Published on 2/12/2019 10:34:49 AM | Source: ICICI Securities Ltd

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

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SMP, PKC surprise positively

Motherson Sumi Systems’ (MSS) Q2FY20 result was ahead of consensus expectations; as EBITDA margin rose to 8.3% (up 81bps QoQ). SMP witnessed 154 bps improvement in margins (absolute EBITDA up 50%) led by both greenfield and organic improvements. The orderbook expanded to EUR18.4bn, with new intake order of EUR3.8bn, even as outflows related to large programs w.r.t to greenfield plants have been accounted for. We continue to remain positive on MSS due to a) strong competitive position across regions, segments & products, b) rising content per vehicle in domestic market post BS-VI (double digit in wiring harness) and c) likely expansion in free cashflows as greenfield plants stabilise leading to improvement in overall return ratios. Key risks: Weaker PV recovery, continued cost escalations in greenfield plants. We maintain our BUY rating on the stock.

* Key highlights: Overall consolidated revenue came in at Rs157.1bn (up 6%) driven by SMP (up 20% to EUR1bn) and PKC (up 12% to EUR0.3bn). The standalone business reported a revenue decline of ~18% at Rs15.9bn, which was lower than the underlying industry volume drop of 15-16%. SMP revenue grew 20% to ~EUR1bn while reported EBITDA margin was flat at 4.2%. This was primarily on account of organic EBITDA growth of 50bps. PKC displayed strong performance with revenue up 12% to EUR307mn and EBITDA growing 50%, with margin up 297bps to 11.7%.

* Key takeaways from earnings call: Management indicated

a) on SMRC, Kecskemet plant to breakeven soon while SMP Alabama is still in ramp-up mode,

b) Tuscaloosa plant has ramped up for 0.7k cars to 1k cars per day, while rejection rates are improving shortage of skilled manpower continues to affect costs,

c) Hungary plant has stabilised and is clocking peak volumes, likely to witness profitability improvement and

d) PKC continues to deliver sales growth and profitability (RoCE improvement from 7% to ~28% currently).

* SMP’s organic margins rise to comfort investors: Market concerns have recently revolved around SMP and its margins. SMP’s organic margins have now risen to 9.8% in Q2FY20 which provides us comfort on the underlying cost and process improvements SMP has undertaken. Greenfields are facing the unskilled labour challenge which is leading to low productivity, high rejections and increased associated costs. We expect these challenges to be overcome in coming quarters.

* Maintain BUY: We lower our earnings growth estimates to ~10.4/% 10.9% in FY20E/FY21E, respectively, accounting for India business weakness for near term. We continue to like the stock at attractive valuations with rising free cashflows. We value it on SoTP basis and maintain our multiples at 22x / 15x Sep’21E EPS for India / international subsidiaries. We maintain our BUY rating on the stock with a target price of Rs156/share (earlier: Rs155).


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