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Healthy profitability sustains, EV order book exciting

Motherson Sumi Systems (MSSL) reported a healthy operational performance in Q4FY21. The key highlight was sustained profitability at its overseas operations: SMR (EBITDA margins at 12.9%) & SMP (EBITDA margins at 8.7%). Consolidated revenues (including DWH) in Q4FY21 were at | 18,482 crore, up 22% YoY. EBITDA on a consolidated basis were at | 1,959 crore with EBITDA margins at 10.6%, down 20 bps QoQ. Consolidated PAT for Q4FY21 was at | 714 crore vs. | 183 crore in Q4FY20.

Longer term growth prospects remain healthy; minimal EV risk

MSSL is a global auto ancillary supplying plastic body parts, mirrors, wiring harness among other auto components to the global OEMs with present product profile being minimal susceptible to EV risk. It is a viable play on global PV growth and vehicular premiumisation with proven capabilities. In the near term, however, hiccups persist in terms of Covid related production as well as supply chain constraints including global semi-conductor shortage impacting global PV industry production. However, over the long term, as supply chain issues ease and given its focus on faster than industry growth via rising content per vehicle, we build 14.1% revenue CAGR for MSSL in FY21-23E. Our estimates do not factor in any inorganic-led growth, which is set to form a cornerstone of the company’s outlined sales ambition of quadrupling sales to ~US$36 billion by 2025. MSSL remains well placed to benefit from electrification, with ~25% of SMRPBV order book formed of EVs. As capacity utilisations improve and operating leverage benefits kick in amid a rise in raw material costs (a pass through, with a lag) EBITDA margins at MSSL are seen improving to 11.3% levels by FY23E.

Q4FY21 earnings conference call – highlights & key takeaways

MSSL said: (1) Its order-book (lifetime sales of awarded programs) at SMRPBV as of March 2021 were at € 15.6 billion (gained € 4.5 billion worth new orders in H2FY21) with share of EVs at ~25%. It will be supplying near similar products to electric vehicles. The content, however, marks a sharp increase amid focus on light-weighing, efficiency & premiumisation; (2) it is less impacted due to global semi-conductor chip shortage; (3) business prospects at PKC are healthy but during the quarter there was some pressure on margins due to rise in copper prices amid increased copper content in wiring harness supplied to trucks; (4) the company is exploring inorganic acquisitions with meaningful development expected post travel relaxations; (5) MSSL sees no pressure on gross margins in the near term.

Valuation & Outlook

On a low base, we build ~74% PAT CAGR in FY21-23E. Near to medium term supply challenges aside, it offers healthy long term growth prospects, with focus on ~40% RoCE and dividend payout. With healthy order book positioning as well robust capital efficiency in offing, we upgrade MSSL from HOLD to BUY, valuing it at | 300 (30x P/E on FY23E earlier TP | 225).

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