctuates widely, then it may impacts its profitability
    •  Wiring Harness division  -  major raw material is Copper
    • Polymer Division - major raw material is crude oil derivative like polypropylenes, polycarbonates, ABS, nylons and resins.
    • Tools manufacture  -  major raw material is alloy steel
    •  Mirror business division -  major raw material is glass, plastic parts and resins.
  • Currently, the prices of copper, crude oil and steel are at multi year low. So the company may benefit low raw material cost. However, if price increases sharply, then it may impacts its margin if it is not able to pass on incremental cost to its customer.
  • Product recall risk - If automobiles parts or components is likely to pose risk to car occupant's safety, then such products are recalled and replaced by car manufacturer. The cost is borne by either car manufacturer or ancillary companies as per terms between them. If OEM recalls large number of units, the components of which are manufactured by MSSL, then this would impact its profitability. Further, MSSL has insurance cover for product recall liability.