Higher EV share, FY22 auto rebound to support Motherson's revenues

Increased utilisation, improving margins and lower debt are profit triggers going ahead

Led by improved performance across key segments, Motherson Sumi returned to growth trajectory in the December quarter. After five consecutive quarters of year-on-year fall in revenues, the company posted 15 per cent growth in consolidated revenues.

The company’s revenues, which were a shade under Rs 18,000 crore, are its highest-ever in a quarter, led by operations recovering to pre-Covid levels and India business reporting 27 per cent growth.

It was the operating performance that stood out as the company reported a 56 per cent jump in operating profit, led by a sharp improvement in its international subsidiaries, especially SMP. Margins at SMP, which accounts for more than half its consolidated revenues, improved 470 basis points to the highest-ever level of 9.5 per cent.

Scaling up of SMP’s greenfield plants, which are operating above the break-even level, and cost-cutting measures at SMR, its second-largest unit, led to a 300-basis point gain in the consolidated margin to 11.4 per cent. Cost-cutting measures and an improving outlook for key auto segments are expected to support revenues and profitability.

What bodes well for the company is the higher share of electric vehicles in the overall order book of its European subsidiaries. SMRPBV, which comprises SMP and SMR, saw the proportion of electric vehicles rise to 21 per cent of its order book as of September 2020, as compared to 18 per cent in March 2020. The company indicated it is a supplier to four of the top five electric vehicle models sold globally.

Hitesh Goel and Rishi Vora of Kotak Institutional Equities believe the company is well-poised to benefit from an increase in electronics content per vehicle in passenger vehicles, shift towards electric vehicles, and consolidation of suppliers, especially in the plastic component industry globally.

Given the auto recovery in FY22, margin improvement in Q3, strong order book, most analysts have increased their earnings per share estimates for FY22-23. Goel and Vora have increased their net profit estimates by 17-20 per cent for the next two financial years. In addition to operational improvement, the company reduced its consolidated net debt level to Rs 6,206 crore, down Rs 1,306 crore on a sequential basis.

Most brokerages have increased their target price after the Q3 performance. However, the 17 per cent share price jump over the last two trading sessions reflects the Q3 outperformance and also prospects. Investors should await better entry points.