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Motherson Sumi: Correction overdone

Despite December'15 quarter results coming in line with expectations, Motherson Sumi's stock fell almost 17 per cent (in four sessions) to its 19-month low (intra-day basis) on Friday. What disappointed the Street was the lower-than-expected revenue growth at the India operations and margins at SMP, its overseas subsidiary, which makes interior and exterior plastic modules. The higher margins at SMR, another international subsidiary which makes rear view mirrors, offset the negatives in other segments.

Analysts at IDFC Securities believe while earnings were slightly below estimates, the sharp correction in the stock was overdone. The stock, according to them, offers a favourable risk-return ratio given receding concerns around the Volkswagen scandal, high earnings growth (30 per cent between FY15-18) and inherent strengths such as scale and deep relationships with auto makers.

Although the stock has recovered a bit adding about 6.3 per cent on Monday, valuations at 18 times FY17 earnings are still reasonable.

While the Street is worried about the fallout of the emissions scandal at Volkswagen, Motherson's management indicated that so far there has been no impact on its operations with newer programmes too on schedule. Motherson has stuck to its five-year revenue target of $18 billion by 2020 (current $5 billion) despite sluggish demand in some markets. Seven of the 17 new facilities will see a significant ramp up from the March'16 quarter, gradually boosting revenues. Incremental revenues are also expected to come from acquisitions and from geographies like US and Asia where Motherson is expanding its presence.

The near-term impact, however, will be earnings related. In the December quarter, while revenues at SMR were 6 per cent higher year-on-year and operating profit improved by 11 per cent, operating profit margins were higher 46 basis points year-on-year and 109 basis points sequentially to 10.7 per cent. However, SMP sales grew 11 per cent year-on-year but margins were up only 26 basis points to 6.2 per cent (down 54 basis points sequentially) and below Street estimates. About 76 per cent of consolidated sales of Rs 9,859 crore for December'15 quarter was accounted for by the two subsidiaries.

At the standalone level (domestic operations), revenues grew by just 2 per cent due to the pass-through effect of lower copper prices (down over 25 per cent), yen depreciation, Chennai floods and euro depreciation, which impacts about 15 per cent of the business. Since standalone operating profit margins are double that of SMR and SMP, lower realisations, higher employee and other expenses impacted margins, which were up 40 basis points year-on-year but down 200 basis points to 17.6 per cent on a sequential basis.