Recovery hopes, non-auto share are positives for Motherson Sumi

Acquisitions such as the one in the aviation space is in line with goal of increasing non-auto revenues

A diversified portfolio following recent acquisitions, recovery in the domestic auto space and scope for margin gains aided the 1.5 per cent gains in Motherson Sumi. The new trigger for the country’s largest auto parts makers by market capitalisation has been recent acquisitions.

The company announced its entry into the aerospace industry on the back of a 55 per cent stake buy in Bengaluru-based CIM Tools. The company is engaged in machining and sub-assembly of components for the aviation sector. The company has an order book of Rs 1,500 crore to be executed over the next five years with 80 per cent of these backed by long-term agreements. While the acquisition is small with the enterprise value of Rs 400 crore, the company has an opportunity to grow the business given the addressable market for aerospace materials and aero-structures is at $2 trillion till 2040 on the back of demand for new planes.

Growing passenger volumes, expanding aviation infrastructure and increased procurement from low-cost countries are positives for the company. Analysts led by Raghunandhan N L of Emkay Global Research say that the Covid-19 pandemic has created an opportunity to realign supply chains and rationalise costs, resulting in openings for new entrants from India.

In addition to opportunities in the new segment, the acquisition is in line with the company’s Vision 2025 roadmap of diversifying into non-auto segments such as logistics, healthcare among others. Motherson Sumi is eyeing a 25 per cent share of overall revenues from the non-auto business over the next four years.

The firm also announced its second acquisition which involves its 50:50 Chinese joint venture, SMR NBHX. The JV took a 60 per cent stake in Nanchang JMCG Mekra Lang Vehicle Mirror Company. The acquisition is expected to expand its portfolio in the Chinese commercial vehicle segment.

While these are positive, the company is expected to face near headwinds due to slow global recovery and supply disruptions brought on by the semiconductor shortages. Among global suppliers, IIFL believes Bharat Forge is better placed than Motherson Sumi in the September quarter. Motherson Sumi will see an improvement in India revenue, margins and subsidiary PKC margins compared to the June quarter. However, the fact that global car production was down sequentially in Q2 due to a sharper decline in Europe would hurt Motherson’s performance materially.  

Analysts at Nomura Research say while the near term is likely to be impacted due to ongoing chip shortages, a sharper recovery is expected from FY23. Gains will be on both revenues and margins with production likely reverting to pre-pandemic levels. Also, structural drivers like a ramp up of electric vehicle order book (25% of the total orderbook) and rising content per vehicle should drive growth ahead of the industry, they add.

The stock has not seen much movement from three month ago levels given the near term worries. However, most analysts have a buy on expectations of a recovery, large order book and improvement in profitability.