Motherson Sumi: Short-term woes?

Street worried that Volkswagen recall in US could force Europe to impose stricter emission norms

Since its high on August 5, the Motherson Sumi stock has lost 37 per cent on issues related to its largest customer Volkswagen, margin concerns in its European subsidiaries, China slowdown and muted growth in India.

The correction, which started after the June quarter results due to a weak domestic show, slow margin gains in overseas subsidiaries and currency volatility has now intensified with the recent weakness in the stock price leading to a 13 per cent fall in the last two trading sessions. The latest fall comes after the Volkswagen group, which contributes about 41 per cent to Motherson’s consolidated sales, admitted to fudging emissions tests of its diesel powered vehicles in the US. The US Environmental Protection Agency said Volkswagen used software that deceived regulators, measuring toxic emissions and could face penalties of up to $18 billion.

  CLSA indicated that there could be a six per cent downside in the company’s FY17 earnings per share if revenues from Volkswagen decline by 10 per cent. Within the Volkswagen brands, about 21 per cent (of the 40 per cent) is accounted for by the Audi brand, and about 12 per cent comes from the Volkswagen brand, while eight per cent is from the Seat brand.

The bigger risk, however, is that due to this incident European regulators could enforce stricter emission norm standards, leading to higher costs for the company. Checks by European regulators in the near term and any adverse action will be watched out for by the Street.

Analysts at J M Financial, however, see a limited impact from the issue for Motherson. They highlight the smaller revenue contribution of the US to Volkswagen’s overall turnover, extensive brand portfolio of the company, which includes Audi, Volkswagen, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Scania and MAN among others.

Further, Motherson’s higher exposure to Audi than Volkswagen and the company’s revenue diversification efforts should limit the impact.

The other issue is about plans by Maruti to diversify its vendor base and could hit Motherson as the former is a major client in India. While 85 per cent of Motherson’s revenues come from outside the country, India is the most profitable market with margins at about 18 per cent compared to less than 10 per cent for its large overseas subsidiaries SMR and SMP. However, the company has been diversifying its client base and expects to minimise the fallout of the same.