Fall in copper prices and loss of market share hitting company's showing
While our negative thesis so far has primarily been based on aggressive street estimates for SMP (European subsidiary), we see some headwinds emerging in the domestic business also.
* Motherson has underperformed the domestic PV (passenger vehicle) industry for two straight quarters now, which we believe is on account of two main factors: First, the sharp fall in copper—although a pass-through, it has an impact on both revenue and Ebitda growth (costs other than commodities do see inflation). With copper falling further ~10% in last two months, the next few quarters will be subdued.
* The second factor, which is a deeper concern, is the loss in market share. Our channel checks indicate that Motherson’s near dominance with Maruti is reducing, with Maruti decreasing its single vendor concentration. Players such as Yazaki and Furukawa (>50% revenue growth in 1Q) are starting to gain share.
* The stock has underperformed the market by ~10% past month with ~10% cut in consensus estimates, but we see further cuts ahead. It trades at 21x FY17e earnings (~50% premium to global peers). We stay UNDERPERFORM and prefer Bharat Forge to MSS.
For the last two quarters, domestic revenue growth at ~1% y-o-y has underperformed the PV industry growth (5% y-o-y). Historically, the company’s outperformance has had a strong correlation with the copper price. Even though copper is largely a pass-through, given some expenses are fixed—an inflationary commodity environment is better for profit growth. Copper was down 4% q-o-q in Q3FY15 and 11% in Q4FY15, which led to growth slowdown (assuming a lag of a quarter).
With copper prices recently declining a further ~10%, top-line growth could be further impacted (especially in Q3FY16). The fact that the company has had to pass on the entire benefit also partially reflects the loss of pricing power with the increasing competitive intensity.
Our channel checks indicate that Maruti is now in the process of strictly enforcing its single-vendor not having a 70%+ share policy, and hence Motherson, which currently has a 85% share, is expected to suffer. Other Japanese wiring harness majors—Yazaki and Furukawa (in JV with Minda corp)—are becoming more aggressive. Minda Furukawa has a target of growing revenues by ~70% in FY16 and cornering 30% of Maruti’s wallet in two years from ~10% at the start of the year. Yazaki is the No. 1 wiring harness company globally and has a one-third share of business with Suzuki. Motherson had a cost advantage over others because of its localisation of applicators (a third of the imported cost) but now other players too are in the process of localising the same.
We have all along maintained that street estimates are just too high; FY16 consensus earnings have already seen a ~10% cut in the last three months. Our FY16/17 estimates are still 8%/14% below consensus and we see a risk to our numbers too, as we haven’t built in the rising competitive intensity on the domestic side in our numbers yet. The recent euro appreciation versus the rupee helps in the translation and hence should help numbers.