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Result a mixed bag; transition into the new form creates distortion

SMRPBV impaired by cost inflation; discussion ongoing for mitigation

* Motherson Sumi (MSS)’s 4QFY22 performance was a mixed bag as India business performed strongly, whereas the SMRPBV business witnessed substantial headwinds of cost inflation. While some of these cost headwinds may persist in the near term, MSS is likely to bounce back sharply led by its leadership position. Further, these supply-side and cost headwinds would recede most likely in 2HFY23E.

* We cut our FY23E/FY24E EPS by 15%/5%, respectively, factoring in slowerthan-expected cost pass-through. We maintain our BUY rating on the stock with a TP of INR155

MSUMI and PKC above our estimates; SMR and SMP disappoint

* 4QFY22 was the first quarter of transition into a new structure of the Motherson group. Hence, there were several adjustments as well as lack of comparable numbers for the consolidated entity on a YoY basis.

* Consolidated revenue grew 4% QoQ to INR171.6b (v/s est. INR150.9b), but EBITDA/Adj. PAT declined 1%/26% YoY to INR12.2b/INR1.7b (v/s est. INR10.7b/INR2.9b), respectively. FY22 revenue/EBITDA grew 11%/5% YoY, respectively, but Adj. PAT declined 15% YoY.

* MSUMI’s (India wiring) revenue rose 10% YoY to INR16.6b (v/s est. INR15.6b) and EBITDA margin was at 14.6% (+90bp QoQ; v/s est. 13.6%).

* PKC’s revenue was in line with our estimate at EUR326m (+4% YoY). EBITDA margin improved 270bp QoQ to 5.7% (v/s est. 4.5%) driven by stabilization of new program launches.

* SMR’s topline declined 3% YoY to EUR359m (in line). EBITDA margin contracted 4.1pp to 8.8% (v/s est. 9.9%) led by high inflation in manpower cost.

* SMP’s revenue dipped 2% YoY to EUR967m (5% miss). EBITDA margin contracted 4.0pp YoY to 4.7% (v/s est. 8.1%) due to high RM and energy cost inflation.

* The new standalone entity witnessed 28% YoY revenue growth to ~INR16.1b. EBITDA margin at 18.2% (v/s 14.3% in 4QFY21) was boosted by ~INR654m of related-party income received from MSUMI pertaining to 9MFY22 (but accounted in 4QFY22).

* Net debt (including lease liabilities) declined QoQ to INR91.4b (v/s INR100.3b in 3QFY22 and INR60b in 4QFY21).

Highlights from the management commentary

* Chip shortage is improving on a daily basis and management expects it to improve considerably from Sep’22.

* SMRPBV’s Mar’22 orders book improved to EUR16.1b (v/s EUR15.3b in Sep’21 and EUR15.6b in Mar’21). The share of EVs in closing order book was at 27% (EVs were >4% of FY22 revenue).

* Cost inflation was witnessed across businesses, with high energy cost impact at SMP (due to large EU manufacturing footprint) and higher manpower cost for SMR and PKC (due to material increase in minimum wages in many countries). Management continues to discuss with its customers to mitigate these cost pressures.

* At consolidated level, working capital was higher by INR20b YoY as it is forced to keep higher inventories due to supply chain disruptions globally. As these factors normalize, inventory will also stabilize gradually.

Positive outlook retained 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. However, we lower our target multiple for global businesses to 15x (from 20x) to reflect the: a) higher volatility in operating performance due to global disruptions and b) increase in risk-free rate. The stock trades at 28.6x/16.1x FY23E/24E consolidated EPS. Maintain BUY with a TP of ~INR155 (premised on Jun’24 SOTP).

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