IGI Logo

Buy Motherson Sumi Systems Ltd For Target Rs.312

Challenging quarter; margins impacted by one-time costs

Motherson Sumi Systems’ (MSS) Q1FY22 operating earnings missed consensus estimates as EBITDA margin came in at 7.6% (down 260bps QoQ) largely due to the one-time impacts in PKC (~EUR20mn/80bps drag). However, SMR/SMP performance was in-line with consensus estimates aided by greenfield plants improvements (we expect these plants to reach PBT breakeven in H2FY22E); this would drive earnings growth in FY23E.

MSS being an OEM centric supplier gets RM cost pass-through with a lag (3-6 month), hence, gross margins are likely to normalise by Q2FY22E. We expect DWH business to unlock value (post restructuring) as a strong proxy play on the electrification / hybrid theme in India. Overall, we continue to like the growth, FCF construct, find valuations attractive (FCF yields of ~6%/ 13% for FY22E / FY23E respectively). Maintain BUY.

* Key highlights of the quarter:

Overall consolidated revenues stood at ~Rs162bn (down ~5% QoQ) mainly due to lower revenues from SMR (down ~14% QoQ in EUR terms). Standalone business reported revenue decline of ~13% to ~Rs11.2bn as margins shrunk to 11.3% (down 248bps QoQ) due to quarter lag of RM pass-through. PKC margins at 4% (down 394bps QoQ) were adversely impacted by the delayed copper price pass-through and component shortage amidst higher logistics and product launch costs. SMR saw 160bps QoQ contraction in reported margins at 11.3% while the same for SMP shrunk 140bps to 7.3%. Net debt grew by Rs13.5bn QoQ due to higher WC requirements due to OEM production issues.

* Key takeaways from earnings call:

a) Operations were negatively impacted by loss of 20-25 days in Q1 due to covid second wave across plant locations; b) irregular production schedules across OEMs led to higher inventory (thus higher WC requirements), which is likely to help MSS limit incremental RM cost inflation; c) PKC witnessed a one-off impact of EUR9.7mn due to delay in copper cost pass-through and EUR9mn-10mn hit from on-time costs due to customer product launches; adjusted for one-off costs, PKC Adj. EBITDA margin would be ~10%; d) demand for trucks globally remains strong; orderbook is robust and PKC is well integrated into new EV programmes; and e) MSS has extended the Marelli partnership with SMP to capitalise on the growing trends in EVs of exterior plastic moulded lighting solutions.

* Maintain BUY:

Robust orderbook coupled with premiumisation play and increasing BEV content (share of pure BEV orderbook at 25% in FY21), is likely to support the ‘increase in content per vehicle’ thesis. With adequate capacity at current plants, Program execution on its growing orderbook would lead to improved asset-sweating and strong RoCE across verticals. We tweak our earnings estimates by -6.7%/0.7% for FY22E/FY23E respectively. We value the stock on SoTP basis and maintain our BUY rating with a revised target price of Rs312/share (earlier: Rs310)

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer