Volkswagen shadow on Motherson Sumi

Near-term pressures could build up if Volkswagen cuts orders

Motherson Sumi’s September quarter results were better than expectations across parameters driven by good performance in the India business and its European subsidiary SMP. The large beat came in the consolidated operating profit, which was up 31 per cent year-on-year thanks to revenue growth (up 15 per cent) and margins (up 130 basis points), over the year-ago period. Consolidated margins were at their highest in 14 quarters. Margins came in higher across the three key businesses — SMP, SMR and the India revenues.

Margins in the standalone business grew 160 basis points to 19.6 per cent, driven by lower other expenses to sales ratio. Lower interest expenses and depreciation helped net profit grow by 36 per cent year-on-year. Despite lower copper prices, revenues grew 10 per cent. The key disappointment in the June quarter was the flattish revenues in the domestic space where the operating profit margins are double that of its European subsidiaries. What had added to the disappointment in the previous quarter was also muted margin show in SMR and SMP.

In Euro terms, sales at SMR and SMP grew 14-31 per cent. However, adverse currency movement meant that in rupee terms sales growth was at three per cent in SMR and 18 per cent at SMP. Margins at the two companies were between 6.7 and 9.6 per cent.

While the order pipeline at the European subsidiaries remains strong with Motherson having an unexecuted order book of €12 billion, emission-related falsification at one of its key customers Volkswagen could, according to analysts at Prabhudas Lilladher, lead to production related blips over the next year. While the Motherson management indicated there have been no production disruptions in its despatches to Volkswagen in the September quarter, analysts have cut their earnings target for FY16 and FY17 on assumption of lower revenues from Volkswagen.

The company continues to stick to its FY20 revenue target of $18 billion, return on capital employed goal of 40 per cent and dividend pay-out ratio of 40 per cent. Given the 25 per cent plus annual revenue growth needed to reach the target, the firm might have to look at acquisitions.

Most analysts have a ‘buy’ on the stock given the steep correction over the past two months due to lower than expected financial performance prior to the September quarter. Investors should await some clarity on the key issue pertaining to Volkswagen before buying into the stock.