Near-term volume, margin headwinds for Motherson Sumi

Supply disruptions have led to downward revision of earnings estimates for FY22

A weak operating performance in the September quarter and muted near term outlook led to downward revisions of earnings of auto ancillary major, Motherson Sumi. The weak sentiment weighed on the stock prices that fell 4.2 per cent; it was the second highest loser among in the BSE 100 index on Monday.

Even as the domestic operations posted a 14 per cent growth in revenues in the quarter on a sequential basis, all the international businesses  which account for 90 per cent of revenues reported a decline.

Within the international business, SMRPBV, the largest overseas operation, registered a 13.6 per cent decline in revenues on account of sharp fall in volumes of automakers. Even though underlying demand was strong, supply chain disruption due to chip shortage dented production schedules. Performance at another unit, PKC which makes wiring harness for commercial vehicles, was hit due to dip in volumes in China, elevated costs due to new launches and supply chain disruption.

While the pressures on chip supply are easing, the same is not strong enough and is expected to weigh on the December quarter performance as well.

Lower volumes and higher raw material costs dragged down the operational performance. Consolidated operating profit margins were down 260 basis points y-o-y to 6.7 per cent due to lag effect of raw material costs pass through. Margins in SMRPBV were also impacted by higher labour and freight costs. The margin dent on account of raw material costs are expected to be offset as the company has a pass through of the same based on contract periods ranging from 3-6 months.

Despite the near term headwinds, the street is positive on the long term triggers for the company on the back of a large order book, structural changes in the auto sector which would benefit Motherson Sumi and gains on the margin front from higher utilisation especially at the greenfield units. The order book at SMRPBV as of September stood at 15.3 billion Euros with new order winds of 2.1 billion Euros.

Increasing share of electric vehicle (EV) supplies as a share of orderbook is another positive as it keeps the company on the right side of industry shift. The share of EVs in the order book now stands at 27 per cent as compared to 25 per cent in March this year. The advanced features of the EV platforms is expected to boost content per vehicle for the company.  

While analysts led by Jinesh Gandhi of Motilal Oswal Research have cut the FY22 earnings estimates by 7 per cent, they maintain their positive view on the company. The reason for the stance is industry recovery, turnaround in greenfield plant and execution of strong order book at SMRPBV. While analysts are bullish, investors should await volume uptick and improvement in margin trajectory before considering the stock which is trading at 22.5 times its FY23 earnings estimates.