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Strong FCF generation accelerates net debt reduction

Motherson Sumi Systems’ (MSS) Q4FY21 operating earnings were in-line with consensus estimates as EBITDA margin came in at 10.1% (up 154bps YoY). However, FCF generation for FY21 positively surprised consensus at ~Rs 30.3bn leading to net debt reduction (ex-leases) at Rs48bn (down ~Rs21bn YoY/ lowest ever debt/EBITDA: 1.2x). Management expects SMP’s greenfield plants to reach PBT breakeven soon (we expect FY22), this is likely to boost earnings growth in FY23. DWH business is likely to unlock value (post restructuring) as one of the best proxies of electrification/hybrid theme in India. Japanese partnership, technological strength and top-quartile financials is likely to create scarcity premia for it. Overall, we continue to like the FCF generation construct, stock remains attractive with FCF yield of ~4%/6%/11% for FY21/FY22/FY23 respectively. Maintain BUY

Key highlights of the quarter:

Overall consolidated revenues stood at ~Rs169bn (up ~18% YoY) led by PKC (up ~27% in EUR terms). The standalone business reported a revenue growth of ~28% to ~Rs12.7bn as margins were lower at 13.7% (down 78bps) due to quarter lag of RM pass-through. PKC and SMR witnessed 15bps and 166bps YoY contraction in reported margins at 8% and 12.9% respectively, while SMP reported 411bps expansion at 8.7%. Strong cashflows aided debt reduction (net debt down by ~Rs14bn QoQ).

Key takeaways from earnings call:

a) Orderbook size reached EUR15.6bn (25% from EVs) with EUR4.5bn of new orders in H2FY21; EV order execution to be ramped up as customer programmes gather pace; contribution of new camera programmes in orderbook is gradually increasing;

b) SMRPBV witnessed strong working capital improvement (down from 11 to 5 days); overall capex for MSS to be

Maintain BUY:

The robust orderbook growth (20% jump over H1FY21/Refer Chart:2) at EUR15.6bn increasing BEV content (share of pure BEV orderbook at 25% vis-avis 21% in H1), is likely support content per vehicle increase thesis. The current plants would be adequate to execute this expanding orderbook, thus would in-turn lead to faster asset-sweating and RoCE improvement. We revise our earnings estimates by -0.7%/5.1% for FY22E/FY23E. We value the company on SOTP basis, maintain our BUY rating with a revised target price of Rs310/share (earlier: Rs253).

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