Shares of Motherson Sumi Systems Ltd have been on a downhill ride since the December quarter (Q3) results were declared, declining almost 5%. Investors’ primary worry is the strain on profits that is evident across businesses.

What belied investor expectations was the 8.5% consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) margin. It fell short of Bloomberg’s average estimate of 9.5%, and was marginally lower than the year-ago level.

Both lower sales volume that hurt operating leverage and higher costs (mainly staff and other expenses) dented Motherson’s margins. Ebitda growth of 11.5% to 1,393 crore was slightly lower than the Street’s forecast for the quarter.

Motherson Sumi's operating performance took a beating in Q3 as all its units faced tough market conditions, with the only exception being PKC.
Motherson Sumi's operating performance took a beating in Q3 as all its units faced tough market conditions, with the only exception being PKC. (Sarvesh Kumar Sharma/Mint)

Among its international subsidiaries that account for almost 90% of revenue, Samvardhana Motherson Peguform (SMP) reported the sharpest 220 basis points year-on-year drop in Ebitda margins to 5.4%.

One hundred basis points equal one percentage point.

Weak auto demand, especially in Europe due to WLTP (Worldwide Harmonised Light Vehicle Testing Procedure) and a strike at carmaker Audi’s plant, dragged revenue down. This, along with costs of ramping up operations, weighed on SMP’s profits.

Only its Finnish subsidiary PKC fared well during Q3. While most of Motherson Sumi’s subsidiaries have higher exposure to the retail auto segment, namely cars and bikes, PKC has a huge client base of heavy-duty trucks, especially in North America and China. It posted a 230 basis points year-on-year jump in Ebitda margin to 8.6%, driven by revenue growth.

Motherson Sumi’s standalone operations however failed to impress. Revenue declined 3% year-on-year. A robust 16% jump in exports partly offset a 6% decline in domestic revenue. Here too, weak sales impacted Ebitda margin that narrowed by 120 basis points to 14.9%.

In other words, size is weighing on the behemoth’s profit margin. Analysts believe that the auto parts maker will face headwinds in the quarters ahead on account of a global auto slowdown, a steep fall in US Class 8 truck sales and technology transition.

However, for Motherson Sumi, there is a silver lining amid the gloomy forecasts of slowing auto sales. In a call with analysts, the management highlighted that BS-VI emission norms will translate into a 10-15% increase in the wiring harness requirements in automobiles. Motherson Sumi is well-positioned to cash in on this. The company also has a strong order book that promises revenue traction over the next two-three years across its international businesses.

Importantly, analysts are optimistic that Motherson Sumi’s capex plans would be lower in the quarters ahead, implying reduced borrowings, lower interest costs and improved cash flows.

True, the Motherson Sumi stock has been battered on account of weaker-than-expected profit margin in Q3. The pain may continue as the company wades through pressures of the auto sector slowdown and sweeping technological changes. But some of this has been factored into valuations that have fallen from 25 times one-year forward about a year ago to the present 18 times earnings.

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