Street positive on Motherson despite weak outlook, drop in Q4 revenue

Strong operating performance, falling debt keep Street positive

Motherson Sumi shares have gained close to 24 per cent in a month, half of which has come in the past week. The strong March quarter performance, falling debt, relaxation in the lockdown, and opening up of factories in key markets lifted the stock.

However, a better-than-expected March quarter — led by the Indian business — was the immediate trigger. Even though consolidated revenues fell 12 per cent, the firm managed to improve both operating profit and margins year-on-year (YoY) and sequentially.

Operating profit margins expanded by 200 basis points (bps) to 9.2 per cent, compared to estimates of under 6 per cent. The improved margin performance was driven by a higher share in the more profitable Indian business, cost-cutting measures, input cost gains, and benefits from improved utilisation.

As regards its India business, the firm reported a better performance — limiting revenue fall to 6 per cent — even though passenger vehicle production declined 18 per cent during the quarter.

 

 

This was on account of higher content per car, which means the firm is supplying more parts to newer BS-VI-compliant vehicles.

On the profitability front, an improved India performance came as a major boost, given the 700-bp gap between its consolidated and India margins. The management expects the firm’s India operations to bounce back faster given its lower inventory, pent-up demand, and a shift towards private modes of transport.
 

The key takeaway, however, has been improvement in cash flows and falling debt. Cash flow from operations improved to Rs 7,430 crore in FY20, from Rs 5,360 crore in FY19. Capital expenditure, which has reduced in FY20, is expected to fall further in FY21.

Despite the impact of Covid-19, analysts at Kotak Institutional Equities (KIE) expect the company to generate robust free cash flow in FY21, on prudent cost management.

Improved cash flows has helped reduce net debt to Rs 6,917 crore at the end of March quarter, to the firm’s lowest level in the last 10 quarters. Analysts expect this number to fall 80 per cent by FY23, on improving operating performance, cost management, and recovery in demand.

Though the March quarter show is a positive, investors should be cautious given the demand situation. While China and Europe are expected to recover earlier than India on lockdown relaxation and government support, the weak economic situation in most major markets indicates recovery will be slow and gradual.