The earlier share price retraced its three week decline (Rs 450-394) in just a week indicating a positive price structure as rallies are stronger and faster whereas corrections are shallow and time consuming. The 21 week EMA has historically acted as a strong support in the stock during the secondary corrective price action as can be seen in the adjacent chart and is currently placed at Rs 404. The stock has seen a strong pullback from the support level and has rallied from strength to strength, thereafter.
It has consistently made higher peaks and bottoms, which indicate a strong appetite to own the stock among market participants. Volume behaviour also supports the overall bullish stance as rallies throughout the year have been on the back of volumes double the 50-week average of 45 lakh shares per week while the secondary correction have seen relatively low volume participation. Considering the overall positive price structure, we believe the stock offers a good reward/risk set-up to ride the next up move. We expect the stock to head towards Rs 590 in the medium-term being the 123.6% extension of the previous major rally (Rs 257 to Rs 448) as measured from the October 2014 low of Rs 352.
Fundamental Outlook Motherson Sumi (MSL) has been increasing its presence across multiple product segments and customers either by forming joint ventures for different product lines or by cross-selling product or technologies. The company has been able to acquire companies available at distressed valuations with assured business from OEMs. The standalone business has also benefited from this and MSSL has grown faster than the domestic auto industry by increasing content per car as its association with the overseas subsidiaries continues to help garner more business in India from global OEMs.
With MSL’s competence on turning around businesses evident from the success of SMR and SMP, we believe the management’s strong focus on RoCE augurs well for the performance in the wake of strong growth potential. MSL’s performance has sustained (PAT CAGR has driven up valuations in sync). Our outlook on the business remains positive with strong growth likely from both organic and inorganic sources, which are likely to ensure that multiples premium remains vis-à-vis peers.
We value the company on SOTP valuation. However, on an overall basis, it remains attractive at ~16x PE, 7x EV/EBITDA FY17E earnings.
Strategy: "Buy Motherson Sumi Systems in the range of Rs 448–456 for a target price of Rs 590.00 with a stop loss below Rs 395.00 on a closing basis", says ICICIdirect.com research report.
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