MUMBAI: Automobile components maker Motherson Sumi Systems Ltd impressed the Street with better-than-expected performance for the March quarter. The stock continued to gain, rising 1% on Wednesday. It rose 5% on Tuesday.

Revenues dropped 12% from the year ago quarter. But thanks to the fall in raw material prices and cost reduction measures, profit margins improved. Consequently, operating earnings during the quarter grew 7%.

The 1.6 percentage points expansion in operating margin came as a pleasant surprise. Considering sluggish automobile sales and pressure on revenues, many analysts had expected the company to report a significant decline in operating earnings.

“Motherson Sumi’s 4Q FY20 operating performance was driven by strong all-round performance in India and margin surprise in PKC and SMR (overseas subsidiaries),” Motilal Oswal Financial Services Ltd said in a note.

The covid-19 shutdown will adversely impact the company’s financial performance in current quarter (Q1FY21). But the company sees sequential improvement in coming quarters. Most manufacturing plants have restarted operations and are seeing production ramp-up, the management told analysts.

The company’s overseas joint venture has a strong order book of 1.07 lakh crore (euro 13.6 billion) and focus is on execution.

As the company curtailed capital expenditure, cash flows from the business improved last fiscal year. This helped it lower net debt. The trend is expected to continue in current fiscal as well, barring an unforeseen acquisition or investment.

“The ramp-up of new facilities and strong focus on working capital management resulted on consolidated net debt falling ~11% YoY in FY20, and we expect further deleveraging in coming years, not considering any large sized acquisitions,” Jefferies India Pvt. Ltd said in a note.

The focus on order book execution, cash generation and liquidity improvement should help Motherson Sumi withstand the current volatility better.

That said, the stabilization of global automotive industry is also important. The company’s diversified presence through several overseas units reduces concentration risk. But with some manufacturing plants still in production ramp-up stage and some units still facing profitability challenges, sustained improvement in business is crucial.

“We would be looking at market recovery across geographies to turn positive as cost control efforts will be contingent on that as cyclical slowdown in some units like PKC (overseas business unit) in coming quarters will have an impact on overall profitability improvement,” analysts at Antique Stock Broking Ltd said in a note.

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