Motherson Sumi pluses outweigh the negatives

The stock of Motherson Sumi Systems, the automotive components maker, declined a little over five per cent in the early part of Thursday's trade, reacting to the June quarter (Q1) results which disappointed Street expectations. Although the performance looks weak, this is mainly due to some one-time transactions or events.

Ironically, despite the Street sensing this impact of one-off items, the stock closed the day's trade in the red, down 3.5 per cent to Rs 317.5. Analysts feel the weak market sentiment and selling in broader markets also weighed on the stock, and that there is little reason for long-term investors to worry.

Net profit plunged by 21 per cent year-on-year to Rs 347 crore, despite consolidated revenue increasing by 25.6 per cent to Rs 13,129 crore. The performance was impacted by Rs 150 crore of an exceptional expense incurred towards early redemption of €500 million of senior secured notes, raised at 4.125 per cent by its overseas subsidiary, SMRP BV. As these were replaced with €300 mn of 1.8 per cent senior secured notes, it resulted in a redemption premium and unamortised transaction cost (mainly foreign exchange).

Going ahead, however, this could result in some reduction in interest cost, which was Rs 117.6 crore, up 38 per cent over a year. Excluding this impact, net profit was Rs 497 crore, up 13 per cent year-on-year.

As for the quarter's operations, helped by nearly 26 per cent increase in revenue, even operating profit (excluding exception expenses) rose 28 per cent over a year before, to Rs 1,186 crore. The operating margin at nine per cent was at about the year-before level of 8.9 per cent. However, sequentially, operating margin fell sharply and was a disappointment.

A host of other reasons such as consolidation of recently acquired PKC's operations and high start-up cost incurred towards new facilities were reasons for the drag on profitability. Margin compression is certainly worrisome, especially after a year of improvement in profitability; however, don't attribute much to this point, says Arun Agarwal of Kotak Securities. He says the fall must have been anticipated as the PKC acquisition was seen to be slightly margin-depletive, though it adds to the revenue. He also notes that for a company which has grand acquisition plans to scale up its business, operating margin could be impacted time and again.

"So, investors should be less concerned about the profitability, as long it maintains strong revenues and operating profit growth," he affirms. These were comfortably met in Q1. Also encouraging is the 15 per cent year-on-year revenue growth posted by PKC, indicating the acquisition wasn't a bad deal at all.

Segmentally, domestic operations grew 21 per cent to Rs 1,721 crore. While its subsidiaries, SMR and SMP, posted 6.7 per cent and 15.6 per cent revenue growth year-on-year, to €399 mn and €851 mn, respectively.

Therefore, given Motherson Sumi's record of keeping to its promise (and turning around acquisitions), analysts say it is on the right path to meet its FY20 goal of $18 billion in revenue. So, while the Street could marginally alter its expectations after the Q1 performance, the fundamentals remain as they were and long-term investors could use any meaningful correction to accumulate the stock.


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