Motherson Sumi Share price has fallen – Why?

Detailed Analysis of Motherson Sumi Share Price Movement to Rs. 142.45 on March 27,2019

Motherson Sumi has seen a fall of around 17% from a month high price of Rs. 172.00 on March 11, 2019 to Rs.142.45 on March 27, 2019. Let us see the Reaons behind its downward trend in this article.

About Motherson Sumi Systems Ltd.

• First group company “Motherson” was established in 1975. Vivek Chaand Sehgal along with his mother had formed the company.
• Motherson Sumi is a joint venture between Sumitomo Wiring Systems (Japan), Sojitz Corporation (Japan) and the Motherson Group. Motherson Sumi Systems is the flagship company of the Samvardhana Motherson Group.
• Motherson Sumi Systems Limited is a system solutions provider to automotive and other industries, offering services from design and prototyping to production and delivery of solutions across a range of products.
• Motherson Sumi is global auto ancillary company. It supplies auto ancillary parts to almost all the major auto companies in the world. As an auto ancillary company, it has a deep penetration in the main stream auto companies.

Market Capitalization of Motherson Sumi Systems Ltd.

• Today, Motherson Sumi has a market capitalization of $7 billion. In rupee terms, the market capitalization of Motherson Sumi is close to Rs. 50,000 Cr.
• The stock of Motherson Sumi has gone through a correction of 30%-35%. This means that the market capitalization of the company got corrected by almost $4 billion and has come down from $11 billion to $7 billion.

Share Price Movement

• Motherson Sumi has seen a fall of around 17% from a month high price of Rs. 172.00 on March 11, 2019 to Rs. 142.45 on March 27, 2019.
• A continuous downward trend in the stock price movement is seen over the period, although being a deep penetration in the System solution provision and prototyping. What could be the reasons behing such a falling trend in the share price of Motherson Sumi?

Reasons behind the Fall in the Stock of Motherson Sumi Systems Ltd.

1. The main and the biggest reason behind this is the slow down in the main stream automobile sector.
2. Auto industry has gone through a decent bull run in the last 4-5 years. And usually, after this kind off strong run, the auto sector then passes through a correction phase. The sluggishness that the sector then faces continues for around 1-2 years to again give the sector a good base effect. And, this is exactly the sluggish phase through which auto sector is passing through. Thus, as a result of that, auto ancillary companies, such as Mother Sumi, are also getting impacted.
3. Rest kept aside, it is a very strong company, with a good corporate governance and is performing well in terms of numbers.

Pros of Motherson Sumi Systems Ltd

1. The supply penetration that Motherson Sumi has in the main stream automobile companies is a strong asset of the company.
2. Another unique advantage that the company has is that it is very good in acquisitions. And after the acquisition, it is also very good in improving and increasing the operational efficiency of the acquired company.
3. The way the company answers the question asked by their investors, during the con-calls that are scheduled during quarterly or annual result declaration, is also very appreciable. Their team gives very in-depth answers and it doesn’t feel like the company is trying to hide any information.

Financial Details of Motherson Sumi Systems Ltd.

1. Revenue
   • In Trailing Twelve Month (TTM), they have a revenue of close to 410 billion.
   • The company has vision, called ‘Vision 2020’, in which they want to have a revenue of $18 billion by December 2020.
   • One can ask whether isn’t this number a little huge. But the thing to be noted here is that, the company grows through organic as well as inorganic segments. Organic growth means the one through their current business and inorganic growth mean through acquisitions and similar. And currently, the company is open for some acquisitions.
2. Debt-to-Equity (DE) Ratio
   • The company, currently, has a DE ratio of 1.05.
   • If the De ratio is above 1 then it is usually regarded as high, but as it is a capital-intensive sector, there are chances of DE ratio being above 1.
3. Interest Coverage Ratio (ICR)
   • ICR = 9.29
   • This is another advantage of the company. Even after having a high DE ratio, still the company has a ICR of 9.29, then the company has a great ability to pay off their debts.
   • If the ICR of any company, goes below 5 in downward trend, then one should get cautious about the happening in the company. And if it goes below 2.5 then that can be an alarming sign.
4. Return on Capital Employed (ROCE)
   • Current ROCE = 20%
   • They have a vision of having an ROCE of 40%
5. Return on Equity (ROE)
   • ROE = 19%
6. Net Profit Growth
   • 10-Year NP Growth = 27%
   • 5-Year NP Growth = 31% (This was a very glorious period for the industry)
   • 3-Year NP Growth = 21%
   • TTM-Year NP Growth = 11% (The number seems low because of the slowdown in the industry)
7. Sales Growth
   • 10-Year Sales Growth = 27%
   • 5-Year Sales Growth = 31% (This was a very glorious period for the industry)
   • 3-Year Sales Growth = 21%
   • TTM-Year Sales Growth = 11% (The number seems low because of the slowdown in the industry)

3C x 15 Strategy of Motherson Sumi Systems Ltd.

This is a strategy adopted by the company. It is as follows:

1. No exposure of more than 15% in any Country.
2. No exposure of more than 15% to any Customer (in terms of revenue).
3. No Component (part) of the company has a share of more than 15% (in terms of supply).

• Currently, the company is getting 20% of their revenue from Audi. They plan on getting it down to 15%. Not that they want to reduce their supply to Audi, but rather want to increase their other customer exposure, and proportionately bring the Audi exposure down to 15%.
• In terms of country, the company has the maximum supply to Germany, almost having an allocation of 30%. This also exposure the company wants to bring down.
• Motherson Sumi has a supply to almost all the German car making companies. This is another advantage the company possesses.

summary

1. In terms of financials, Motherson Sumi is very comfortably placed.
2. Fundamentally the company looks good with strong corporate governance.
3. Business wise the company has no issues and the ‘3C x 15 Strategy’ that it follows is also very unique.
4. The company has a very healthy debt management system, which can be understood from its DE ratio and Interest Coverage Ratio.
5. Once the auto industry gets a healthy base, it may again experience another strong run.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that these are bad companies, or the stocks of these companies are bad.
• We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.