Should you invest in Mothserson Sumi in the aftermath of Volkswagen scandal?

By: | Updated: September 25, 2015 12:38 PM

Motherson is a key supplier to Volkswagen in Europe and sales to VW Group accounted 44 per cent of Motherson's consolidated revenue in 2014-15. However, VW alone constitutes 12 per cent of Motherson Sumi sales.

volkswagen scandalMotherson is a key supplier to Volkswagen in Europe and sales to VW Group accounted 44 per cent of Motherson’s consolidated revenue in 2014-15. However, VW alone constitutes 12 per cent. (Reuters)

Motherson Sumi Systems shares remained in limelight this week amid concerns related to German automaker Volkswagen (VW), which has admitted to cheating emissions test in the US and may face a fine of up to $18 billion.

Motherson is a key supplier to Volkswagen in Europe and sales to VW Group accounted 44 per cent of Motherson’s consolidated revenue in 2014-15. However, VW alone constitutes 12 per cent of Motherson Sumi sales.

The share price of Motherson, which supplies parts such as mirrors, bumpers, dash board and door trims to various auto companies of the Volkswagen Group tanked after the controversy surfaced.

The share price of Motherson Sumi slid over 11 per cent during September 18 and September 24. The share price of the company fell from Rs 283.85 on September 18 to Rs 251.25 on September 24. Market analysts and the management of Motherson sees limited impact of the controversy on the company shares on bourses.

Rohan Korde, analyst, Prabhudas Lillaher said, “Volkswagen’s admission of not complying with emission standards for some of its diesel models in the US poses a potential threat to the prospects for Motherson – if the fallout extends beyond North America. If the issue is contained there, then the impact is likely to be very limited. With Motherson’s strong order pipeline, continued debt reduction and improvement in subsidiary profitability, the long-term outlook for Motherson Sumi Systems remains bright. We maintain ‘Buy’ with a price target of Rs 400.”

Motherson Sumi Systems on Tuesday said its supplies to VW will not be affected. “The reaction is over exaggeration,” Motherson Sumi Systems CFO GN Gauba said. Stressing that the company will not be affected by the issue, he said, “The emission matter is related to engines and we do not supply any engine parts to VW. Moreover, it is not like a recall due to a part defect.”

The share price of Motherson Sumi declined 7.42 per cent in the past one year till September 24 against 3.29 per cent fall registered by the benchmark index Sensex in the same period. At current market price, the scrip was trading at 57.93 price-to-earnings ratio (P/E) against indstry P/E of 42.12, indicating over valuation of stocks.

Source: Company, JM FinancialSource: Company, JM Financial

After the recent correction, if you are thinking to add Motherson Sumi shares in your investment portfolio then hold on for a while as G Chokkalingam, founder and managing director, Equinomics Research & Advisory, said, “We suggest investors to wait for the stock to correct at least Rs 200 level. At current market price, the scrip is trading around 17x FY17 EPS. This kind of P/E for an auto component company is quite stretched in our view. Sentiment wise there could be more adverse news flows for Vokswagen as issue is not just recall of vehicle rather rigging fact. The same could impact valuation multiple for Motherson Sumi.”

In the past 10 years, consolidated gross sales of the company jumped around 45 per cent annually to Rs 35178.60 crore for the financial year ended March 2015. Gross sales was at Rs 882.73 crore at the end of FY05. Net profit of the company jumped 31 per cent annually during the same period.

For the year ended March 2015, the company posted a consolidated net profit of Rs 1291.50 crore against Rs 85.83 crore in FY05. During the period debt-to-equity ratio of the company jumped from 0.53 in FY05 to 1.55 in FY15.

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