Worries ahead for Motherson Sumi as tariff wars threaten global car growth

Auto components maker Motherson Sumi has been showing a downward trend, shedding over a third of its market cap since the start of the year, 13 per cent of which has been in the last month. Given the developments in the industry, analysts say, the trend is likely to remain weak. Puneet Gulati of HSBC believes that the sharp sell-off in the stock is due to a global auto slowdown, potential tariff on its key customers and a lack of faith among investors in margin expansion. What has compounded the problems is that demand worries have come at the same time both for its global car clients as well as Indian passenger vehicle manufacturers. 

Global woes

 

Motherson Sumi gets over 85 per cent of its revenues from its international subsidiaries SMR, SMP and PKC. Within this, SMR, which makes exterior mirrors and SMP (bumpers, instrument and door panels) account for two-third of revenues and global car makers are its key clients. Expectations of a slowdown in the global car segment is thus a key worry for investors. Analysts highlight the muted profit guidance from BMW as the first indication of the slowdown. The German luxury car maker indicated that margins for 2018 will fall below 8-10 per cent band, the first time in a decade, due to international trade conflict and new strict emission rules. 

Earlier Daimler (Mercedes) had cut its volume targets due to escalating trade war, while Ford and Honda have also issued warnings about rising commodity costs and impact of tariffs. Uncertainty about tariffs and retaliation from China is leading to postponement of purchases hitting car makers globally. In a period of falling volumes and higher costs, car makers are forced to maintain a fine balance between raising prices without impacting volumes/market share. While Motherson Sumi has not commented on the impact its operations will have due to the slowdown, analysts believe it could lead to lower orders.
 

Growth worries in India too

The other speed bump for Motherson is its India operations. Passenger vehicle growth in September fell by 5.6 per cent year-on-year, the third straight month of decline. Rising cost of ownership and higher product prices brought on by regulatory changes (like insurance) as well as increase in commodity prices (and weak rupee) are impacting sales volumes and margins of auto makers and key clients such as Maruti. While companies are hoping for an uptick from the festive season as well as rural markets, most brokerages have cut their passenger vehicle volume growth estimates for FY19 from 9-10 per cent to about 6 per cent. While India accounts for about 13 per cent of Motherson’s consolidated revenues, it is the most profitable contributing about 26 per cent of operating profits. Margins at the Indian entity, which makes wiring harnesses, are 2-3 times those at its overseas entities. 

Road ahead

It is the improvement in margins of overseas operations, which have never crossed the 12 per cent mark that the street will be looking at. What should help SMR and SMP is improvement in utilisation levels as three plants will come on stream in FY19. While it’s Hungarian plant commenced production in June quarter, the US-based Alabama and German plants are expected to start production in the current quarter. 

 

Motherson has been taking steps to diversify its risk in terms of products, geographies and segments to minimise the impact on its operations. Firstly, it is increasing the content per vehicle to improve the share of revenues and market share from auto makers. The acquisition earlier this year of Netherland-based Reydel, which makes instruments, door panels, console and cockpit modules, will help increase Motherson’s global product offering be it on technology, market share and geographic presence. Last year’s Finnish acquisition (PKC) made it the market leader in wiring harness business for heavy duty commercial vehicles in North American and Europe. These are in line with its 2020 goal of not having any country, component or customer accounting for more than 15 per cent of revenues. In fact, new order wins from other customers as well as the Reydel/PKC acquisitions have helped reduce its dependence on Audi from 22 per cent of revenues in FY15 to 17 per cent, while Volkswagen’s share is down to 7 per cent from 12 per cent.

While the strategies are sound, investors should be cautious given the uncertainty in the global car market grappling with supply disruption (due to tariff wars), regulatory changes (emission norms) and transition to new technologies.