Motherson Sumi: Good quarter, more to follow?

Street to watch out for any fallout of emission scandal at Volkswagen, Motherson's largest client

The Motherson Sumi stock has been volatile in recent weeks with positives being the strong order book and March 2016 quarter results coming in above expectations even while the Volkswagen issue continues to be an overhang. The management has indicated there has been no order cancellation by Volkswagen and the supplies to its biggest client are continuing as normal. Motherson has also reiterated its target of reaching $18 billion in sales by 2020 from current revenues of $5.77 billion. The company’s order book currently stands at euro 13.5 billion (Rs 1 lakh crore) with orders worth Rs 66,000 crore added in FY16. The company also hopes to achieve a return on capital employed target of 40 per cent by 2020.

The trigger for the stock, going ahead, is the company's ability to sustain the March'16 quarter performance especially on the India business (standalone) front and margin gains in its two global subsidiaries.

The firm's revenues on a standalone basis were up 13 per cent year-on-year, almost double that of analyst estimates with margin improvement of 70 basis points to 20.9 per cent. The margin improvement came on the back of lower raw material and staff costs. Although domestic revenues constitutes only 14 per cent of overall revenues, it is the most profitable part of the company’s portfolio. Sales have been range-bound with muted growth over the past few quarters.

The other positive has been the profitability of overseas subsidiaries, which saw record margins in the March 2016 quarter. SMR's margins at 12.5 per cent and SMP’s number at 7.5 per cent were the highest since the acquisition of the two companies in 2009 and 2011, respectively. Good show at the India business, margins gains at the international level, coupled with lower taxes helped the consolidated entity post net profit at Rs 476 crore in the March quarter, up 50 per cent over the year-ago period. If the firm is able to improve on its March quarter performance, especially with respect to revenue growth at international level, the stock could see further gains up move.

Analysts at HSBC are positive on Motherson Sumi in the longer term given the increasing role of auto component suppliers; higher complexity of parts, innovation in camera-based technologies, and use of modern interior architecture. While there are competitive pressures in the domestic and international businesses, the key is the fallout of the emissions scandal at Volkswagen. Motherson, however, indicated that so far it has not faced any negative impact of the same.