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Misses expectations; new plants ramp-up cost hurts SMP EBITDA margin
* Consol. revenue grew 11.4% YoY to INR172b (in-line), driven by SMP (+18 YoY in EUR terms, led by contribution from greenfield plants and Reydel consolidation), SMR (+4% YoY) and PKC (+14% YoY). However, S/A revenue declined 12% YoY owing to slowdown in the domestic auto industry and the lagged impact of copper price pass-through.
* Consol. EBITDA margin misses estimate due to weak SMP margins: EBITDA declined 17.2% YoY to INR12.4b (our estimate: INR15.7b). EBITDA margin shrank 250bp YoY (-120bp QoQ) to 7.2% (our estimate: 9.4%) due to (a) lower SMP margin (-700bp YoY, -350bp QoQ to 1.9%; our estimate: 6.2%) on account of ramp-up cost related to greenfield capacities and SMRC consolidation and (b) 40bp YoY contraction in S/A margin. Adj. PAT declined 23% YoY to INR4b (our estimate: INR4.6b). For FY19, revenue/EBITDA grew 13%/4% YoY, while PAT declined 5% YoY.
* Key takeaways from the call:
(a) Expect normalization in SMP margin in 2-3 quarters once new product launches come through.
(b) No change in orders/order book due to uncertain market conditions.
(c) SMRPBV order book stood at EUR18.2b (including ~EUR2.3b order book of Reydel).
(d) Greenfield capacity utilization: Kecskemet - ~60%, Tuscaloosa - 40-45%.
(e) Consol. capex to be at INR20-22b in FY20. SMRPBV capex at EUR200m.
* Valuation and view:
We cut consol. FY20/21 EPS by 15%/7% to factor in the likely ramp-up cost impact until 1HFY20 and the weak volume outlook for India and PKC. However, the EU business will likely benefit from a favorable base from Sep’19. This, coupled with the execution of strong order book and limited capex at SMPBV and the benefit to India business from content increase in BS6, augurs well for MSS. The stock trades at 19.7x/16.2x FY20E/21E consol. EPS. Maintain Buy with a target price of INR144 (~20x Mar’21 consol. EPS, which is at ~20% discount to 10-year average).
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