Motherson Sumi: Domestic revenues, subsidiary margins disappoint

Street will be eyeing further improvement in profitability

Motherson Sumi Systems disappointed the Street with the June quarter’s consolidated earnings. The stock fell five per cent, as net profits grew 62 per cent over a year to Rs 266 crore, short of consensus estimates of Rs 296 crore. Overall revenue at Rs 9,252 crore was up 12 per cent year-on-year, while operating profit at Rs 841 was up 14 per cent, lower than expectations.  

The Indian operations disappointed, with revenue growth of only one per cent. Year-end discounts, lower copper costs, a pass-through, currency fluctuations led to the muted topline of Rs 1,216 crore. Adjusted for these, revenue growth, according to the company, would have been 15-17 per cent. With the introduction of higher value vehicles and premiumisation, the value per car and scope for growth is expected to be strong.

The company’s two subsidiaries, which account for 78 per cent of overall revenue, grew 25 per cent in euro terms and seven per cent in rupee terms. Margins, however, barely grew. While the Street was expecting this number to move up strongly, at 7.2 per cent, they were up by 10 basis points (bps). While margins for its SMP subsidiary inched up by 20 basis points to 6.2 per cent, they were in fact lower by 10 basis points to nine per cent in the SMR subsidiary.

Higher costs related to ramping up of its various plants and the product, as well as geographic mix at SMR, led to the muted margins. While a key worry for the supplier to passenger vehicle makers would be slowdown in China, the company management indicated sales there would be seven to eight per cent and does not pose immediate problems from the revenue perspective. The company is looking at expanding its US operations through its acquisition there and expects things to ramp up over the next couple of years.

The Street will continue to keep an eye on the margins and the commissioning of its various plants. Though 75 per cent of the analysts tracking the stock have a buy there could be a downward revision in margin expectations, given the disappointing numbers. At the current price, the stock is trading at 33 times its FY16 consensus earnings estimates. While the company has a strong order book and good record of execution, any further pressure on  margins could be a dampener. Accumulate on dips.