Near-term demand woes to keep Samvardhana's margins under pressure

The stock of the largest listed auto component company Samvardhana Motherson International has shed about 23 per cent of its value over the past month. The latest trigger for the downward trend has been the weaker than expected September quarter (Q2FY25) results. A muted operating performance in the quarter resulted in the stock falling over 8 per cent over the past couple of trading sessions.

 

The company’s operating profit margin slipped by 80 basis points on a sequential basis to 8.8 per cent and was lower than street expectations. In addition to seasonality, the lower profitability was on account of slowdown in the global passenger vehicle sector and slow ramp up in electric vehicles. 

 

On the revenue front, the auto parts company posted 18 per cent growth in consolidated revenues in the quarter on the back of its inorganic acquisitions while revenue on an organic business was 4-5 per cent over the year ago quarter. The company outperformed its peers as the global light vehicle industry fell by 5 per cent during this period. 

 

While the demand environment for light vehicles is sluggish, what is driving the company’s content per vehicle are premiumisation and hybridisation which fit well with its powertrain-agnostic product portfolio. Further, the inorganic initiatives have also started contributing to the company’s overall financial performance. What should support revenue growth is the current order book of $88 billion as against $84 billion in FY24 and would be executed over the next five years. Of the overall order book about 24 per cent comes from the electric vehicles. 

 

Given the muted demand environment, brokerages have cut their earnings estimates for the next couple of years by 6-9 per cent. Kotak Securities believes that the downward revision in margins by global automakers due to a slowdown in the passenger and commercial vehicles segments’ demand will negatively weigh on Samvardhana Motherson’s margins.

 

The company, however, expects the second half to be stronger on account of seasonal factors, pick up in projects which are currently stuck, steady margins and the normalisation of increased working capital. It indicated that its return on capital employed improved despite multiple challenges with the metric at 17.3 per cent in the first half of FY25 as compared to 16.9 per cent in FY24. 

 

Jay Kale of Elara Securities has cut the earnings estimates by 9 per cent for FY26/27 and is monitoring further acquisitions for which the company has raised Rs 6,500 crore through a qualified institutional placement. Further, the ramp-up in the consumer electronics vertical could support valuation, he adds. 

 

Most brokerages are positive about the prospects of the company in the medium to long term. Analysts led by Aniket Mhatre of Motilal Oswal expect the company to continue outperforming the global automobile sales, fueled by rising premiumisation and electric vehicle transition, a robust order backlog, both in autos and non-autos and successful integration of recent acquisitions. 

 

Rishi Vora and Praveen Poreddy of Kotak Securities also believe that the company is well-poised to benefit over the medium term from the increase in content per vehicle in passenger vehicles, driven by M&As and premiumization, strong relationships with automakers, consolidation of suppliers, and strong growth in the non-automotive business, led by new product additions.