Global auto component manufacturer Motherson Sumi Systems Ltd may be able to meet its revenue growth targets, but hiccups on profitability may slow down earnings growth.
The company’s shares have fallen 35% since April, when it announced the acquisition of Reydel Automotive group. Its acquisition-led growth has worked out well in the past, but its September quarter profitability is under strain due to multiple challenges.
On the overseas front, its subsidiaries dragged down performance. Analysts believe that becoming compliant to new emission norms has temporarily hit auto industry sales and, therefore, component suppliers.
Samvardhana Motherson Peguform’s low capacity utilization levels at its new units and starting-up costs hurt profitability. At its overseas business, Ebitda margin declined 190 basis points year-on-year. Cost pressures at the recently acquired Reydel units also contributed to the decline. Ebitda stands for earnings before interest, tax, depreciation and amortization.
Performance was equally stressful on the home turf. No doubt, the Indian operations were on a stronger footing, clocking 8% revenue growth on the back of a healthy auto industry performance. However, higher raw material costs, along with adverse currency movements, pulled down its Ebitda margin by 250 basis points year-on-year to 16.8%. A basis point is 0.01%.
Overall, Motherson’s operating profit grew only marginally, rising 6% during the quarter. Its interest outflow increased on the back of higher working capital and debt. The 13% increase in net revenue was not sufficient to cover rising operating cost pressures and higher depreciation. Therefore, its net profit declined by 15% year-on-year during the quarter.
The company’s track record of turning around acquired businesses inspires confidence that it can repeat the performance with Reydel. Even so, it needs sales growth, along with higher utilization rates, to improve profitability at its new units. That will generate enough profits to support the cost of servicing the investments it has made.
The Motherson stock may continue to trade at current levels till the Street regains faith in the company’s ability to not only improve revenue growth, but also attain higher earnings growth.