Motherson Sumi: Decent results, PKC integration key to valuation
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The proposed acquisition of Finnish auto component maker, PKC Ojy, is certainly a feather in Motherson Sumi Systems Ltd’s (MSSL’s) cap. But apart from that, its December quarter performance did not excite investors to sustain the rally in the stock since a month ago, when the PKC deal was announced.
This is not to say that MSSL fared badly. No doubt, consolidated net revenue of Rs10,604.1 crore was a tad below the Bloomberg average estimate. But it was up 12.3% from a year ago. Revenue from overseas subsidiaries that comprises about 85% of the total rose by 12% while that of domestic operations rose by a healthier 24%.
More remarkable is the firm’s sustained efforts at improving profitability. The consolidated operating margin at 10.1% inched up from 9.6% in the year-before period, while the Street expected it to remain stable. This came on the back of a robust 360 basis points jump in stand-alone margin and a 110 basis points jump in subsidiary Samvardhan Motherson Reflectec’s margin too. Analysts were a bit disappointed by the flat profitability of its subsidiary Samvardhan Motherson Peguform at just 5.9%, where expectations were higher.
In any case, the operating profit measured up to the Street’s expectation. However, the reported net profit of Rs415.9 crore, which was 33% higher than a year earlier, included some exceptional mark-to-market gain on the funds raised through its recent qualified institutional placement and accounting adjustments due to the new norms under the Indian Accounting Standards. Adjusting for these changes, the net profit was quite close to the forecast.
However, the management in a phone conversation with Mint indicated that some borrowing (debt) might be needed to fund the PKC deal in addition to the existing cash and bank balance. This may increase MSSL’s net consolidated debt in the near term. Fortunately, the firm’s robust operating cash flows have kept its consolidated interest cover ratio at a commendable 9.
That said, the PKC acquisition will fuel revenue growth given that it clocks annual sales of about Rs6,100 crore through its global wiring harness business—which is MSSL’s forte too. Besides, it has a large global footprint in wiring harness supplies to original equipment manufacturers.
The one hitch is that PKC’s low profit margins could dilute the near-term profitability of MSSL. Besides, according to IIFL’s report, if we extrapolate CY16 financials into CY17, the deal would dilute earnings per share of MSSL. More so, if the weakness in US trucks continues in CY17.
Indeed, in the past, through smart turnaround of acquired firms, MSSL’s net sales and net profit grew at a compound annual growth rate of 42.5% and 28%, respectively, over a decade, sustaining its rich valuation when compared to other component makers. A similar turnaround in PKC’s profitability, for which there is room, would be the next lever to push up its stock price, which is trading at about 22 times one-year forward earnings estimates by analysts for FY18.