Motherson Sumi: Near term headwinds, outlook intact

But operational performance, outlook strong

The Motherson Sumi stock has shed 24 per cent, after the announcement of its quarter ended June results. A weaker domestic performance, with a slow margins movement in its overseas subsidiaries, as well as currency volatility saw the stock fall sharply in the past two weeks.

Margins in the June quarter for its two key subsidiaries SMR and SMP were between 6.2 and nine per cent, flat year-on-year and lower sequentially. Analysts say these margins will scale more slowly than in the past, given the start-up costs of a number plants across locations. While the Street has probably factored in some part of the earnings and margins disappointment, demand, especially in China, new competition and currency changes are concerns.

China luxury car slowdown could hit performance. The company said China makes up seven to eight per cent of revenues. The bigger concern is the Brazilian slowdown, where the company has frozen further investments.

HSBC analysts say the new joint venture (JV) of Johnson Control and Yanfeng could slow the company’s growth. They say the JV, which has started bidding for orders, will be a formidable competitor to the interiors business (about 15 per cent market share) for Motherson.

Depreciating rupee is another moving part which can impact earnings. While the company’s sales and costs are euro denominated and acts as a natural hedge, Prashant Biyani of SPA Securities says a falling rupee could impact all items in the P&L.

In euro terms, the performance of the company’s two key subsidiaries has been strong registering double-digit growth rates. Given the order book, US expansion and increasing business from new markets, most analysts thus are bullish on the company’s long-term prospects. 21 of the 33 analysts tracking the stock have a ‘buy’ with the consensus target price at Rs 375.