We maintain our negative view on Motherson Sumi Systems (MSS) as we believe consensus estimates are too optimistic, particularly on margin improvement in the SMP business.
We expect new SMP plants to operate at lower than current margins of the company as capacity utilisation rates are likely to remain low. Further, the standalone business is also facing incremental competitive pressure from Minda-Furukawa, which could impact profitability. While we retain our earnings estimates for now, we cut our valuation multiples to factor in the uncertainty around revenue growth from Volkswagen.
We see limited impact in the near term on Motherson Sumi from probable fines on Volkswagen for violating emission norms in the US of its diesel vehicles. We believe Motherson Sumi will get impacted if VW diesel vehicle sales get impacted in Europe due to this issue which we believe is difficult to assess at this juncture. We maintain our sell rating on the stock as we are concerned on slowing revenue growth in the standalone business and slower than expected improvement in SMRPBV Ebitda margins
We believe that normally such investigations last for several months and may result in significant financial outgo for the OEMs. There could be some impact on VW’s sales volumes at least in the near term.
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