A recent Bank of America Merrill Lynch report unleashed concerns on auto ancillary company Motherson Sumi when it saw increased downside risks to the company's FY15/16 forecast on the back of a sharp fall in stock prices of its peers across the US and Europe. It also pointed to a stronger rupee versus the euro leading to translation loss in the company's EU subsidiaries.
But Vivek Chaand Sehgal, Chairman, Samvardhana Motherson Group, rubbished the concerns, adding that there is no reason to be unduly concerned about the rupee versus the euro scenario considering that most of Motherson Sumi's manufacturing takes place in EU. At the most, there can be a minor translation loss, but that's about it, he adds.
Chaand says he is seeing strong traction on automotive numbers and across Europe, the only weak point has perhaps been Russia. He says in western Europe, numbers are up 3 percent year-on-year and up until August, it was up 5.8 percent, beating the US market which saw 5 percent growth.
Motherson Sumi is targeting ROCE at 40 percent this fiscal year.
Below is the verbatim transcript of Vivek Chaand Sehgal's interview with Anuj Singhal and Latha Venkatesh on CNBC-TV18.
Anuj: I am just reading a report from Merrill Lynch and they are saying that there is some reason to be concerned about the strong rupee versus euro and that could lead to some translational losses for your subsidiaries. Would those fears be genuine?
A: I do not know which report you are referring to. However, as far as Motherson Sumi is concerned we have no reason to be unduly concerned about the rupee versus the euro because our manufacturing and everything is taking place in that country per se. So, if there is anything it would only be a translation loss.
As far as the profitability of the subsidiaries and all these things are concerned, maybe you could see a translation loss which is negligible. We are always giving; we are true to our normal way of presentation. We always gave you the rupee term growth and the euro term growth and we are seeing growth everywhere. So, we don’t worry too much about translational loss coming up here and there somewhere.
Latha: Not withstanding the otherwise good performance of the stock, it is precisely at higher levels that people will worry whether more can be squeezed out and here the worry appears to be that similar stocks in the US and in the European Union are beginning to see pressure. That is probably because of the fairly deep slowdown that we are seeing in the European economy itself. Yesterday a couple of German economists were discussing near recessionary conditions in Germany and that was the only performing economy. So, is there something to worry about in terms of sales numbers for the quarter gone by and the one that we are in?
A: As far as we are concerned we are seeing strong traction as far as the automotive numbers are concerned. Europe as you know, the only weak point in Europe as far as the automotive is concerned is Russia where there was some kind of growth but then there are special reasons for that.
As far as Western Europe is concerned the numbers are up 3 percent year-on-year (YoY). Up till August the numbers are up 5.8 percent in Europe. I don’t know too much about economics and things like that but as far as the car numbers are concerned they are doing very well. In fact it has beaten the US market; the US market is growing at about 5 percent and Europeans are doing 5.8 percent and this must be taken into consideration that August is kind of a holiday month for Europe.
Keeping that in mind the numbers are quite good and solid but it is a matured area. In our case we are more supplying to the German carmakers and things like that. If you look at it, the weakening of euro helps the sales of the cars that much more and that is exactly what we are seeing.
Anuj: The interesting bit about your company is that even a 1-2 percent uptick in margins can lead to significant re-rating in EPS. Case in point was Q1 when margins went up from 6 percent to 8.6 percent and the profit jumped 2.2 times despite just an 18 percent revenue growth. From hereon what kind of margin trajectory do you expect?
A: We always give you guidance on ROCE and the reason why we don’t get too much into quarter-on-quarter (QoQ) is because as a company which is very prudent and very conservative when we talk through our numbers we expense out our R&D, any expenditure that is there we write it off. So, that can definitely show you a little bit of a margin up and down little bit on the QoQ.
However, on a YoY if you see Motherson is one company which will definitely do better because the improvement that have been done in SMP and SMR and Motherson Sumi and all these things you will find that they are sustainable; they are things that are there. However, we are opening up a lot of plants, new things happening and we would rather write-in on the face of it rather than pass it through our balance sheets and things like that.
Latha: You have an added advantage of lower commodity prices. While some of that will be taken away by the new factory startup costs even then are you going to end up with higher margins on an average for FY15?
A: I don’t give any guidance. I have just finished the quarter so I don’t want to get there. However, this is the fifth year of our five year plan. So, you can be rest assured that all of us working hard to make sure that we give all our investors a very good fifth year good news or whatever you want to say.
I think my teams are working very hard on that and all these particular things are auguring well. However, there are certain things that are in the global kind of a basket, you will have these ups and downs here and there. However, automotive is resilient to a great number of these things because what is happening is people are buying cars, there are exports that are taking place from Europe, now they are putting up new plants close to the US market because it is expanding so much. Same is happening in China, same is happening in India, so, there is an exuberance as far as the cars are concerned. The automotive market is surely showing that.
Latha: What is the prevailing guidance for the current year?
A: 40 percent ROCE is what we are going to target to hit. We have hit already 29.8 percent in the last quarter; let us see how close we get to 40 percent.
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