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Higher utilisation to improve margins for Motherson, profit seen rising 25%

Rising raw material and start-up costs impacted the company's profitability in the June quarter

Ram Prasad Sahu 

Motherson Sumi

The stock of auto components major, has shed 3.5 per cent in the last two trading sessions on weak June quarter performance. The company’s operating and net profit came in 5-11 per cent below expectations. The lower-than-expected operational performance was due to the delay in passing on commodity inflation to customers, low utilisation and start up costs at its plants. On the revenue front, adjusted for change in accounting standards, the same were up 24 per cent and came above analyst estimates.

For the stock to see significant upsides, the key trigger would be an uptick in margins at its two foreign auto parts subsidiaries, SMP and SMR. The operating profit margins for SMP were up 90 basis points to 6.2 per cent, while those at SMR were down 12 basis points to 11.2 per cent. While there were pressures on the profitability front, Prayesh Jain of IIFL believes that SMP margins will improve once the new plants scale up to the optimum utilisation levels. For SMR, the gains, according to him, will come from value addition in its mirrors business as better technology adoption is one of the top differentiators for

However, unlike SMR and SMP's June quarter show, the third major overseas subsidiary, PKC put out a strong performance as revenues were aided by robust commercial vehicle sales in the US and commissioning of a joint venture plant in China. Margins for the business improved by 140-330 basis points on a sequential and year-on-year basis to 9.5 per cent in June quarter, on higher revenues and backward integration. Growth for this business is expected to continue on strong demand trends in the US and European commercial vehicle market. The three major overseas subsidiaries account for over 80 per cent of Motherson's consolidated revenues.

In the standalone operations in India, a sharp rise in copper prices, the primary raw material and lag in passing on this rise impacted margins. Prospects of the business, however, are expected to improve due to sustained growth in

Given the prospects of the various businesses, analysts believe that Motherson will be able to grow its net profit by 25 per cent annually over the next two years. A large part of the gains for the company, which has stuck to its FY20 revenue target of $18 billion (just under $9 billion currently), is expected to come from a strong order book and an improvement in margins.

First Published: Thu, August 09 2018. 15:04 IST
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