Margin gains key trigger for Motherson Sumi in Q2; stock rises over 4%

The stock of Motherson Sumi was up over 4 per cent on Monday after the company reported a better-than-expected performance for the September quarter (Q2FY20). Led by a  double-digit growth at its two units — SMP and PKC — the company reported 6 per cent improvement in consolidated revenues as compared to estimates, which had pegged growth at 3 per cent. 

The uptick in growth came in from Finland-based PKC, which makes wiring systems and electronics for automotive companies. The unit reported growth of 12 per cent, contributed by China, Europe and North America. The improvement at the operational level also helped the unit’s Ebidta to grow by 37 per cent over the year-ago quarter. 

SMP, which makes interior and exterior modules, saw a growth of 20 per cent over the year-ago quarter, with operating profit adjusted for the IND AS impact coming in marginally higher than the year-ago quarter. Higher losses at the start-up plants limited the gains at the operating profit level. On a like-for-like basis (excluding greenfield units), margins have improved by 50 basis points (bps) to 9.8 per cent. Improvement in profitability will depend on how quickly it scales up its Alabama plant and keep costs under control.  Analysts say that the European auto slowdown, coupled with the ramp-up in costs at its greenfield facilities is expected put some pressure on the company’s bottom line over the next couple of quarters. Recovery in the Euro auto sales, which is grappling with emission-related procedures such as the world harmonized light-duty vehicles test procedure (WLTP) is expected in Q1CY20. 

The company’s India business witnessed a drop of 18 per cent, given the pressure on passenger vehicles volumes, which shrank 28 per cent in the quarter. Margins dropped by 50 bps to 16 per cent. While retail trends are encouraging, the sector continues to grapple with multiple headwinds related to higher cost of vehicles, transition to BS VI emission norms, as well as higher inventory. 

While Q2 has been better than what the Street estimated, investors will have to watch out for start-up costs at its greenfield units and its impact on profitability in the coming quarters. Any cost escalation will be a drag on margins. Similarly, peak capex is behind the company improvement in debt (at Rs 8,800 crore), and will depend on cash flows, organic revenue growth and any inorganic plans. Though the stock trades at a sharp discount its historic averages, given the headwinds, investors should await further improvement, especially in margins, before considering it.



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