Mothersumi Sumi: Good quarter, more to follow?


Mothersumi Sumi: Good quarter, more to follow?

  The Motherson Sumi stock has been volatile in recent weeks with positives being the strong order book and March 2016 quarter results coming in above expectation, even while the Volkswagen issue continues to be an overhang.


The management has indicated that there has been no order cancellation by Volkswagen and supplies to its biggest client are continuing as normal. Motherson has also reiterated its target of reaching $18 billion in sales by 2020 from current revenues of $5.77 billion. The company’s order book currently stands at euro 13.5 billion (over Rs one lakh crore) with orders worth Rs 66,000 crore being added in FY16. The company also hopes to achieve a return on capital employed target of 40% by 2020.

The trigger for the stock going ahead is the ability of the company to sustain the March 2016 quarter performance especially on the India business (standalone) front and margin gains in its two global subsidiaries. The company’s revenues on a standalone basis were up 13% year-on-year, almost double that of analyst estimates with margin improvement of 70 basis points to 20.9%. The margin improvement came on the back of lower raw material and staff costs. Though domestic revenues constitute only 14% of overall revenues, it is the most profitable part of the company’s portfolio. Sales have been range-bound with muted growth over the past few quarters.

The other positive has been the profitability of overseas subsidiaries which saw record margins in the March quarter. SMR's margins at 12.5% and SMP’s number at 7.5% were the highest since the acquisition of the two companies in 2009 and 2011, respectively. Good show at the India business, margins gains at the international level coupled with lower taxes helped the consolidated entity post net profit at Rs 476 crore in the March quarter, up by nearly 50% over the year-ago period. If the company is able to improve on its March quarter performance especially with respect to revenue growth at international levels, the stock could see further upmove.

Analysts at HSBC are positive on Motherson Sumi in the longer term given the increasing role of auto component suppliers, higher complexity of parts, innovation in camera-based technologies, and use of modern interior architecture. While there are competitive pressures in the domestic and international businesses, the key is the fallout of the emissions scandal at Volkswagen. Motherson, however, indicated that so far it has not faced any negative impact of the same.