Analysts downgrade Motherson Sumi estimates after third quarter results

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The company’s business in Europe is facing headwinds due to the new WLTP rules, which measures fuel consumption and CO2 emissions from cars.(Website screenshot)

With analysts downgrading earnings estimates for FY20 and FY21, the stock of Motherson Sumi fell to a new 52-week low on Tuesday, closing the session at Rs 129 at the Bombay Stock Exchange (BSE). On Monday, the stock had fallen to Rs 130.5 before closing at Rs 132.75, after the auto component maker announced a poor set of results for Q3FY19.

Motherson reported a 1.19% year-on-year (y-o-y) decline in consolidated net profit, which was a good 14% below analysts estimates. The weaker than expected profits were the result of the poor performance of the standalone business which comprises Motherson’s business in India and abroad, excluding joint ventures and indirect subsidiaries. Analysts have trimmed earnings estimates for 2019-20 and 2020-21 by 5-9%.

“We cut our FY2020-21E consolidated earnings per share estimates by 7-9%, led by 5-7% cut in revenue estimates and 70-100 bps cut in Ebitda margin for standalone business,” analysts at Kotak Institutional Equities (KIE) said.

Analysts attributed the reason for the trimming the estimates to muted demand in the domestic market and stringent vehicle test norms in Europe which will continue to put pressure in the medium-term on overseas subsidiaries.

Motherson is a producer of automotive wiring harnesses, mirrors and plastic components, among others for passenger cars. In the domestic market, it supplies to carmakers including Maruti Suzuki, Tata Motors and Toyota, while global customers comprise of Daimler, Volkswagen and Hyundai Motor.

Analysts also trimmed earnings estimates on standalone basis by 6.6% and 4.7% for FY20 and FY21, respectively. The company’s standalone operating profit margin fell by 280 basis points to 14.9% in Q3FY19 due to an increase in staff costs leading to negative operating leverage, analysts noted. Revenues at Motherson, which has acquired 21 companies globally and has a joint venture with over 30 companies, also declined 4% y-o-y in the October-December quarter.

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VC Sehgal, chairman at Motherson Sumi said the December quarter had been tough and added the March quarter would continue to be challenging.

“Tariff issues and Brexit continued to be the hurdles for industry,” he said, referring to the global businesses. Motherson Sumi supplies to passenger vehicle players in China and US and has facilities in both the countries. Analysts at Edelweiss said near-term demand outlook remains muted, leading to lower utilisation of some existing plants.

“The commissioning of new plants has coincided with near-term demand weakness, thereby putting pressure on margins,” they noted.
In Q3FY19, the company’s revenues from outside India grew by around 15% y-o-y, much lower than the analysts expectations. Besides, India revenues stayed virtually flat as demand from car makers remained subdued. Car makers, in turn saw weak sales during the festive months as customers stayed away due to rising insurance costs and costlier finance.

GN Gauba CFO, MSSL said there had been slowdown in demand during the last quarter as the festive season demand remained subdued.
“When demand in auto industry slows, we also witness the pressure and the same happened in the last quarter, primarily because the festive demand was weak,” he added.

With regard to global operations, the Motherson management had highlighted that factors such as Brexit and the worldwide harmonised light vehicle test procedure (WLTP) rules will continue to keep the auto industry under pressure. The company’s business in Europe is facing headwinds due to the new WLTP rules, which measures fuel consumption and CO2 emissions from cars. Several automakers have to halt deliveries of several models that were yet to be re-certified and component makers need to make changes in existing product portfolio to meet the new norms. Analyst at Motilal Oswal said weakness across businesses was primarily because of WLTP effect and slowdown in domestic industry that impacted revenue.

“Revenue declined, led by slowdown in domestic auto industry, and lagged impact of copper price pass-through,” they noted.
For overseas business, analysts said considering exposure to European OEMs, which are under pressure due to WLTP rules, group companies like Samvardhana Motherson Automotive System Group (SMR PVB) and Samvardhana Motherson Peguform (SMP) will face pressure on revenues and Ebitda in the medium term.

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