Strong order book, margin gains ahead for Motherson
Though Q2 was a bit disappointing, analysts expect numbers to improve in the second half
Motherson Sumi’s September quarter (Q2) results were marginally lower than estimates due to slowing revenue growth and margin pressure at its overseas subsidiaries, SMR and SMP, respectively. Consolidated operating profit, which came in at ~1,250 crore (up 26 per cent year-on-year or y-oy), was about five per cent lower than consensus estimates. Adjusted for the PKC group acquisition, operating profit growth was limited to 11 per cent. Over 85 per cent of revenue and 74 per cent of operating profit for Motherson Sumi comes from its overseas operations of SMR, SMP and PKC.
Operating profit margins fell 50 basis points (bps) y-o-y to 9.3 per cent due to start-up costs at SMP. These costs relate to the setting up of new plants, which more than doubled on a sequential basis to ^13.7 million, impacting SMP’s (down 50 bps y-o-y to 5.9 per cent) and overall margins. Adjusted for the start-up costs, margins would have been in line with estimates at about 10.1 per cent. SMP, the largest of the company’s three major subsidiaries, however, posted a robust 19 per cent y-o-y growth to ^808 million. Analysts at Elara Capital say SMP’s revenue growth trajectory has been impressive and expect start-up costs to taper off as the new plants ramp up, thereby increasing margins.
Similarly, while SMR’s revenues saw a muted growth of one per cent over the year-ago quarter to ^378 million, analysts expect growth to come back to double digits as two new plants each are expected to become operational in the December and March quarters. This should aid the top line as well as margins, which were robust at 10.1 per cent in Q2. Consolidated net profit at ~436 crore was up 21 per cent y-o-y but lower than estimates due to the reasons explained above.
Unlike the volatility in the overseas subsidiaries, standalone operations outperformed expectations with revenues growing 17 per cent y-o-y. This was led by passenger vehicle growth, market share gains given supplies to higher selling Baleno and Brezza models of Maruti and rise in copper prices. Operating profit, which grew 12 per cent y-o-y at ~360 crore, was better than estimates. Indian operations are important as margins at 19.6 per cent are more than double that of consolidated operations and its contribution to the bottom line is over 60 per cent.
Though the Q2 results were slightly sub-par, most analysts have a buy rating on the stock given strong order book (^15.2 billion at the end of Q2) at SMP/SMR and robust growth rates at the Indian entity. Analysts at Emkay Global expect consolidated revenues to grow at 20 per cent annually in the FY17-20 period, and improvement in operating profit margins by 130 bps, led by leverage and plant utilisation at SMR and SMP.