Workers assemble wire harnesses at the Motherson Sumi Systems Ltd. wiring harness plant in Faridabad (Photographer: Brent Lewin/Bloomberg)

Why The Gap Between Estimates And Reality Is At Its Widest For Motherson Sumi

The divergence between what analysts expect and how shares of India’s second-largest auto parts maker have fared is at its widest. And U.S. President Donald Trump’s tariff threat is to blame.

Shares of Motherson Sumi Systems Ltd. have fallen 31 percent so far this year, the biggest decline in a year since 2008. It’s also the worst performer among Nifty 50 peers after Tata Motors Ltd.

Yet, analysts have so far retained their faith in Motherson Sumi. Eighty-one percent of them have a ‘Buy’ rating on the stock, according to forecasts compiled by Bloomberg. The consensus estimate suggests an upside of 43 percent in next 12 months, the highest since 2015.

That comes when Motherson Sumi’s largest clients like Volkswagen, Daimler and BMW groups are expected to feel the pain of Trump’s protectionist policy. In June, the U.S. threatened a 20 percent tariff on cars imported from the European Union, the biggest market for Motherson Sumi with nearly 40 percent of its revenue coming from the bloc.

The U.S. contributed 14 percent to Daimler’s Mercedes-Benz’s revenues in 2017, according to its annual report. Similarly, over 14 percent of BMW deliveries were made in the U.S, and VW’s Audi gets 12 percent of its sales from the American market. BMW, in fact, lowered its guidance for the year citing trade conflicts.

Motherson Sumi is yet to respond to BloombergQuint’s email queries on the possible impact of U.S. tariffs.

Valuation Concerns

Not everyone of the 37 analysts tracking the stock is optimistic though. And its high valuations are a key concern. After the slide this year, according to Bloomberg data, the stock trades at 22 times its estimated earnings.

That’s expensive compared with peers like Suprajit Engineering Ltd. (20 times) and is as high as that of India’s largest automaker Maruti Suzuki Ltd., Deepak Shenoy, founder and chief executive officer at investment advisory Capitalmind, said. Given the trade war overhang in Europe, relatively higher valuations and current weakness in Indian equities, he said it’s best to avoid Motherson Sumi currently.

Morgan Stanley, which remains ‘Underweight’ on the stock, said the company’s valuations are higher than its nine-year mean of 18 times.

The company has a target of hitting $18 billion revenues by 2020—that compares with consolidated sales of $9.6 billion in the year through March. The management, in the five-year targets set in 2015, expects a return on capital employed of 40 percent by 2020. It managed 18 percent in 2017-18.

To diversify and reduce risks, the company also aims to keep revenue contribution from a single country, component or customer at 15 percent, according June quarter filings. Vivek Chaand Sehgal, chairman of the parent Samvardhan Motherson Group, had told BloombergQuint earlier that the company was confident of achieving 2020 its targets.

Motherson Sumi may take a year or two beyond 2020 to achieve its targets, should the European auto industry witness a further slowdown.