Brokerages cut Motherson's FY20 profit estimates on weak demand outlook

Motherson Sumi stock was down over 9 per cent over last four trading sessions on weak global automotive demand. Weak demand in key markets such as China and the US, regulatory restrictions related to emissions and higher investments is taking a toll on Motherson Sumi. 

Given the near-term demand weakness, plant utilisation is being impacted. Analysts at Edelweiss Securities believe that the commissioning of three new plants has coincided with near-term demand weakness, thereby putting pressure on margins. For example, revenues for SMP was down 2.3 per cent on a comparable basis due to emission norms-related issues. Margins for the business was also down due to weak operating leverage and gradual ramp up of plants. The management indicated that the impact of regulatory issues will last for a couple of quarters more. 

The pressure is not limited to its overseas operations. Even in India, the slowdown in demand is impacting its operations. After 13 quarters, revenues were down over the year-ago quarter by 3.6 per cent. In addition to weak demand, lagged impact of copper price pass-through also led to the decline.  Standalone operating profit margins too fell to at least a 15-quarter low of 14.9 per cent. The India business profitability is by far the highest among its key businesses and any weakness in the same impacts consolidated margins. 

Despite the headwinds, the management has reiterated its $18 billion revenue target by FY20 to be achieved by organic and inorganic initiatives. On the organic side, the company is looking at ramping up plants this year to improve the top line. While the company is open to acquisitions, higher valuations are an issue currently and may correct given the ongoing slowdown, offering the company more opportunities. 

Given the muted near term outlook, analysts have cut their net profit estimates by 14-20 per cent in FY20 and may lower their targets if the slowdown risks increase. Investors should await for an improvement in the demand scenario before taking an exposure the stock.