High margins lift Motherson Sumi's performance

International margins improved sharply while domestic ones also gained

The stock of Motherson Sumi zoomed around eight per cent on Thursday, largely helped by the better-than-expected performance of its foreign subsidiaries.

Revenues from foreign operations grew seven per cent year-on-year (y-o-y), especially of Samvardhana Motherson Automotive Systems Group, holding company of Samvardhana Motherson Reflectec (SMR) and Samvardhana Motherson Peguform (SMP). Operating margins in the foreign business witnessed a 77 basis point (bps) y-o-y growth to 8.26 per cent in the quarter ended March (Q4).

This was largely helped by margins of SMR, which manufactures rear-view mirrors, going up by 188 bps y-o-y to 12.53 per cent, while that of SMP, which focuses on exterior and interior modules for passenger cars, saw its operating margins expand from 6.15 per cent in the year-ago period to 7.25 per cent in Q4.

  SMR and SMP have for long suffered from under-utilisation of plant capacities and, hence, their operating margins have been under stress. But, if margins improve, it can have a meaningful impact on the consolidated numbers of Motherson. Prayesh Jain of IIFL feels a positive guidance from the management, particularly for SMP, could lead to an upgrade in estimates for Motherson’s stock as the Street was particularly worried about SMP.

The improvement of operating margins of the domestic business to 21.2 per cent from 20.8 per cent in Q4 also augurs well. With troublesome subsidiaries displaying a turnaround, the Street was not perturbed by Motherson Sumi marginally missing its revenue target. Consolidated revenues at Rs 10,068 crore, up eight per cent y-o-y, were slightly below the Bloomberg estimate (Rs 10,543 crore). Net profit at Rs 414 crore grew by 21.6 per cent y-o-y and was way ahead of Bloomberg estimate of Rs 351 crore. Copper and crude oil prices staying at benign levels supported the 60-bp operating margin expansion in Q4. However, with commodity prices, particularly crude oil, recovering significantly, it needs to be seen if these margins are sustainable.

While some analysts feel the benefit from commodity price recovery may wither by the second half of financial year 2016-17 (FY17), Jain says scaling up SMR and SMP's operations will increase leverage and hence help sustain margins at current levels. As interest expenses continue to moderate (down 23 per cent to Rs 66 crore in Q4) net profit growth may also be sustained at current levels in FY17.