From being just a wiring harness supplier to Maruti, MSSL, today, has 135 manufacturing locations spread across 25 countries
Mortherson Sumi Systems Limited.
While the Great Financial Crisis dealt a fatal blow to several large corporations all over the world, it also ensured two things: (a) lots of great assets became available at pretty attractive valuations; and (b) the ultra-loose monetary policies adopted by central banks around the world gave credit-worthy corporations access to very cheap loans. One of many corporations, that have been making the best use of these two factors, is Mortherson Sumi Systems Limited. Result: The company has seen its consolidated sales grow at an astounding CAGR of 48.3% in the last 10 years, thanks largely to two mega acquisitions
Shakti Shankar Patra | @TheDollarBiz
From being just a wiring harness supplier to Maruti, MSSL, today, has 135 manufacturing locations spread across 25 countries
No peers
MSSL came into being in the early 1980s after a JV was formed between the Motherson Group and the Japan-based Sumitomo Wiring Systems Ltd., which continues to own a fourth of MSSL. The main motivation behind forming this JV was the massive demand for auto components that was being generated by Maruti, which had just started rolling out cars in collaboration with Suzuki. For the next several years, MSSL was content with supplying wiring harness to carmakers, primarily Maruti, and was just another Indian auto component manufacturer. But by the time the Indian economy opened in right earnest, and top global carmakers started making a beeline for the country, MSSL had consolidated its position as India’s top wiring harness manufacturer. Then came the bull run of the mid-2000s.
With the Indian economy on an absolute tear, MSSL’s topline recorded a CAGR of 37.1% in the five years between FY2003 and FY2008. Despite the crisis of 2008, MSSL’s topline grew by a healthy 28% even in FY2009. But if one thought this was great, one was in for a big surprise. For, in the five years between FY2009 and FY2014, MSSL’s topline has grown at a CAGR of, hold your breath, 63.5%!
“MSSL has made two major acquisitions since the GFC – Visicorp in 2009 and Peguform in 2011”
Inorganic case study
MSSL’s stupendous growth in the last five years has been aided by two mega acquisitions – Visiocorp in March 2009 and Peguform in November 2011. But they haven’t come cheap. While the Visiocorp acquisition saw MSSL’s total debt rise by 83% between FY2008 and FY2009, the acquisition of Peguform saw its total debt almost quadruple between FY2011 and FY2012. In fact, a The Dollar Business Intelligence Unit study reveals that in the decade between FY2005 and FY2014, even though MSSL’s topline has grown by over 38x, the total debt on its books, have also grown by 38x. As a result, its interest outgo has increased by over 87x to Rs.294.3 crore in FY2014, from just Rs.3.1 crore in FY2005. So, has the company gone overboard in acquiring some of these assets? Not really.
If one takes into account the additional revenue that the company has managed to generate thanks to its acquisitions, one realises that these acquisitions have, indeed, been very prudent decisions. For, while MSSL’s debt was equal to 16.1% of its sales in FY2005, it was equal to just 15.9% of its sales in FY2014. So, for all practical measures, MSSL’s debt is, today, lower than what it was a decade back! Why then has the company’s profit margin collapsed to just 2.5% from almost 11% a decade back?
“Rising raw materials and employee costs have eroded MSSL’s margins in a big way in the last 10 years”
The sour point
The acquisition of Visiocorp in March 2009 saw MSSL’s profit margin almost halve to 3.6% in FY2010 as compared to 6.8% in FY2009. While it did recover marginally to 4.8% in FY2011, the acquisition of Peguform saw profit margin collapse, once again, to just 1.8% in FY2012. While it has managed a small uptick in FY2014, there’s no doubt that every major acquisition by MSSL has seen a dramatic fall in its profitability, a big reason for which has been higher interest outgo to serve the additional debt.
But debt apart, the main reason why MSSL’s profit margins have come down to levels that they have, is lower EBITDA margins. For, from levels of 19% a decade back, MSSL’s EBITDA margin has crashed to just 7.8% in FY2014. And one of the main reasons for this fall in EBITDA margins has been higher raw material costs. While in FY2005, raw materials accounted for about 54.7% of MSSL’s sales, in FY2014, they accounted for 64.4% of its sales – a clear 10 paisa jump in expenses for every rupee worth of sales. Similarly, while employee expenses constituted 8.8% of MSSL’s consolidated sales in FY2005, they accounted for 16.8% of consolidated sales in FY2014 – another eight paisa jump in expenses for every rupee of sales. And if lower EBITDA margin and increased interest outgo were not enough, higher profits in absolute terms and being located at some high-tax destinations means MSSL’s tax rate, at 31.3% in FY2014, has almost doubled in the last 10 years and has shrunk its profit margin further.
Not content
From being just a wiring harness supplier to Maruti a couple of decades back, today, MSSL is a component supplier to most of the world’s top carmakers – be it Asian giants Hyundai, Toyota and Honda or German Big Three (Audi, BMW and Mercedes) or good old Ford. It now has 135 manufacturing units spread across 25 countries and its revenue has crossed the $5 billion mark, which it had set as a target for FY2015. That profits have failed to rise in sync with the rise in sales is, of course, a concern. But then, the last few years have been extremely challenging times. And anyway, fully turning around distressed assets does take time. That MSSL had made Visiocorp EBITDA positive, within just one quarter of acquiring it, means if there is one management on Dalal Street, which you would bet your last buck on, it is that of MSSL. Why then is the market not very gung-ho about the company?
In a recently published research report, brokerage house Emkay observed, “The Street’s focus on near-term earnings has possibly led to missing the bigger picture, where the company has emerged from being an Indian wiring harness maker to becoming a supplier of rear view mirrors and polymer products to major European OEMs.” And given that MSSL’s stated strategy now is “Increasing Content per Car”, one is more than sure that the Street’s myopia will soon get corrected.
next page: “We have remained immune to the slowdown in the EU” - Exclusive interview with Pankaj Mittal, COO, Motherson Sumi Systems Ltd.
“We have remained immune to the slowdown in the EU”
The risk with acquiring multi-million dollar companies, going through tough times, is you never know what the right price is. Timing is also an issue. But the management of Motherson Sumi Systems seems to have made a habit of getting both the pricing and timing right. To know more about the company’s acquisition philosophy and its long-term strategy, The Dollar Business caught up with MSSL’s COO Pankaj Mittal
Interview by Jayashankar Menon | @TheDollarBiz
Pankaj Mittal, COO, Motherson Sumi Systems Ltd.
“Our recent euro bond issuance will ensure we remain immune to any major rise in interest rates”
TDB: Typically, companies which are expanding the way you have been for the last 10-15 years, don’t pay large dividends. What is the philosophy behind your high-dividend payouts?
PM: I think, there are two ways of looking at this. When you pay taxes and dividends, it’s a clear sign that you are generating cash. In FY2005, the dividend outflow from MSSL was Rs.26.8 crore. And last year we paid Rs.258 crore. So, you are right that we are a high dividend paying company, but at the same time we check ourselves, we measure ourselves on RoCE. This means we neither take our shareholders for granted, nor over leverage ourselves. In fact, our stated policy is to pay 40% of our profit as dividend. However, in the last two-three years we have paid only about 32-33%.
TDB: About 84% of your consolidated sales comes from overseas, while around the same of your standalone sales comes from India. Do you have plans to make use of the ‘Make in India’ campaign and increase India’s share in your revenue?
PM: India is a key market for us and we do expect India to play a larger role in our next five year plan of 2020.
Unfortunately, though we have grown in India in the last two years, it’s not a rate at which we would have liked to. We are a great believer in the Indian economy. The car penetration in India is still very low. At the same time, all the acquisitions that we have done, will help us bring the best of technologies to India.
TDB: Since you have so many group companies, have you tried to put a number on the synergy that you might have derived?
PM: It is very difficult to put a value to this. But I can speak about the kind of synergies that exist, how they lead to the fructification of lots of opportunities. For instance, SMR, our mirror company, requires lot of wiring harnesses, which we are, today, able to do ourselves. It is a business, which constitute a substantial part of Motherson Sumi’s exports. The same is the case on the moulding side. The global locations which came into the group, with the acquisition of SMR in 2009 and SMP in 2011, have opened up several new markets for us, which would have been, otherwise, very difficult to tap.
