Employees of Motherson Sumi Systems Ltd, work on a car wiring assembly line inside a factory in Noida on the outskirts of New Delhi (Photo: Reuters)
The Motherson Sumi
stock is likely to remain under pressure on the back of a weak performance in India, margin pressures, and a muted near-term outlook. The stock has shed over 16 per cent since the start of the year, as supply chain disruption — on account of coronavirus
— has added to slowdown concerns in the India market.
The company reported a 5 per cent dip in domestic sales, given the fall in passenger vehicle production and weakness in copper prices. The lower volumes led to negative operating leverage, thereby denting operating profit margins. While margins at 15 per cent were 10 basis points (bps) higher than the year-ago quarter, they fell short of Street estimates by over 100 bps.
Recovery in India is crucial for overall margins, given the region is most profitable and margins here are twice that of consolidated operations. In addition to India, brokerages believe profitability gains will depend on a recovery in auto volumes across the EU, better operating efficiencies, and cost reduction efforts.
The international business of the company (subsidiaries) also reported a weaker-than-expected performance. Within this, while weakness in South Korea led to a 5 per cent fall in SMR’s business, a slowdown in Class 8 truck orders dented the performance of PKC (both subsidiaries).
While SMR makes automotive mirrors, PKC manufactures wiring harness and electronics, mainly for commercial vehicle makers. SMP, which supplies internal and external modules, reported growth of 2 per cent. This was driven by organic growth, as well as a ramp-up of its greenfield facilities. The ramp-up of its Alabama plant in the US was critical for SMP and consolidated margins.
Brokerages have highlighted that revenues will be affected due to the weak global automotive demand. Lower-than-expected ramp-up of new plants and uncertainty on account of coronavirus
could lead to pressure on revenues and margins.
In addition, expensive valuations of global subsidiaries vis-à-vis global peers has led Kotak Institutional Equities to give a ‘sell’ rating to the stock.
Investors should await a steady uptick in revenues and margins before considering the stock.