SMR margins weakened due to changes in accounting std: Motherson

Automotive products manufacturer Motherson Sumi Systems said profit in the April-June quarter grew by 15.8 percent year-on-year to Rs 439 crore, which was ahead of estimates but revenue and operational performance missed expectations. Revenue for the quarter increased 15.5 percent to Rs 10,450 crore on yearly basis with domestic business showing 19.1 percent growth and exports 15.7 percent. Operating profit (EBITDA - earnings before interest, tax, depreciation and amortisation) jumped 20.3 percent to Rs 928 crore and margin expanded by 40 basis points to 8.9 percent on yearly basis.

Its European subsidiary Samvardhana Motherson Reflectec (SMR) saw margins fall to 9.1 percent against 12.5 percent on a quarterly basis and sales growth slowed to 6.5 percent at 374 million euros (Q-o-Q).

Vivek Chaand Sehgal, Chairman of Motherson Sumi Systems, said that there’s no slowdown as far as SMR is concerned. The changes adopted for accounting standards make SMR’s margins look optically weak on quarterly basis, but they’re still healthy, he said. There’s no slowdonwn on a year-on-year basis, he added.Below is the transcript of Vivek Chaand Sehgal’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: First I wanted to start off with the growth slowdown in your key subsidiary, Samvardhana Motherson Reflectec (SMR). The sales growth has slowed down to 6.5 percent year-on-year (Y-o-Y) compared to 14 and 15 percent that you had many quarters ago. Are you facing any pressure at all in the European markets?A: On the contrary, it is a great story of SMR. They are, at this particular moment, looking at a growth all over the world. But maybe sometimes, if you comparing it, the accounting standards have been changed and a lot of these things are on joint ventures and things like that. So, all those things might have been playing on the numbers, but by and large, there is no slowdown at all as far as SMR or Samvardhana Motherson Peguform (SMP) or any of the companies are concerned.Anuj: The SMR margins have been impacted, now at single digits. So, is this going to be a new norm or was this an aberration?A: This is where the accounting standards have changed to the Indian Accounting Standards (Ind AS). So, what we have done is we have recast the Y-o-Y, quarter-on-quarter (Q-o-Q), but we have not recast the numbers on the Q2, Q3, Q4. So, it would not be a fair comparison and we are always in a hard press to get our companies all done. This is more related to that, because the numbers are all mixed up, but Y-o-Y is the right comparison as far as this particular quarter is concerned. So, we are not at all worried about that. In fact, it is very healthy.Sonia: As per the new accounting standards then, can you tell us what you see as the margins for SMR over the next couple of quarters?A: Basically, our object is to follow the law as the law wants us to do it. What we are doing is, we have not recast the numbers of Q2 and Q3, but if you look at it, definitely, the margins are going to start to look better and better. We are a return on capital employed (ROCE) focused company, not so much as a margin focused company, we have repeated that so many times, but it is okay. As far as we are concerned, we are focusing more or ROCE and ROCE is something which is very exciting for us. You are growing also and you are improving the ROCE. That is where we are looking at. So, definitely your margin is sometime product mix. Many things can affect the margin. It is not a single one product which is being sold all over the world. So, you have to take that into cognisance. Anuj: So, can you tell us what the new orders are looking like at SMP? Can you share the order book with us?A: You know that we will always give you a guidance every six months because it is very difficult to every quarter to focus just on the order book only. So, what we have done is twice in a year, we will focus on our order book and twice a year, we will tell you about the new production sites and the new plants that we are doing. So, we have already attached it to our presentation, 14 plants are in different stages of construction, four of which are brand new plants and seven of these plants are going to go out, they are not going to be reported for the next six months. So I would request you to focus on every six months rather than every quarter, because my team goes crazy trying to figure out everything every quarter.Sonia: What could the growth rates be for SMR the rest of FY17? When do you see SMR getting back to double digit growth rates?A: As of today, we do not see any slowdown or any reduction of numbers on a Y-o-Y basis because in Europe or in America, we have a holiday season in July-August and things like that. So, all these particular things play a role and hence, sequentially we cannot look at the numbers. We have to look at it on a Y-o-Y basis and on the recast numbers based on the accounting standards. I feel there is no this thing over there. We have no indication that there is going to be a reduction in the numbers or something like that. In fact, if you look at all the European car numbers and the American car numbers they are at one of the highest ever. So, we are very enthused with that.Sonia: Let us continue chatting about your numbers because the stock is still down 6 percent. The other business, SMP which is the other subsidiary has seen an improvement, so margins have improved to about 7 percent. Can we expect a bigger upside in margins in the next couple of quarters?A: Again, we are not a margin company, we are a ROCE company. But definitely, your questions are valid. You want to know about margins. The big difference between the last quarter and this particular quarter, just to give you an idea, Daimler which used to be 5 percent of our business, in this quarter is sitting at about 11 percent and that is because of the new factory that has started in January is now coming into the full course. So, there are a lot of changes that are happening in our order and there is also the product as well as the customer also. So, we believe that this thing is going to go better and better, so we are in spite of all the rejection and all those things that we might have had in the last six months, we are actually doing better and better. So, I am sure that in the future, you will see even better than what we are doing at the present moment. But definitely, on the ROCE, I cannot tell you about the margin, definitely it will be better.Sonia: You just told us briefly about how Daimler is contributing more, I did not get that numbers. How much does Daimler contribute currently to the business now versus what they contributed a couple of quarters ago?A: The presentation that was made to the board is that they were doing at about 5-6 percent, if you look at our old presentation. This time, they are almost at about 11 percent, so more than doubled. Anuj: Your India business remains a big positive. A revenue growth of 19 percent, has demand picked up?A: It is a very important question that I would like to answer. First thing, Motherson’s entire sales is to original equipment manufacturers (OEM) only. We do not do any aftermarket sales. So, my customers have done phenomenally well. More than that, the customer orders on us for the models have done even better. So, with the result you have a phenomenal improvement on the sales and definitely, it translate to the other earnings before interest, taxes, depreciation and amortisation (EBITDA) and profit before tax (PBT) and profit after tax (PAT). So, Motherson does not do any aftermarket sales and in that process, we are a true reflection of the customers’ order which have come to us. So, it is an OEM sale. So, my customers are doing very well. There is a lot of enthusiasm in the air with a good monsoon and good things happening. So, I am sure we are going to do even better in the standalone side.Sonia: Lastly, would you hold on to your guidance of USD 18 billion by 2020 in terms of revenues?A: On the contrary, our group turnover is USD 26 billion, so USD 18 billion is not really an issue. We are seeing a lot of opportunity in the markets. There is a lot of liquidity that is there in the market. We are picking up a lot of bonds and things like that. We have also got an enablement of qualified institutional placement (QIP) like last time. About a year and a half to two years ago, we had done an enablement but we did not use it because there was no opportunity. But this time, we see a lot of opportunity, so I am saying, USD 18 billion is not really a concern, we are sure we are going to exceed that.