Motherson Sumi's future hinges on foreign arms, stock sheds nearly 5%

The Motherson Sumi stock shed nearly 5 per cent on Thursday on muted margins, new order growth and higher valuations. Consolidated margins at 9.7 per cent in the March quarter (Q4) was 130 basis points (bps) lower year-on-year (y-o-y) because of higher start-up costs due to a new plant, as well as the lag effect of passing on higher raw material costs. 

The India business, which is its most profitable, saw a margin decline of 201 bps y-o-y to 18.5 per cent while the SMP (Samvardhana Motherson Peguform) business, too, saw a decline of 30 bps over the year-ago quarter. The Street will keep an eye on the margin improvement especially in the overseas subsidiaries, while India business margins are expected to improve as it passes on higher raw material costs. 

Though the order book at 17.2 billion euros at the end of FY18 is its highest ever, analysts at Kotak Securities say new orders of SMRPBV (Samvardhana Motherson Automotive Systems Group BV), which controls both its international subsidiaries, is coming down over the past couple of years. This, according to them, could lead to a slowdown in revenue growth of the company. While new orders in FY16 stood at 8.8 billion euros, it was 4.7 billion euros at the end of FY18. Going ahead, how the order book translates into growth for the subsidiaries will be key, as so far it is yet to reflect in higher revenue growth. 

A positive for the stock, however, continues to be performance of India business. Revenues grew 22 per cent both on strong volume growth in the passenger vehicles business as well as market share gains. The India business accounts for about 13.5 per cent of overall revenues. Group company PKC, which reported revenues of 275 million euros in the quarter, is also expected to benefit riding on the strong US class 8 truck orders. 

At the current price, the stock is trading at an expensive 24 times its FY20 earnings estimates and investors should await better entry points based on revenue growth and margin improvement at SMRPBV.