Motherson Sumi: strong domestic growth drives margins in 3rd quarter

Motherson Sumi: strong domestic growth drives margins in 3rd quarter

The pricing power of a product is a key determinant of a firm’s profitability, especially in times of rising inflation. Take the case of Motherson Sumi Systems Ltd (MSSL), a market leader in the wiring harnesses used by the automobile industry.In the December quarter, consolidated operating profit margin (OPM) grew 110 basis points (bps) year-on-year (y-o-y) and 60 bps quarter-on-quarter (q-o-q) to 10.5%. Markets welcomed its performance, as rising commodity prices along with higher staff costs adversely affected several component firms during the quarter.

Also See | Pricing Power (PDF)

Material costs as a percentage of sales increased by about one percentage point compared with a year back. But this was offset by tight control on manufacturing and staff costs. MSSL’s consolidated operating profit grew 32% y-o-y and 15% q-o-q to Rs221.6 crore during the December quarter. One can attribute this partly to its pricing power, which stems from the 65% share it commands in the passenger car wiring harnesses market. This segment has grown exponentially in the last two years and a 15-16% growth rate in revenue is estimated over the next two years. The resulting operating leverage itself will give it an edge. Further, MSSL is enhancing the “content per vehicle"—a higher number of products, which will add to profitability, besides expanding revenue.

For December, consolidated domestic revenue grew 62% y-o-y and 14% q-o-q to Rs863.4 crore. Exports, mainly reflected through its subsidiary Samvardhana Motherson Reflectec (SMR) that commands a 26% share in global rear-view mirrors, declined marginally y-o-y. This was the impact of the 12% depreciation in the euro, which almost negated the 13% growth in euro terms. In fact, SMR’s OPM, too, declined by around 50 bps on a y-o-y and q-o-q basis to about 6% in the quarter. Needless to say, domestic growth is assured in the medium term.

An added boost would come from the international auto segment, where there has been a sequential traction in revenue in the last two quarters. The firm has orders worth €800 million (around Rs4,900 crore) over the next five years. Management reckons that these could improve profit margins, given the firm’s pricing edge.

MSSL’s consolidated net profit grew 42% y-o-y and 23% q-o-q to Rs106.5 crore. But adjusting for one-time payments from a client and a forex gain/loss between the y-o-y periods, the net profit for the December quarter, at Rs85 crore, was 59% higher than the year-ago period.

Given its market dominance in the growing auto segment and the sustained profitability pattern, MSSL’s shares have outperformed the National Stock Exchange’s CNX mid-cap index by around 50% since April. The present price discounts the estimated fiscal 2012 consolidated earnings by around 17 times, implying reasonable valuations. The thin margins that the component sector operates on weigh on valuations. But a favourable currency, higher volume offtake in international markets over the next 24 months and a leadership position in the domestic auto segment will sustain valuations.

Graphics by Yogesh Kumar/Mint

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