This mid-cap auto parts stock doubled since March, still has some steam left; check target price

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Published: June 3, 2020 1:01 PM

While share markets tanked in the month of March, analysts and experts warned against painting all the stock with the same brush and deserting the shares that are sound fundamentally.

analyst corner, expert opinion, motilal oswal, motherson sumi, merger and acquisitions, M&A, M&A opportunities, where should i invest, motherson sumi investmentAnalysts at Kotak Securities said that Motherson Sumi is well placed to capitalize on the recovery in auto demand once the pandemic starts to wane.

While share markets tanked in the month of March, analysts and experts warned against painting all the stock with the same brush and deserting the shares that are sound fundamentally. Among such stocks, one was Motherson Sumi, a joint-venture between Samvardhana Motherson International Ltd and Motherson group that manufactures wiring harnesses and auto parts. Motherson Sumi shares tanked 60% between January and March, however, as predicted the stock has jumped 95% since then. Although the firm has posted a fall in profits for the March quarter, brokerage and research firms are revising estimates and reaffirming their buy calls on the stock.

Motherson Sumi is expected to benefit from a number of reasons in the near future. Analysts at Kotak Securities said that Motherson Sumi is well placed to capitalize on the recovery in auto demand once the pandemic starts to wane. While those at ICICI Securities said that the strong competitive position of Motherson Sumi across regions, segments (M&HCV/PV/2W) and products (Interiors/Exteriors/Wiring Harness) is something that makes the firm attractive. With the free cash flow position improving, investors have less to worry about sending the stock higher and higher. 

Consolidated revenue for the March quarter stood at Rs 14,870 crore, down by 12% on-year basis largely dragged down by Samvardhana Motherson Automotive Systems Group BV and PKC, although margins remain strong at almost 17%. In the last fiscal year, OCF/EBITDA conversion of the firm improved to ~122% from 81% in financial year 2019, which led to strong FCF generation of Rs 4,070 crore. Consolidated net debt reduced by Rs1,670 crore on-quarter basis to Rs 6,920 crore.

The management commentary post the rest announcement has been largely positive, indicating that the majority of the plants globally have restarted operations and are expected to reach over 75% utilisation this month except those in India. The company’s Chinese arm is working at 100% capacity. Motherson Sumi said that the firm has dealt with the coronavirus pandemic positively despite plants across the globe being closed at some point. The near-term outlook remains weak across Motherson Sum’s business lines, said Edelweiss Securities. “It anticipates a strong bounce back in demand to the pre-COVID-19 level given the robust direct and indirect support by governments across regions. Highlights of the company’s next five years’ plan also indicates that management’s penchant for M&A is unlikely to wane,” the brokerage firm said while maintaining buy call with a target price of Rs 117 on the stock. The stock is trading at 33.7/15.0x FY20/21E PE.

ICICI Securities had a target price of Rs 127 per share at the beginning of this year, the same has been trimmed to Rs 116 per share. “We lower our earnings growth estimates by ~54.1% and 13.0% for FY21E and FY22E respectively due to Covid related production dislocations. We continue to like the stock (even after the recent rally) as FCF generation remains amongst the best in the industry,” the brokerage firm said. Consolidated EPS estimates have been trimmed for this fiscal by 8% by Kotak Securities. “We believe auto demand will likely recover in 2HCY20 as customers would prefer personal cars over public or shared transport, due to hygiene and health-related concerns. We expect the company to generate positive FCF in FY2021E despite a subdued demand environment,” it said. Fair value of Rs 110 has been pinned on the stock by Kotak Securities.

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