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Result below estimate; RM cost inflation and operating deleverage weaken margin

Management expects stability in supply chain in a couple of quarters

* Motherson Sumi (MSS)’s 3QFY22 result was impaired by commodity cost inflation and slower improvement in chip availability. While near-term supply chain issue may persist, it is likely to recover fast due to MSS’s leadership position in its key businesses along with a strong order book.

* We cut our FY22E/FY23E EPS by 16%/14%, respectively, factoring in the cost inflation. Maintain BUY with a TP of INR210 (premised on Mar’24E SOTP).

India and SMP in line, other businesses disappoint

* Consolidated Revenue/EBITDA/Adj. PAT declined 5%/32%/69% YoY to ~INR171b/INR13.8b/INR2.46b, respectively. However, MSS’s 9MFY22 revenue/EBITDA/adj. PAT grew 16%/37%/109% YoY, respectively.

* The India standalone business (including DWH) rose 11% YoY to INR22.9b. EBITDA margin contracted 300bp YoY to 15.5% (v/s est. 15.8%). PAT declined 14% YoY to INR2.14b (v/s est. INR2.2b).

* SMP revenue decreased 8% YoY to EUR975m (v/s est. EUR958m). EBITDA margin contracted 240bp YoY to 7.1% (v/s est. 7.5%), impacted by higher aluminum prices. 

* SMR revenue dipped 13% YoY to EUR335m (v/s est. EUR327m). EBITDA margin contracted 420bp YoY to 9% (v/s est. 12%), due to higher resin and aluminum prices.

* PKC revenue grew 2% YoY to EUR293m (v/s est. EUR286m). EBITDA margin contracted 600bp YoY to 3.1% (v/s est. 6%) led by weak volumes in North America and China, as well as cost pressures.

* Net debt (including lease liabilities) declined QoQ to INR84.5b (v/s INR89b in 2QFY22 and INR74.6b in 1QFY22).

* Post reorganization, the new entity (SAMIL)’s revenue was INR164.4b (+14% QoQ), with 7.5% EBITDA margin (flat QoQ) and PAT of INR2.27b (+61% QoQ). Net debt (excluding lease liabilities) stood at INR87.4b (flat QoQ).

Highlights from the management commentary

Supply chain: 3QFY22 saw easing of chip shortage, but other supply chain challenges hurt performance. Management expects global production trend to improve MoM. However, higher input prices will be a challenge.

 Raw material (RM) cost impact: RM and energy prices to remain elevated, which will mar profitability in the near term.

 EVs: The share of revenue from EVs has increased to >3.5% for 9MFY22 (v/s >3% in H1), as the key programs have ramped up.

 SMRPBV capex for FY22 expected to be at EUR150-175m.

Maintain our positive outlook on the stock with a BUY rating

Our positive view on MSS remains intact, given – cyclical recovery + turnaround in Greenfield plant + execution of strong order book of SMRPBV). MSS trades at 26.6x/18.4x FY23E/FY24E consol. EPS. Retain Buy.

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