Motherson Sumi growth drivers in place, but debt concerns weigh on stock

Growth at Motherson Sumi via inorganic and organic route in near-to-medium term may take debt levels higher, both on account of working capital needs and long-term debt


Viewed against the turmoil in the global auto market, the 22% jump in consolidated operating profit at Motherson Sumi to <span class='WebRupee'>Rs.</span>940.4 crore against a year ago is commendable. Photo: Bloomberg
Viewed against the turmoil in the global auto market, the 22% jump in consolidated operating profit at Motherson Sumi to Rs.940.4 crore against a year ago is commendable. Photo: Bloomberg

The increase in a company’s debt is bad news for the equity market.

So, news of the 29% rise in Motherson Sumi Systems Ltd’s (MSSL’s) debt from a year ago and the fact that it missed analysts’ estimates for the June quarter has dragged the stock down 10%, after it announced results last Wednesday.

But this is not to say that the auto parts maker fared badly. Viewed against the turmoil in the global auto market, the firm’s 22% jump in consolidated operating profit to Rs.940.4 crore, when compared with a year ago, is commendable. Even better is the fact that the overseas business, which comprises nearly about 87% of its consolidated revenue, continues to post stable growth.

Further, the firm staged a decent 19% growth, albeit on a relatively low base, on home ground, too. This is despite the huge fall in copper prices, which may be the reason why overall revenue was below Bloomberg consensus estimates. With MSSL’s business being focused on auto parts supplies to original equipment manufacturers and, largely, in the passenger car segment, it is evident that the battery of new launches in the domestic market augured well for it.

That said, although the 15.5% jump in consolidated revenue gave operating leverage, MSSL’s profit expansion is also from the firm’s ability to successfully turn around its strategic overseas acquisitions. Both Samvardhan Motherson Reflectec (SMR) and Samvardhan Motherson Peguform (SMP) have seen traction in profits over the quarters.

Also, the June quarter’s consolidated operating margin at 8.5% was a tad higher than a year ago, but nearly 150 basis points below what the Street had penciled in. Analysts say SMR’s profitability was lower than expectations. Forecasts remain positive as the firm is steadily diversifying its global market to de-risk and also include emerging markets in its footprint. One basis point is one-hundredth of a percentage point.

In spite of these positives, the increase in debt may be an overhang on the stock. That’s not all. MSSL’s growth through the inorganic and organic route in the near-to-medium term may take debt levels higher, both on account of working capital needs and long-term debt.

At its current market price of Rs.319, the stock trades at nearly 22 times its fiscal 2018 estimated earnings. This is rich, given the business segment it operates in. Triggers for the stock mainly come from news of a turnaround of acquired units or rise in profit margin.

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