Motherson Sumi could see earnings downgrades over auto sector slowdown

Muted global and domestic auto environment to impact revenues and margins

Hemmed in by demand issues in the Indian and the global automotive markets, along with and higher start-up costs, Motherson Sumi reported a lower than expected March quarter performance. While revenue in the quarter was broadly in line with estimates, margins, especially in international operations, were affected as the company ramped up operations at new plants and recent acquisitions. 

The key worry for the Street, however, is the slowdown in the global automobile sector, especially the luxury car segment. 

The European auto sector has reported a 3 per cent decline in the March quarter, compared to low single-digit growth over the past couple of years, according to analysts at CLSA. 

"Given some of the key global markets are slowing down, the outlook over the next couple of quarters will be very tough for the company as automakers cut back to adjust to the fall in demand."

While the company is sitting on a large order book, a slowing demand environment as well as tough new environment regulations on emissions will impact the overall demand. Analysts expect the same to get reflected in the company revenues and margins for the international operations. Margins in the quarter for international operations halved over the year-ago period. The company indicated that margins would stabilise over the next few quarters, once the greenfield plants scaled up, and costs were absorbed.  

For the India business, car sales have been affected by higher insurance premiums, fuel prices and interest costs. In the India business, the company reported a 13 per cent fall in revenues, though margins have held steady. 

Analysts believe that growth could come back in the second half of the year on a pick-up in consumption and implementation of BSVI norms. 

Given the muted global environment, brokerages believe that the company will see downward revision of earnings and a valuation derating. Investors should avoid auto part suppliers, given the lack of revenue visibility and demand pressures.