Motherson Sumi: Margin worries near term overhang for auto component maker

Growth in client volumes of Motherson Sumi and easing up of supply chain issues could be triggers.

Hit by higher raw material costs and supply chain issues, the December quarter (Q3FY22) performance of the country's largest listed auto component company, Motherson Sumi, missed Street estimates. Elevated cost pressures led to a 14-16 per cent reduction of earnings estimates by Motilal Oswal Research for FY22 and FY23.

The company’s profitability on a y-o-y basis took a hit for the second quarter in a row. After a 190 basis points fall in Q2, margins in Q3 were down 380 basis points. The worst affected business was that of its component supplier to commercial vehicles, PKC, which saw a margin compression of 600 basis points y-o-y to 3.1 per cent. The Street was working with  estimates that had pegged the number at twice that. The dip in margins was led by weak volumes in North America and China, as well as cost pressures. PKC was the only segment which reported a dip in margins both on a sequential as well as on a y-o-y basis.

The India business (wiring harness), which is the most profitable in the group, fetching margins in excess of 15 per cent (twice that of consolidated operations), saw a 300 basis points dip in profitability for the quarter. The outlook for the business, however, is strong due to higher content per vehicle. This is on account of multiple regulatory requirements both on safety and BSVI emission norms.  

In addition to higher raw material costs and lower volumes due to supply chain issues, staff and other overheads too weighed on profitability. The operating profit was 20 per cent below estimates of Edelweiss Research and the issues could take some time to sort out. Says Chirag Shah of the brokerage, “Margin pressure was witnessed across business segments, and can persist till the supply chain/material costs stabilise. While performance would improve on a sequential basis, normalisation may take two quarters according to management.”

Most brokerages expect margins to move up as capacity utilisation improves in greenfield sites. Volumes aided by gradual scaling up by auto makers and some stability in commodity prices too could contribute to sequential improvement in margins.

While margin movement will be a key monitorable, the Street is positive on the revenue trajectory going ahead. Say analysts at ICICI Securities, “Backed by revival of worldwide client volumes of original equipment makers, strong order-book and electric vehicle neutral product profile, net sales are expected to grow by 11 per cent compounded annually over FY21-23.” The share of electric vehicles continues to rise and is now 3.5 per cent of consolidated revenues;, 25 per cent of orderbook are for components the EV space. The brokerage, however, has a hold rating on the stock given slower than anticipated recovery in passenger vehicle auto volumes globally amid persisting chip shortage.

At the current price,the stock, which has shed about 7 per cent over the last few sessions, is trading at 19 times its FY23 earnings estimates. Given the multiple headwinds on the margin front and lack of visibility on volume pick up, investors should await progress on the same before considering the stock.