Near-term pressures for Motherson Sumi due to supply disruptions

Margin trajectory at international subsidiaries remains a key trigger for the stock

Motherson Sumi reported a muted performance in the June (Q1FY22) quarter because of multiple issues across its major markets. While global operations were impacted by production stoppages due to erratic supplies, domestic business underperformed on account of the second wave of Covid infections. 

Though the consolidated revenue fell 5 per cent on a sequential basis, missing expectations by 9-10 per cent, it was the sharp miss at the operating profit level that disappointed the most. The company reported a 29 per cent sequential decline in Ebitda at Rs 1,220 crore —

30 per cent lower than estimates. Supply disruptions because of chip shortage and higher raw material prices dented profitability, the margin slipped by 260 basis points to 7.6 per cent.

Besides the semiconductor shortage, disruptions caused by a hurricane in Texas and floods in Belgium led to production stoppages by automakers. The company expects the semiconductor shortage to continue in the near term before some recovery in the second half of FY22. European car registrations continue to be strong, growing 12 per cent QoQ. 

Though disruptions have led to delayed production, brokerages point out strong underlying demand for both cars and commercial vehicles.  

 

Part of the impact because of supply chain constraints was offset by operating efficiencies at subsidiary SMRPBV, which caters to passenger cars. The larger margin impact was on PKC, the subsidiary that supplies parts to commercial vehicles. In addition to component shortages, logistics and launch-related costs, as well as delayed pass-through of copper prices, dented the margin of PKC. 

Given the pass-through, the company is expected to recover 80 per cent of the cost increase in the September quarter. While SMRPBV posted a 190-basis point fall in the margin to 8 per cent, the decline was 394 basis points for PKC on a sequential basis, to 4 per cent. 

The margin performance at SMRPBV was the single-biggest trigger for the stock. Cost reduction and improving efficiencies led to two consecutive quarters of strong margins, before they slipped in the June quarter. 

Most brokerages have cut the earnings estimates of the company by over 8 per cent for FY22, citing lower revenue and margin assumptions. However, they are optimistic about the long-term prospects. Analysts led by Jinesh Gandhi of Motilal Oswal Research said: “While the near-term outlook is murky due to supply chain uncertainties, MSS is well-positioned to benefit from a cyclical recovery in its key businesses, as well as from the strong order book and improving efficiencies in SMRPBV.”

While the net debt increased by over Rs 1,300 crore to Rs  6,120 crore in the June quarter due to the adverse working capital cycle, it was lower than the March 2020 level of Rs 6,920 crore. Kotak Institutional Equities expects the company to become net cash by FY2023. 

On the operational front, analysts expect the company to gain from higher content per vehicle as customers globally shift towards electric vehicles (EVs) over the medium term. About a quarter of SMRPBV’s order book of Rs15.6 billion comprises dedicated EV models.

Though the stock is down 17 per cent from its June highs due to supply disruptions, analysts remain positive over its long-term prospects. At the current price, the stock is trading at 19x its FY23 earnings estimates; investors should await consistent improvement in the margins of its international subsidiaries before considering the stock.