Another Case of "Buying A Good Business In Distress/Unusual Condition" ??
CMP: 250
Buy on dips:225-217
TGT1: 295-335 (1-6M)
TGT2: 395-435 (12-24M)
TSL<210
Note: Consecutive closing below 210 for any reason/adverse news-flow, MSS can fall to 200-190 or even 175-160 zone, where it may be again accumulated for better investment buying average.
VWG Issue: This issue of "Emission Software Fudging" in a diesel vehicle model in US-VWG is perhaps blown out of proportion with MSS. Although on a consolidated basis gross revenue from VWG group is around 44%, its around 12% on a standalone basis. Audi is the largest OEM of MSS at around 22% and rests are more or less spread over other notable auto makers in India and other parts of the world (EU/US).
Being the 2-nd largest OEM supplier to VWG, no doubt such negative news-flow definitely affect MSS and the stock price also tumbled by nearly 20% in the last few days after the VWG news broke out.
This VWG issue is of engine emission software components as disclosed by the company itself (in one of its diesel model). This issue is not related to the overall quality and customer trust, VWG enjoyed globally. Again, sales of VWG is not significant in North America (NA) and this is not a recall issue with defective auto parts. VWG will simply recall the affected models and replace that emission software or the electronic circuit free of cost.
MSS do not supply any engine components to VWG, it only supplied some exterior & interior auto accessories like mirrors,dash board, bumpers and door trims and that too is covered with adequate insurance for any unforeseen events.
As par the MSS management the VWG reaction is "over exaggeration" and the company sees no significant impact on its total revenue as it supplies more in EU than in US/NA.
As an auto maker, VWG is running normally, even in US as only one specific diesel variant is involved in that issue. "Auto recall" is very normal in any part of the world including US, where regulation is more stringent.
VWG has already provisioned around $4.5 bln for likely fine/replacement costs in US against the expectations of around $18 bln as par reports.
The new CEO (Ex Porsche chief) has also a very tough job in restoring the image & trust of the company as the investigations against such issue are spreading all over the world including India. All the other automakers can also be asked to clarify and investigated for similar issue.
Although the US EPA (environmental protection agency) still maintains that the affected diesel cars of VWG is still safe to drive there (as its simply an pollution issue) they have
not issued total recall yet, but likely to do that in the coming weeks after full investigations are completed.
Having said all the above, ultimately VWG will likely be let off with a reasonable fine which the company is well capable of absorbing. In US, previously, another prominent auto maker GM faced similar regulatory issues and were let off with a reasonable fine also.
In effect, VWG as a group will not be affected significantly simply because of employment issues both in US & EU.
Also, auto makers in US are traditionally "good fund contributors" to main stream political parties and keeping in mind, the forthcoming 2016 presidential election campaign there, we might see that nothing "unusual" will happen and normal "business" will go on for VWG also.
MSS is also targeting to diversify its business among other auto makers in different parts of the world, so that maximum 15% dependency will be there either by company/region wise by 2020.
There are also some other factors which contributed some earning downgrades for MSS:
Credit Suisse (CS) has downgraded the stock recently citing subdued copper price and over reliance on single customer (Maruti) in India.
As par CS,
performance of auto ancillaries is directly co-related
with copper and with the falling prices of the same,
the company also has to pass the cost benefits
to its customers and that is hurting its pricing
power. That's why CS has cut the FY17 earning by more
than 10% (street consensus).
Having said that, we have to keep in mind also that although commodity super bull cycle may be over, with the the recent low along with China jitters and their various initiatives to stimulate their economy, all commodities and specially copper might be in the process of bottoming out.
Going ahead, we may see less capacity additions (supply) and stable demand, which will improve demand supply metrics.
Looking ahead:
Going by the time & price action of MSS scrip, all the above bad news might be discounted largely. The stock may further react over the investigations of VWG issues in other countries. but that will be limited.
The stock has cracked nearly 40% from its cyclical high on the back of this VWG issue and its poor/below estimate Q1FY16 result.
The main reasons prior to the VWG issue are poor domestic
performance and narrow operating margins. Also its
overseas operations was affected due to forex
volatility and China jitters and Brazil slowdown.
Looking ahead, new JV in EU & China may be the triggers for MSS along with growing market in US as "VWG's pain might turned into gains for some other auto maker's also".
Also, domestic auto industry will gain momentum in the coming days because of festival season and implementation of 7-th pay commission by Jan'16.
MSS's strong order book, continued debt reduction plan and improvement in subsidiary synergy & profitability along with management's long term strategy of reducing dependency on a single company/country may be some of the triggers in the coming days.
Valuations of MSS as par BG metrics: In the current market parameters
Current median valuation may be around: 295
Projected fair valuations might be around: 360-435-515 (FY:16-18)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | LV | SV | MV | 200-DEMA | 10-DEMA |
| MOTHERSUMI | 7.29 | 25.05 | 45 | 290.41 | 295.63 | 293.02 | 257.08 | 266.41 |
| MOTHERSUMI | 10.75 | 27.75 | 45 | 352.65 | 358.99 | 355.82 | 257.08 | 266.41 |
| MOTHERSUMI | 15.65 | 30.3 | 45 | 425.50 | 433.15 | 429.32 | 257.08 | 266.41 |
| MOTHERSUMI | 21.95 | 33.45 | 45 | 503.92 | 512.98 | 508.45 | 257.08 | 266.41 |
Analytical Charts:
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