Published on 23/09/2019 10:46:20 AM | Source: ICICI Securities Ltd

Buy Motherson Sumi Systems For The Target Rs.156 - ICICI Securities

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SMP improvements comforting; more to go!

Motherson Sumi Systems’ (MSS) Q1FY20 headline revenues and EBITDA were in line with consensus expectations; however, PAT fell short due to higher interest and tax expenses. Revenues came in at Rs167.9bn (up 14% YoY) while EBITDA margins were at 7.5%. The greenfield SMP plants (US, Hungary) witnessed QoQ improvement with EBITDA losses reducing from EUR51mn to EUR37mn. We expect breakeven at these plants to be reached in H2FY20. Net debt has increased marginally to ~Rs84bn (up Rs1bn YoY). We continue to be positive on MSS due to: a) strong competitive position across key markets, b) rising content per vehicle in domestic market (10-15% in wiring harness), and c) likely expansion in free cashflows as the greenfield plants stabilise. Key risks: a) prolonged domestic PV slowdown, and b) continued cost escalations in greenfield plants. Maintain BUY.

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* Key highlights: Overall consolidated revenues came in at Rs167.9bn (up 13.7% YoY) driven by SMRPBV (up 23% to Rs116.6bn) and PKC (up 10% to Rs25.7bn). The standalone business reported a revenue decline of 8% YoY at Rs18.4bn, which was lower than the underlying industry volume drop of 15-16%. Consolidated EBITDA margins were at 7.5%, down 208bps, primarily driven by higher employee costs (146bps rise) even as gross margins were higher at 42.5%. SMP (including SMRC) revenues grew 35% YoY to EUR1,071mn while reported EBITDA margin improved 72bps QoQ to 2.6%. This was primarily on account of lower EBITDA loss of ~EUR37mn (Adj. SMP EBITDA margins were at 8.6%). SMR revenues were flat at EUR402mn with EBITDA margins down 77bps YoY to 10.9%. PKC displayed strong performance with revenues rising 10.5% YoY to EUR327mn and EBITDA growing 18% YoY, with margins up 63bps YoY to 10.1%. Below EBITDA line, higher interest costs (up 55%) were a key reason for PAT decline of 25%. 


* High focus on greenfield cost stabilisation: Market concerns have of late revolved around SMP and new plants’ cost stabilisation. We believe SMP has undertaken various measures to improve productivity, cost synergies and reduce wastage. Barring a severe change in customer ramp-up programmes, we expect the greenfield plants to achieve EBITDA breakeven in H2FY20, thus aiding rise in SMP margins.

* Maintain BUY: We lower our earnings growth estimates to ~16% and 9.4% in FY20E and FY21E respectively, accounting for higher below-EBITDA expenses. We continue to believe the stock is available at attractive valuations considering rising free cashflows. We value it on SoTP basis and maintain our multiples at 22x / 15x FY21E EPS for India / international subsidiaries. We maintain our BUY rating on the stock with a target price of Rs156/share (earlier: Rs179). 


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