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Below est; all-round miss due to cost inflation, op. deleverage

Underlying demand for PV / CV recovery remains strong

* Motherson Sumi (MSS)’s 1QFY22 performance was impacted by exogenous factors in all its businesses (COVID in India and supply-side issues in overseas businesses), sharp copper price inflation, and non-recurring expenses at PKC. While the near-term outlook is murky due to supply chain uncertainties, MSS is well-positioned to benefit from cyclical recovery in its key businesses as well as from the strong order book and improving efficiencies in SMRPBV.

* We cut our FY22E EPS estimates by 8%/3%, factoring in headwinds from the semiconductor shortage as well as copper cost inflation. Maintain Buy, with TP of INR285 (Sep’23-based SOTP).

Transitory impact of RM cost, one-offs at PKC hurt performance

* 1QFY22 consol (incl DWH) revenues / EBITDA / adj PAT declined 6%/27%/59% QoQ to INR168.5b/INR14.6b/INR2.9b.

* The India S/A business (incl DWH) declined 21% QoQ to INR18.2b (v/s est INR16b). EBITDA margins declined 4pp QoQ to 14.5% (v/s est 16.5%). Adj. PAT stood at ~INR1.8b (v/s est INR1.46b), registering decline of 26% QoQ.

* SMP revenues declined 5% QoQ (+71% YoY) to ~EUR944m (est. EUR992m). EBITDA margins contracted 140bps QoQ to 7.3% (v/s est 8.5%).

* SMR revenues declined 14% QoQ (+77% YoY) to EUR318m (est. EUR378m), and EBITDA margins declined 160bps QoQ to 11.3% (est. 13%).

* PKC revenues grew 3% QoQ (85% YoY) to EUR323m (est. EUR306m), while EBITDA margins declined 4pp QoQ to 4% (est. 9%), impacted by copper price inflation and one-off cost.

* SAMIL’s business performance (pro-rata basis) was impacted in 1Q, with revenues declining 12% QoQ to INR5.6b and EBITDA margins at 6.9% (- 350bp QoQ). Net debt stood at INR14b (v/s INR12.9b in 4QFY21).

Highlights from management commentary

* Outlook: Global supply chain disruptions are likely to be headwinds for OEM production over the near term, but are expected to improve from 2HFY22. However, the underlying demand for PVs and CVs is very strong.

* SMP’s greenfield plants have stabilized and continue to improve. The Hungary plant saw a higher impact from supply chain issues.

* PKC’s performance was impacted by a) a lag in the copper price passthrough (~2.9pp impact), b) component shortages, and c) higher logistic and product launch related costs (~3pp). While the copper price pass-through is expected in 2QFY22, product launch related costs are largely a one-off.

* Consol. net debt increased QoQ to INR74.6b (v/s INR60.9b in 4QFY21 and INR82.6b in 1QFY21) due to higher working capital.

Valuation and view

* Our positive view on MSS remains intact (led by cyclical recovery, turnaround at the greenfield plant, and the execution of SMRPBV’s strong order book). It trades at 28.8x/19x FY22/23E consol. EPS. Maintain Buy, with TP of ~INR285 (Sep’23 SOTP).

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