After having jumped 141% from its March lows, shares of Motherson Sumi Systems are still going strong. Analysts expect the stock price to reach Rs 150 per share helped by its healthy order-book and strong improvement in plant utilization. In the July-September quarter, Motherson Sumi Systems posted a net profit of Rs 388 crore, up from Rs 377 crore it had reported in the same period last year. The automobile component manufacturer reported strong demand during the quarter and with a large number of plants running despite local lockdown. Currently Motherson Sumi trades at Rs 128 per share.
Turnaround in subsidiaries
Revenue from SMP, a subsidiary of Motherson Sumi Systems, declined 10% while EBITDA margins expanded 240bp to 13.4%. On the other hand, PKC’s revenue declined d14%. However, demand is picking up on the back of an increase in Class-8 truck orders. Management highlighted that there is no slowdown in production schedules. The improvement in operation performance by SMP is being termed as a positive for Motherson Sumi. During the quarter, the greenfield plants of SMP USA achieved EBITDA breakeven. Profitability could continue to improve with cost-saving initiatives and volume ramp-up. The turnaround in the greenfield plant, execution of a strong order book of SMRPBV are the key drivers behind Motilal Oswal’s ‘Buy’ call for Motherson Sumi Systems with a target price of Rs 150.
“The company is well poised to benefit from increase in electronics content per vehicle in passenger vehicles, shift towards electric vehicles and consolidation of suppliers, especially in the plastic component industry globally,” said Kotak Securities in a note. The brokerage firm has an ‘Add’ rating on the scrip with a fair value of Rs 140 per share citing attractive valuations.
Play on recovery in global car sales
Motherson Sumi is a beneficiary of a recovery in car sales figures in the EU and China supported by demand for personal mobility and incentives announced by various EU nations. The second wave of lockdown in the western world has so far not deterred Motherson Sumi’s operations. Motherson Sumi is running 80% of its facilities at 75% capacity. The firm expects better utilization going forward. “Going ahead, improving profitability at Greenfields and recovery in global auto sales are likely to drive earnings. We estimate 36% CAGR in consol. earnings over FY20-23E,” said JM Financial in a note. Analysts at JM Financial have a target price of Rs 150 apiece on Motherson Sumi.
The complex structure of Motherson Sumi, which has a number of JVs and subsidiaries is being cited by Edelweiss as a key risk to the company. Edelweiss has a ‘Buy’ call on the stock with a target price of Rs 147 per share. “The company’s key subsidiaries (SMR/SMP) are highly dependent on demand from the luxury car segment. Weakness in global premium car demand can impact order books of SMR/SMP. This in turn could delay expected turnaround in these subsidiaries,” they added.
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