Highlights: - Decent top line growth in Q4 FY19 - Operating margin continues to be under pressure - Business outlook for the company is weak for short term, positive for long term --------------------------------------------------
Motherson Sumi Systems Limited (MSSL), India’s largest automotive wiring harness player and one of the largest auto ancillary firms, posted a disappointing set of numbers for Q4 FY19. Slowdown in demand both in domestic and international markets and margins contraction for SMP and SMR businesses weighed. Order book, however, continues to be very strong.
The push towards EV (electric vehicles) and transition towards BS VI emission norms should result in healthy growth in top line and a gradual increase in margins. This, coupled with ramping up of new plants, is expected to result in increase in operating leverage. MSSL is trading at reasonable valuations, which calls for investors’ attention.
Quarter in a nutshell
While the company posted year-on-year (YoY) growth of 11.4 percent in its consolidated net revenues, its earnings before interest, tax, depreciation and amortisation (EBITDA) margin witnessed contraction of 250 bps due to poor operating performance of SMP (Samvardhana Motherson Peguform) and SMR (Samvardhana Motherson Reflectec).
Segment-wise, standalone business witnessed a significant revenue decline of 12.1 percent (YoY), hit by 15.4 percent decline in domestic business, reflecting subdued consumer sentiment in the Indian auto industry. International business, however, witnessed top line growth of 7.9 percent. Standalone EBITDA margin witnessed a YoY contraction of 40 bps at 18.1 percent.
The business of SMP, the subsidiary which is into modules and polymer component business and is a leading global supplier of door and instrument panels and bumpers, however, witnessed 17.7 percent revenue growth in euro terms. EBITDA margin fell 700 bps, primarily, due to startup costs.
As for SMR, a leading global supplier of exterior mirrors, revenue perked up 3.9 percent in euro terms and its EBITDA margin contracted by 150 bps on a YoY basis.
PKC, a Finland-based wiring harness specialist company, clocked a growth of 14.2 percent in revenue in euro terms on the back of healthy demand in North America, which got partially offset by muted demand in China. EBITDA margin expanded by 240 bps.
Factors to watch out for
Industry outlook The Indian passenger car industry has been passing through a rough patch owing to multiple challenges such as increase in the total cost of ownership due to mandatory long-term insurance, implementation of safety regulations and higher cost of retail finance. Subdued consumer sentiment has forced major original equipment manufacturers (OEMs) to cut production, impacting auto ancillary players such as MSSL as well.
There has been a slowdown in the global automobile market too, impacting MSSL’s performance. The downturn was further aggravated by the implementation of WLTP (Worldwide harmonized light vehicles test procedure), which hit SMP’s performance.
Moreover, sales of Class 8 trucks (heavy trucks with 15 tonnes plus weight limit) in North America have also slowed. These trucks contribute 54 percent of PKC’s revenue. PKC, a subsidiary which is into wiring harness for commercial vehicles, is also focused on the truck market in China, which too is in a slow lane.
Triggers going forward Wiring harness demand, however, is expected to outperform PV industry growth, driven by increase in the content per vehicle and new product launches. In fact, implementation of BS VI emission norms would lead to complexity in wiring harness and consequently, the value. MSSL is in a strong position to take advantage of growth coming in the PV segment in India.
Focus on EVs across globe would be an important growth driver for the company, going forward. As per the company’s management, battery driven vehicles would need more wiring component which would increase the content per vehicle by close to 10-20 percent, which would benefit MSSL. Other businesses related to polymer- and mirror-based products are immune to the shift to EVs.
Additionally, the management has highlighted that all the key greenfield projects are now complete and in ramp-up phase now. Once the ramp-up is done, operating leverage will kick in and startup costs would go away, contributing to margin expansion.
Further, MSSL has a very strong order book that gives earnings visibility. SMRPBV’s order book was at euro 18.2 billion at the end of FY19. In fact, despite the slowdown in the industry, MSSL has been able to garner new orders worth euro 5.6 billion in FY19.
Debt position – on way down What has been the concern for MSSL is the rising debt levels on the back of its amplified capex plans and the quest to grow business inorganically. With the capex cycle coming to an end, the company has started paying off its debt and repaid debt to the tune of Rs 1,713 crore in the quarter. Its net debt now came down to Rs 7,992 crore (debt to equity 0.6x).
Valuations In light of weak demand outlook, the stock has corrected quite significantly and is down 45 percent from 52-week high. It trades at 21.2 times FY20 and 16.2 times FY21 projected earnings. We advise investors to accumulate this stock in a staggered manner.
For more research articles, visit our Moneycontrol Research page.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
