Home >Markets >Mark To Market >Exposure to auto sector mainly in Europe hits Motherson Sumi
Sluggish auto sales, along with the threat of factory lockdowns across countries, puts the auto component maker’s revenue at greater risk, according to analysts. (Reuters )
Sluggish auto sales, along with the threat of factory lockdowns across countries, puts the auto component maker’s revenue at greater risk, according to analysts. (Reuters )

Exposure to auto sector mainly in Europe hits Motherson Sumi

  • The marginal sales growth did little to lift operating profit, which dropped by 6% from a year ago
  • The Motherson Sumi stock has been sliding downhill for several months now, especially after some rating downgrades dented investor confidence

Panic-stricken investors have punished the Motherson Sumi Systems Ltd stock severely for its high exposure to developed markets. The stock, which has fallen 55% year to date, is among the biggest losers in the auto pack.

Shares of Bharat Forge Ltd, another global auto parts supplier, have fallen around 20% this year.

As much as 90% of Motherson’s consolidated revenue accrues from international markets, which has investors worried. About 40% of its sales come from Europe and the UK, where the coronavirus pandemic has already caused significant disruption.

Sluggish auto sales, along with the threat of factory lockdowns across countries, puts the auto component maker’s revenue at greater risk, according to analysts.

To make matters worse, the pandemic has struck at a time when the macroeconomic situation in markets such as Europe and the US is grim. The management in its Q3 FY20 analysts’ call stated that there was a broad- based slowdown due to weak consumer sentiment and stringent regulatory framework across global auto markets.

The impact was mirrored in the revenue drop in the last few quarters across most of Motherson Sumi’s overseas subsidiaries, which were acquired in the last two decades. Despite its efforts to cut costs, weak operating leverage impacted profitability.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

The upshot is that consolidated nine-month performance in FY20 was unimpressive. The marginal sales growth did little to lift operating profit, which dropped by 6% from a year ago.

The Motherson Sumi stock has been sliding downhill for several months now, especially after some rating downgrades dented investor confidence. Recently, Standard and Poor’s revised its outlook to negative for one subsidiary, Samvardhana Motherson Automotive Systems Group BV. This followed the downgrade of the parent by Moody’s Investors Service in November, citing weak performance of its greenfield operations and slowing global auto sales.

In comparison, Bharat Forge, which also gets a little more than half its revenue from international markets, has made efforts to derisk its business. Lately, it is diversifying into areas such as defence and oil and gas, which should offset the cyclicality of the auto sector.

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