Motherson Sumi’s profit margins impress in Q4, but risks linger1 min read . Updated: 03 Jun 2020, 10:47 PM IST
Some of its plants are in production ramp-up stage and some are still facing profitability challenges
Shares of Motherson Sumi Systems Ltd have gained 4.5% since the automobile components manufacturer announced its March quarter results. While revenues dropped 12% from a year earlier, operating profit rose 7%, thanks to cost-cutting measures and a fall in raw material prices.
Considering sluggish auto sales and the pressure on revenue, many analysts were expecting it to report a significant fall in operating earnings. “Motherson Sumi’s Q4FY20 operating performance was driven by strong all-round performance in India and margin surprise in two overseas subsidiaries," Motilal Oswal Financial Services Ltd said in a note.
Of course, the covid-19 shutdown will adversely impact the company’s financial performance in the current quarter. But social distancing norms and preference for personal vehicles are projected to drive demand for auto parts. Most manufacturing plants have restarted operations and are seeing an increase in production, the management told analysts in a call.
“Management expects all its plants to operate at ~75% utilisation level by June 2021-end (except India). It anticipates a strong bounce back in demand to pre covid-19 level given the robust direct and indirect support by governments across regions," Edelweiss Securities Ltd analysts said in a note.
The company’s overseas joint venture has a strong order book of ₹1.07 trillion and the focus is on execution. As the company cut capital expenditure, cash flows from the business improved last fiscal year. This helped it lower net debt. The trend is expected to continue in the current fiscal, barring an unforeseen acquisition or investment. “The ramp-up of new facilities and strong focus on working capital management resulted on consolidated net debt falling ~11% YoY in FY20, and we expect further deleveraging in coming years, not considering any large sized acquisitions," Jefferies India Pvt. Ltd said in a note.
While the focus on order book execution and liquidity boost should help it withstand the volatility better, stabilization of the global auto industry is also key. Some of its manufacturing plants are still in production ramp-up stage and some are still facing profitability challenges. Weak operating leverage at these plants can weigh on overall profit margins.