Pace of recovery, execution key to Motherson achieving 2025 targets

Sharp gains in stock prices leave little upsides in the near term

The Motherson Sumi stock has gained over 37 per cent since the start of the month on better-than-expected performance in the September quarter and aggressive growth targets for the next five years. The company recently unveiled its Vision 2025 plan which envisages more than three-fold growth in revenue over the FY20 level of around $10 billion to $36 billion by 2025.

While most of the sales growth is expected to come from existing product lines, technology improvements and new products, a quarter of the sales growth is on account of diversification. The company wants to increase its presence in non-auto segments like aerospace, logistics, healthcare and software.

A large part of the gains will be on the back of acquisitions. Analysts at Emkay Global believe that the ongoing restructuring exercise would result in a reduction in Sumitomo’s stake, allowing the company to follow acquisition opportunities aggressively. The company, however, indicated that the acquisitions would be funded by free cash flows and debt/equity infusion. The extent of cash infusion (equity dilution/higher debt) will be important as Kotak Institutional Equities pegs the number at $8.7 billion. 

While the company has achieved its five-year targets in the periods between 2005 and 2015, it missed its FY20 target of $18 billion and the return on capital employed target of 40 per cent. The Indian and overseas units achieved returns in the 10-31 per cent range. A lot will depend on its execution, especially the ramp-up of overseas subsidiaries, margin improvement, increase in market share across segments and growth recovery.

Analysts at Nomura Research believe that the restructuring is likely to be earnings-accretive, led by significant improvement in profitability of international business by FY22-23. They also expect the company to benefit from the recovery of passenger vehicles in India, a healthy order book in overseas subsidiaries and commercial vehicle improvement for its unit Motherson PKC, which could help drive overall revenue.

What should help going ahead is the diversification of its customer base, with no client accounting for more than 10 per cent of revenues.

While the street is positive about the new plan and expects the company to be a key beneficiary of the recovery, given that the target prices are in the range of Rs 150 to Rs 162, there is limited upside from the current level. Investors should await broad-based recovery and consistent margin gains at its overseas units before considering the stock on dips.