Near term demand concerns ahead for Samvardhana Motherson's stock

Shares of auto component major, Samvardhana Motherson International, has gained 11.5 per cent on the bourses after the company approved the qualified institutions placement (QIP) issue and announced the calculation methodology for its compulsorily convertible debentures, or CCDs, into equity shares.

Analysts cite strong investor response to the issue that has kept the sentiment positive for the stock. 

Brokerages, however, have a mixed view on the outlook for the auto parts supplier.

Most brokerages are bullish on the medium-term prospects while indicating that the company is likely to have a bumpy ride in the short term. 

Prior to the recent rally, the stock has been under pressure given the weakness in demand in key markets such as Europe, high debt and expensive valuations. 

Recently, luxury vehicle maker BMW revised its full-year margin outlook by 200-300 basis points due to supply-related issues. The margin revision was prompted by delays in vehicle deliveries due to a braking issue.

In addition to the component issue, the company also cited a persistent slump in demand within the Chinese market as a contributing factor to its revised forecast.

While thus far, the issues are limited to BMW any further escalation to this or profit warnings by other companies could negatively impact market sentiment. 

Citi Research has given a sell call as recent trends in auto volumes across key global markets have been weak and global auto companies too have revised down their volume guidance.

Any weakness in demand, higher inventories, higher debt could lead to stock’s underperformance. Further valuations at 38 times FY25 earnings provides little comfort, says the brokerage. 

Investec Research has also downgraded the stock to a hold rating citing weakness in the EU region, which could hamper the company’s organic growth.

Commentary of major European car makers has also failed to inspire confidence in future growth. The brokerage has cut its FY25 and FY26 earnings by 3-5 per cent. Valuations are also a factor as the stock is up 85 per cent since January this year as compared to 15 per cent gains for the Nifty. 

In a recent note, analysts led by Jay Kale of Elara Capital highlight that the global passenger vehicle industry slowed in Q2 and posted a slight decline of 0.6 per cent Y-o-Y as compared to 5.7 per cent growth in Q1CY24. Most automakers have a cautious outlook on the global economy & expect a slight increase in the volumes, they add. 

 While the brokerage is watchful of global growth slowing down, it expects inorganic growth to aid in the outperformance of Samvardhana Motherson. The analysts will monitor further acquisitions in the near future as well as ramp-up in the consumer electronics vertical which could be supportive of valuations.

While highlighting the near-term worries, Kotak Institutional indicated that medium term opportunity remains strong for the company. 

Though the near-term demand trends in the PV and M&HCV segments are likely to remain sluggish, the company is well-poised to benefit over the medium term, say Rishi Vora and Praveen Poreddy of the brokerage.

The gains are expected from the increase in content per vehicle in passenger vehicles, driven by mergers and acquisitions and premiumisation, strong relationships with automakers, consolidation of suppliers and strong growth in the non-automotive business, led by new product additions and higher capex spends.

JM Financial Research has also highlighted that global light vehicle (LV) sales remained flat year-on-year (Y-o-Y) at 22.4 million units during 1Q.

While emerging markets like China, India and North America continue to witness steady growth, LV volumes in EU and NA (commercial vehicles) were impacted by delay in electric vehicles launches.

Vivek Kumar and Ronak Mehta of the brokerage believe that the company with its global presence, an expanding product portfolio and a wide customer base presents a multi-year growth opportunity.