Motherson Sumi’s management addressed investors with an update on its business. Its global operations (SMR, SMP and PKC) have started to shut down in EU (particularly in Germany and Spain) as customers stop production by the end of this week. US operations are normal so far, whereas China operations are back to normal (except 1 of the 27 plants in that country).
While these shutdowns can hurt near-term volumes, the management indicated that OEMs may make up for the current loss by reducing normal shutdowns of August (holiday season). From its suppliers’ perspective, most of its key suppliers are large corporates like Sumitomo, BASF and Reliance Industries. Thus, there is no need to provide them support in challenging times. For parts sourced from smaller suppliers, it has visibility of alternative suppliers. It is monitoring the situation very closely. The group is facing no credit squeeze from any financiers and has enough liquidity available in all operating entities. If need be, both the listed entity and SAMIL (holdco) will repay the loans as they have enough liquidity.
For the debt at the holdco level (SAMIL), for which there is pledge of MSS shares, management indicated that it can pay down the entire debt today (if need be) as it has sufficient cash. We have lowered our FY21/22 consolidated EPS by 15%/8% to factor in the near-term volume weakness in all key businesses. We maintain our positive view on MSS.
However, the near-term stock performance could be influenced by development on coronavirus and the ongoing restructuring exercise. We are also lowering our target multiples for both India (from 25x to 20x) and global business (from 15x to 12x). Maintain ‘buy’ with a target price of ~`108 (March 2022E SOTP).