Recovery, non-auto share positives for Motherson Sumi
Acquisitions like the one in aviation are in line with firm’s goal of increasing non-auto revenue
A diversified portfolio after recent acquisitions, recovery in the domestic auto space and scope for margin gains have sparked a 3.4 per cent uptick in the Motherson Sumi stock over the last couple of trading sessions.
The company announced an entry into the aerospace industry on the back of a 55 per cent stake buy in Bengalurubased CIM Tools. The company is engaged in machining and sub-assembly of components for the aviation sector. It has an order book of ~1,500 crore to be executed over the next five years with 80 per cent of these backed by long-term agreements.
Though the acquisition is small, with an enterprise value of ~400 crore, the company has an opportunity to grow the business, given the addressable market for aerospace materials and aerostructures is projected to hit $2 trillion by 2040 on the back of demand for new planes.
Growing passenger volumes, expanding aviation infrastructure, and increased procurement from low income countries are positives for the company. Analysts led by Raghunandhan N L of Emkay Global Research say the pandemic has created an opportunity to realign supply chains and rationalise costs, resulting in openings for new entrants from India.
Additionally, the acquisition is in line with the company’s Vision 2025 road map of diversifying into non-auto segments such as logistics and health care. Motherson Sumi is eyeing a 25 per cent share of overall revenues from the non-auto business over the next four years.
The company also announced its second acquisition, which involves its 50:50 Chinese joint venture SMR NBHX. The JV took a 60 per cent stake in Nanchang JMCG Mekra Lang Vehicle Mirror Company. This is expected to expand its portfolio in the Chinese commercial vehicle segment.
However, the company is expected to face near-term headwinds due to slow global recovery and supply disruptions brought on by the semiconductor shortages. Among global suppliers, IIFL believes Bharat Forge is better placed than Motherson Sumi in the September quarter. Motherson Sumi will see an improvement in India revenue, margins and subsidiary PKC’S margins compared to Q1. However, the fact that global car production was down sequentially in Q2 due to a sharper decline in Europe would hurt Motherson’s performance materially.
Analysts at Nomura Research say while the near term could be impacted by chip shortages a sharper recovery is expected from FY23. Gains will be on both revenue and margins with production likely reverting to pre-pandemic levels. Also, structural drivers like a ramp-up of electric vehicle order book (25 per cent of the total order book) and rising content per vehicle should drive the industry’s growth, they add.
The stock has not seen much movement given the near-term worries. However, most analysts have a ‘buy’ on expectations of a recovery, large order book, and improvement in profitability.