Motherson Sumi's stock fall is overdone

Results in line with estimates; Street expected more on foreign units' margins, stand-alone biz

Despite December quarter results coming in line with expectations, Motherson Sumi Systems' stock fell almost 17 per cent in four sessions to its 19-month low (intra-day basis) on Friday. What disappointed the Street was the lower-than-expected revenue growth at the India operations and margins at Samvardhana Motherson Peguform (SMP), its foreign subsidiary which makes interior and exterior plastic modules. The higher margins at Samvardhana Motherson Reflectec (SMR), another international subsidiary which makes rear-view mirrors, offset the negatives in other segments.

IDFC Securities analysts say while earnings were slightly below estimates, the stock fall was overdone. The stock, they say, offers a favourable risk-return ratio, given reducing concerns on the Volkswagen emissions scandal, high earnings growth (30 per cent between FY15 and FY18) and strengths such as scale and relationships with automobile makers.

Though the stock has recovered a bit, adding 6.3 per cent on Monday, valuations at 18 times the estimated FY17 earnings are still reasonable.

While the Street is worried on the fallout of the scandal at Volkswagen, Motherson said there has been no impact on its operations. Motherson has stuck to its five-year revenue target of $18 billion by 2020 (current $5 billion) despite sluggish demand in some markets. Seven of the 17 new facilities will see a significant ramp-up from the March quarter, gradually boosting revenues.

The near-term impact will be earnings-related. In the December quarter, while revenues at SMR were six per cent higher year-on-year and operating profit improved 11 per cent, operating profit margins were higher 46 basis points year-on-year and 109 basis points sequentially to 10.7 per cent. However, SMP sales grew 11 per cent year-on-year but margins were up only 26 basis points to 6.2 per cent (down 54 basis points sequentially) and below Street estimates. About 76 per cent of consolidated sales of Rs 9,859 crore for the December quarter was accounted for by the two subsidiaries.

At the stand-alone level (domestic operations), revenues grew two per cent due to the pass-through effect of lower copper prices (down over 25 per cent), yen fall, Chennai floods, and euro fall, which hits 15 per cent of the business. Since stand-alone operating profit margins are double of SMR and SMP, lower realisations, higher employee costs, and other expenses hit margins, up 40 basis points year-on-year but down 200 basis points to 17.6 per cent on a sequential basis.