Motherson Sumi Shares Drop On Downgrades From Jefferies, CLSA, Nomura

Shares of Motherson Sumi Systems Ltd. dropped the most in more than a month after at least three global research firms downgraded the auto parts maker’s stock.

Jefferies, CLSA and Nomura lowered their investment recommendations for the auto ancillary, which counts Audi AG, Daimler AG and Volkswagen AG as its top customers, and highlighted its expensive valuation on account of a stock rally. They, however, hiked price targets, expecting it to benefit from a global auto recovery and increase in focus on electric vehicles.

Motherson Sumi, one of the world’s largest makers of automotive wiring harnesses and mirrors for passenger cars, saw its profit and revenue fall sequentially in the quarter ended March, but stayed above the Bloomberg consensus estimates. The company also pared its gross and net debt during the period, bringing its debt-to-Ebitda ratio to the lowest ever.

While the better-than-expected results prompted the shares to rally the most in more than a year on Wednesday, the rating downgrades caused the stock to drop as much as 7.1%—the biggest fall since April 19—on Thursday.

Of the 30 analysts tracking Motherson Sumi, 20 have a ‘buy’ rating, eight suggests a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 1.4%.

Here's what brokerages made of Motherson Sumi's Q4 results:

Jefferies

• Downgrades to ‘underperform’ from ‘hold’, but raises target price to Rs 205 apiece from Rs 190.
• Top line in euro terms was down 4-7% QoQ at the mirrors and plastics subsidiaries, which Motherson Sumi attributed to extended holidays and lower production at original equipment manufacturers.
• Notwithstanding some near-term semiconductor-related challenges for the global auto industry, Motherson Sumi has good operational outlook as it should benefit from a cyclical recovery in global autos.
• While the brokerage likes Motherson Sumi’s good earnings growth outlook, valuations have turned too expensive after the sharp year-to-date rally.
• When compared to the blended average price-earnings ratio of Maruti Suzuki (benchmark for India business) and global auto-component companies, Motherson Sumi is now trading at around 45% premium versus historical average of 25%.

Nomura

• Downgrades to ‘neutral’ from ‘buy’, but hikes target price to Rs 301 from Rs 252, implying an upside of 11.9%.
• Content per car and profitability will continue to rise further as EVs likely gain share.
• In India as well, Motherson Sumi will likely benefit from its strong SUV launch pipeline, which will be more feature-rich. Thus, Motherson Sumi will likely keep growing well ahead of the industry.
• Remains positive in the long run, but does note that the stock has moved up 13% post results (+63% year-to-date) and now trades at 24.2x FY23 earnings per share — closer to its fair value zone.
• Prefer Minda Industries Ltd. in the sector on its ability to grow faster than the industry and potential upside from its presence in EVs.

CLSA

• Downgrades the stock from ‘buy’ to ‘outperform’, but increases target price from Rs 285 to Rs 295, implying an upside potential of 10%.
• Remains constructive on the medium-term revenue and margin trajectory for Mothersom Sumi, but stock outperformance (57% vs Nifty in six months) is likely factoring that.
• An extended slowdown in India and European auto demand are downside risks. Better-than-expected profitability in global subsidiaries is an upside risk.

Goldman Sachs

• Q4 Ebitda missed consensus forecasts, led by sequentially weaker contribution from global subsidiaries. The fewer number of production days in 40 and production disruptions (such as shortage of semiconductors) affected their performance.
• Motherson Sumi has solid order intake, with electric vehicles now making 25% of its order-book. This backs the management’s upbeat stance on the revenue growth potential and sustainability of margins.
• Management also highlighted the lowering capex requirements as the company does not see any need for additional plants to service the existing order book, which bodes well for cash flow generation in FY22-23.
• “We see Motherson Sumi as a global play on auto recovery led by premium/luxury cars (more than 33% of customer base). Moreover, the company benefits from increases in content per car with more electronics and tighter emissions.”