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Last Updated : Sep 24, 2015 08:19 AM IST | Source: Moneycontrol.com

Is it just bargain hunting? Motherson a 'buy' despite fall

Though Prabhudas Lilladher agrees that US poses a potential threat if the Volkswagen's fiasco extends beyond North America, it believes that with strong order pipeline, continued debt reduction and improvement in subsidiary profitability, long-term outlook of Motherson Sumi remains bright.

 
 
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Amidst sharp sell-off and uncertainty, few analysts are still betting on Motherson Sumi and recommend panic reaction as an oppurtunity to buy. Though, most brokerages are negative as the stock is on a free fall this week due to concerns around one of its biggest clients Volkswagen. The German carmaker has been accused of cheating on diesel emission tests in the USA and may face penalties of up to USD 18 billion.

However, Prabhuhas Lilladher maintains a buy rating with a target price of Rs 400 per share.


Though Prabhudas Lilladher agrees that US poses a potential threat if the Volkswagen's fiasco extends beyond North America, it believes that with strong order pipeline, continued debt reduction and improvement in subsidiary profitability, long-term outlook of Motherson Sumi remains bright.

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In a conference call with management, the auto part maker said, "VW’s global market share goes down because of this development,it is possible that Motherson Sumi may not be impacted as some other original equipment makers (OEM) which takes up the slack is also a MSS customer."


VW constitutes 12 percent of MSS’s sales, most of which are to Europe. Motherson has a limited exposure to Volkswagen in the USA. Volkswagen is a key customer for Motherson in Europe and sales to its group contributed 44 percent of its consolidated revenue in FY15.


That is not all. Joining the 'buy' brandwagon are Bank of America Merill Lynch, Deutsche Bank and Antique.

BoA ML maintains buy rating as it expects margin expansion. It says that the Volkswagen risk can be material only if VW gets impacted globally. "We estimate the direct impact to be 1 percent of sales, and unlikely to impact US expansion plans. We, however, can’t assess the reputational impact on VW globally. Given the customer diversification plans, we believe the worst-case impact is unlikely to be more than 10 percent on bottom line," it says.

Deutsche Bank also retains buy stating that stock correction appears overdone but near-term overhang remains. Though it feels the stock has discounted risks, the brokerage has cut target price by 30 percent to Rs 275 per share. It has also slashed earnings per share (EPS) 13 percent due to tempering of margin expectations in global operations and slower-than-expected India growth.

Echoing similar sentiment, Antique reiterates buy rating with a revised target price of Rs 294 per share. According to the brokerage, uncertainty in terms of demand outlook from the VW group, higher pricing pressure from it going ahead, large scale earnings dilutive inorganic deal on present net debt-to-equity and decline in market share of the wiring harness business in India are major risks.


"Maximum impact on its revenue would be 8 percent, assuming the suggested diesel models in affected markets stop getting sold completely going forward. This we find too hard to digest," it says on a confident note.


However, it has cut consolidated FY17 revenue estimate by 10 percent and consolidated EBITDAmargin by 50 basis points (bps), leading to an earnings cut of 20 percent.


Shares of Motherson Sumi extended losses for third consecutive day, falling over 5 percent intraday on Wednesday. The stock was at 52-week low of Rs 228.50 per share and down 20 percent year-to-date.


At 11:25 hrs Motherson Sumi Systems was at Rs 232.60, down Rs 9.30, or 3.84 percent. 

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First Published on Sep 23, 2015 08:50 am
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