Motherson Sumi: is revenue growth coming at cost of profitability?
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Auto parts maker Motherson Sumi Systems Ltd’s (MSSL’s) June quarter results surpassed revenue expectations, but fell short on net profit and margins.
With the integration of the recently acquired Finnish firm PKC Ojy, net revenue was significantly better than the average estimated. The 25% growth in revenue from a year ago was fuelled by PKC that clocks annual sales of Rs6,100 crore, and a strong growth in the existing domestic and overseas business.
In fact, it is the strong revenue traction that has made the MSSL stock a steady outperformer returning 30% since April, while the benchmark Nifty Midcap 50 index was flat. The company’s strategy to ramp-up growth through acquisitions and internal growth, while enhancing the number of parts per vehicle that it caters to, is a feather in its cap. The overseas firms under its subsidiary Samvardhana Motherson Automotive Systems Group BV cater to auto makers across nearly 20 countries.
But then, is revenue growth coming at the cost of profitability? June quarter MSSL’s operating margin was 9%, in-line with a year back, but it has slipped from the March quarter. It was also about 50 basis points below forecasts on the Street, which the management said was due to lower margins at PKC and start-up costs incurred at one of its subsidiary units.
Early this year, when the PKC acquisition was announced, Mint had forecast that the firm’s low-profit margin could dilute near-term profitability of MSSL.
And this quarter, even the domestic margins were under pressure. Only Samvardhana Motherson Reflectec, one of the group’s early acquisitions that supplies rear-view mirrors to automobiles, is on a strong footing with double-digit margins. June quarter’s margin at about 11.3% was 220 basis points higher than a year ago.
That MSSL is able to hold on to a range-bound profitability is a key positive given its scale of operations, competition, raw material cost increase and also currency volatility. However, another worry is the 39% jump in interest cost due to borrowings that funded acquisitions. Interest cost may come down in the coming quarters as the company raised money through low-cost bonds.
Thankfully, the strong revenue traction led to a healthy 28% year-on-year jump in operating profit that was in line with Street forecasts. Net profit (adjusted for exceptional one-time items) was 41% higher at Rs428 crore. The reported net profit however missed estimates significantly as MSSL provided for cost of bond issuance/premium on early redemption, start-up costs and amortization of intangible assets created by the PKC acquisition.
Strong growth in operating performance, besides a healthy order book should support the MSSL stock. For now, the company’s shares trade at around 23 times estimated earnings per share for fiscal year 2019. With growth on track, the risk to valuations is the currency, as more than three-fourths of MSSL’s revenue accrues from overseas.