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Gradual improvement with chip supply restoration ahead

Motherson Sumi Systems’ (MSS) EBITDA margin was flat QoQ at 6.7% (down 383bps YoY) despite ~15% revenue growth as benefit of operating leverage got negated by raw material inflation. PV production, though improved on benign base of previous quarter in key markets like US/EU, MSS was unable to bear the impact of steep, hurting its gross margin (especially of PKC). With scaling up of production led by improving chip supplies and stabilising raw material prices, we expect MSS’ margins across key businesses to revive in the coming quarters. Revenue share of EV-related components inched up to 3.5% (~Rs19bn) as OEMs are ramping up EV production. We value MSS (SAMIL) at 22x FY24E earnings (including ~33.4% holding in DWH), with ~35% of SAMIL earnings coming from India. Overall, we continue to like the growth and FCF construct of MSS with rising production from OEMs likely to push earnings momentum in next couple of years. We value MSS (SAMIL) at 22x FY24E EPS of Rs8.6 to arrive at a target price of Rs190 and ascribe an ADD rating.

Key highlights of the quarter:

Consolidated revenues stood at ~Rs161bn (down ~6% YoY) with SMR/SMP being down 13%/8% YoY. Standalone business reported revenue growth of ~17% to ~Rs13.2bn, though EBITDA margin was down ~420bps (flat QoQ) led by gross margin decline. PKC margin at 3.1% (down 637bps YoY) was impacted by elevated raw material costs along with supply chain issues in North America and volume impact in China (from emission change impact).

Key takeaways from earnings call: Management indicated:

a) Q3 sales, though better QoQ, were negatively impacted by OEM production disruptions, which is likely to ease further as supply chain disruptions are easing off and freight costs are moderating; b) impact of higher resin prices will get partially reflected in Q4 as well even as copper prices remain elevated, though there would not be much impact of higher gas prices on margin; c) orderbook remains strong with EVs contributing ~3.5% of overall orderbook at Rs19bn revenue potential (MSS is a supplier to seven of the top-10 selling EV models globally); and d) global demand for trucks remains strong and CY22 is likely to witness ramp-up in production of Class-8 trucks.

Premiumisation and content play in PVs; ADD:

Strong orderbook coupled with play on premiumisation and increasing EV content is likely to support the ‘increase in content per vehicle’ thesis, thus further adding to growth. We value MSS at 22x FY24E SAMIL earnings at Rs190, with ~35% of its earnings coming from India. SAMIL’s earnings would also include ~33.4% equity stake in the domestic wiring harness business (DWH).

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