Revenue recovery expected ahead; maintain Buy
* Q1FY21 revenue stood at Rs85bn, a decline of 49% vs. estimated 56% fall. Net loss stood at Rs8.1bn, better than the estimated Rs9.1bn loss. The positive highlight was shrinking losses at new Greenfield plants of SMP, owing to cost reduction efforts.
* We expect revenue performance to improve going ahead, led by a ramp-up in production levels and recovery in underlying segments, supported by relaxation of lockdowns, pent-up demand and government stimulus measures.
* Management has reiterated Vision 2025 – revenue target of $33-35bn with ROCE of 40% (vs. 2020 revenue of $12bn and adjusted ROCE of 25%). To achieve this vision, the company will retain emphasis on the auto segment and also focus on new segments.
* We retain Buy with a TP of Rs120 (Rs115 earlier) based on 20x Sep’22E EPS (earlier Mar’22E). We expect revenue/earnings CAGRs at 8%/21% for FY20-23E, with an average FCF of Rs25bn/year. We retain EW stance in sector EAP.
What we like? 1) A large portion of plants are operating at over 75% utilization as of Jul’20 – 73% of Americas plants; 45% of Europe, Middle East & Africa plans; 77% of Asia (excl. India) & Australia plants; and 44% of India plants. Utilization levels have further improved in Aug’20 and expected to reach pre-Covid-19 levels in Q3FY21. 2) Losses in Greenfield plants of SMP (Tuscaloosa and Kecskemét) have narrowed to EUR19mn in Q1FY21 (vs. loss of EUR175mn in FY20). The focus remains on achieving the EBITDA break-even. 3) Liquidity position is healthy at Rs100.4bn in Jun’20 (vs. Rs105.3bn in Mar’20), with cash reserves of Rs48.7bn and undrawn limits of Rs56.6bn.
What we did not like? 1) Weak margin performance across India and overseas businesses owing to low scale. 2) Increase in net debt by Rs22bn qoq, led by increase in working capital (expected to reverse as operations normalize), adverse forex movement and receipt of government grants in form of low cost loans. We expect net debt to fall going ahead due to cash flow generation in subsequent quarters.
Retain Buy: We reduce our FY21/22E/23E EPS by 7%/7%/4% to Rs2.5/Rs5.4/Rs6.6, driven by lower margin assumptions. We expect revenue/earnings CAGRs at 8%/21% for FY20-23E, with an average FCF of Rs25bn/year. Our positive view is underpinned by strong management capabilities and expectations of a gradual pick-up in underlying segments. Also, the proposed restructuring exercise aligns interests of all stakeholders and creates a platform for future growth through inorganic and organic routes. Reduced stake of Sumitomo Wiring Systems in MSS will allow it to pursue acquisition opportunities more aggressively. This restructuring exercise is a step toward the company’s Vision 2025 – revenue target of $33-35bn with ROCE of 40%. We retain Buy with a TP of Rs120 (Rs115 earlier) based on 20x Sep’22E EPS (earlier Mar’22E). Key downside risks are demand contraction in target markets, weak performance of larger clients, and adverse currency rates, among others.
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