Motherson Sumi Says ‘Well-Prepared’ To Deal With Coronavirus Impact

Motherson Sumi Systems Ltd. said it is “well-prepared” to deal with the crisis stemming from the novel coronavirus outbreak, aiming to calm panic-stricken investors dumping shares of the auto components maker due to its exposure to developed markets.

The stock has tumbled 57 percent so far this year compared with Nifty Auto Index’s 33 percent decline, according to Bloomberg data. It is the worst performer in that barometer after Tata Motors Ltd., which slumped 61 percent.

To be sure, Motherson Sumi shares were already reeling from the effects of a prolonged auto slowdown in India. The Covid-19 pandemic has only added to investors’ woes as the stock is down 77 percent from its December 2017 high.

Auto and auto component makers, which together contribute more than 7 percent to India’s gross domestic product, have been grappling with the worst sales slowdown in two decades. And now the mounting coronavirus cases threaten to stall even a fragile recovery as the outbreak has disrupted supply chains globally and affected footfalls at dealerships.

Key Highlights From Motherson Sumi’s Conference Call

• The company has 27 plants in China that have returned to normalised levels, barring the plant close to Wuhan—the epicentre of the coronavirus outbreak. Plants have been started with 75-80 percent attendance.
• Europe-based customers are considering a 15-20 day plant shutdown to prevent contagion from the virus among workers, which may impact Samvardhana Motherson Automotive Systems' business from the region. Germany and Spain are going for shutdown from today.
• The situation in the U.S. is stable as there is not much impact on demand so far, while Indian plants are also running smoothly.
• The company remains ready to ramp-up production as per client requirement.
• The Covid-19 impact should normalise in one month, given widespread controls on movement by various governments.
• There is no material threat from supply disruption as most supplies come from global players and collaborators and more than 90 percent of smaller components are made in-house
• Capital expenditure is likely to drop significantly given the current environment.
• There is sufficient liquidity and does not believe there will be any issue in working capital requirement.
• The management prefers to conserve cash to support activities globally and is not interested in buyback.
• Extended duration of plant shutdown by customers is the key risk in the near term.

Analysts' Take On Motherson Sumi

Nomura

• The stock is trading at attractive valuations with free cash flow yields of 7 percent.
• Recommends buying the stock with a target of Rs 157 apiece.

Prabhudas Lilladher

• Upgraded stock to a ‘buy’ after conference call with a target price of Rs 115 apiece.
• Cut the FY20/21/22 EPS estimates by 8 percent/18 percent/11 percent to factor in for production shudown in China and Europe due to Covid-19.
• Significant correction presents an opportunity to buy this stock at an attractive valuation at 11 times FY21 estimates.

Morgan Stanley

• Overweight on the stock with a target price of Rs 103 apiece
• The risk-reward is attractive even though the near-term visibility is low.

On Thursday, Motherson Sumi shares rose as much as 6.33 percent to Rs 65.50 apiece, compared to benchmark NSE Nifty 50’s 7.51 percent decline.