Mercedes and BMW
appear to be slowing down because of the mushrooming speed bumps on the global trade superhighway, and a group of Indian companies supplying key components to the luxury carmakers are feeling the effects.
Motherson Sumi, Varroc Engineering, and Endurance Technologies count the top German brands as their customers, and conventional wisdom at a time when the local unit is sliding daily against the dollar suggests that these names would draw investor interest.
But BMW has now joined Daimler, the maker of Mercedes cars, in reducing its profit outlook, and the cautions could potentially hurt the earnings of their suppliers. Last Tuesday
, BMW said its profit margin could shrink in the first such cautionary announcement in a decade. The company has abandoned its earlier operating profit margin guidance, which is typically seen as sacrosanct among investors, and the cautionary note could rattle the industry.
Global carmakers see a significant rise in costs due to a hard Brexit as companies may have to build new plants. For instance, BMW has to make a new plant at the Netherlands in case of a hard Brexit.
Furthermore, the recent disruption in the European market is the Worldwide Harmonized Light Vehicle Test (WLTP)—a test to measure fuel consumption and CO2 emission—which comes into force from September 2018. Due to WLTP, carmakers are rushing to sell non-WLTP vehicles at heavy discounts, putting further pressure on car pricing. US and European car sales are expected to increase 0.4 per cent and 0.1 per cent, respectively, in 2018 after reporting negative 1.8 per cent and 3.4 per cent sales in 2017, according to Nomura.
Stocks of Motherson Sumi, Varroc, and Endurance have corrected 15-21 per cent in the past one month, while the Nifty dropped 5.6 per cent in the same period. Typically, investors benchmark Motherson Sumi to ascribe P/E to another component supplier. The one-year forward P/E of Motherson Sumi compressed to 18.07 from 22.93 a month ago. Audi, Daimler, and Volkswagen accounted for nearly one-third of the total revenue of Motherson Sumi in FY18.
The global lighting business, where Varroc Engineering provides lighting solutions to global carmakers, accounts for 60 per cent of the total revenues. Similarly, Europe makes up 30 per cent of Endurance Technologies revenues, and it caters to customers such as FCA, Volkswagen and Daimler.
According to Bloomberg consensus estimates, the Street is pricing earnings growth of 42.8 per cent and 31.8 per cent for FY19 and FY20 for Motherson Sumi. For Endurance Technologies, the estimates are 32.6 per cent and 26 per cent. Lower volumes at global carmakers may impact the projected revenue growth of their suppliers. Morgan Stanley recently wrote in a note that Motherson Sumi is increasingly becoming a global player and it sees the risk of earnings cuts as global auto demand is peaking.