Auto parts cos like Motherson Sumi, Bharat Forge top global peers in valuation
Shares of export-oriented auto ancillary companies in India have seen a surge in stock prices ranging between 30 per cent and 85 per cent.
Shares of export-oriented auto ancillary companies in India like Motherson Sumi, Balkrishna Industries, Bharat Forge and smaller companies like Suprajit Engineering have seen a surge in stock prices ranging between 30 per cent and 85 per cent.
The top five global auto ancillary companies have a weight of 26.48 per cent in the Bloomberg World Auto Part Index, which has gained 36 per cent in the past one year. Motherson Sumi and Bosch India are the only Indian constituents of the index with a cumulative weight of 1.4 per cent.
Indian auto ancillaries are still enjoying premium valuations compared with global players because their average growth across financial parameters like revenue, operating profit has been higher than that of their global peers. Indian auto ancillaries also command higher P/E (price-earnings multiple) than their global counterparts. The P/E ratio denotes the price an investor is willing to pay for every unit of profit.
“Key reasons for auto ancillaries to command higher premium than their global peers are better earnings growth, continuous entry into newer markets and a shift towards higher-margin products,” said an analyst with a domestic fund house.
Motherson Sumi, for instance, will have a compounded annual average growth (CAGR) of 59 per cent for profits during FY12-14 compared with Delphi’s 14 per cent and Hyundai Mobis’ 6 per cent in the same period. On the operating profit side, Motherson Sumi’s CAGR stands at 61 per cent against Johnson Control’s 28 per cent, which is the highest among the top five global players.
Among the top five global ancillary companies, except for Hyundai Mobis, the others either have a negative five-year CAGR profit growth or are marginally positive. But Motherson Sumi, Balkrishna Industries have registered a five-year CAGR net profit of more than 20 per cent. Moreover, Indian auto ancillaries have a higher RoE (return on equity) than global biggies.
Motherson Sumi has shown a revenue CAGR of 47 per cent in the past 10 years, and during the same time, its export contribution has increased to 74 per cent from 16 per cent. Bharat Forge, a forging company based in Pune, has also increased its export contribution, which now stands at almost 50 per cent of its revenue. Similarly, Balkrishna Industries derives almost 90 per cent of its revenues from exports.
According to Bloomberg, Motherson Sumi has been trading at 43x and Bharat Forge at 32.48x compared with Denso Corp at 15.55x. Reflecting the trend, brokerage houses are quite bullish on the Indian auto ancillary sector: 86 per cent of the analysts covering Motherson Sumi have put a ‘Buy’ on it, while for Balkrishna Industries and Bharat Forge, the ‘Buys’ are at 92 per cent and 60 per cent, respectively.