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Improvement across verticals drives outperformance

Motherson Sumi Systems’ (MSS) Q2FY21 operating performance was a beat on consensus estimates across verticals as EBITDA margin came in at 9.3% (up 139bps) even as revenues were down 2% YoY. The elephant (Tuscaloosa plant) has started to turn around as EBITDA turned positive at EUR 3mn (FY20: EBITDA loss EUR 175mn). Management expects further improvements in 2H, delivery on this could cause a hockey stick impact on earnings (we partially modelled it). Ramp-up of plants, productivity improvement and continued debt reduction (Net debt down QoQ: ~RS16bn) is likely to be the key thesis in 2H/FY22. We continue to like MSS due to: a) strong competitive position across segments (M&HCV / PV / 2W) and products (interiors / exteriors / wiring harness); b) rising content per vehicle; and c) potential of non-linear improvement in earnings. Maintain BUY.

* Key highlights of the quarter: Overall consolidated revenue stood at ~Rs150bn (down 2% YoY), dragged down by SMRPBV (down 10% in EUR terms) and PKC (down 14% to ~EUR263mn). The standalone business reported a revenue growth of ~3% at ~Rs10bn as margins were slightly lower at 14% (down 36bps). SMP and SMR witnessed 237bps and 297bps margin expansion in reported margins at 13.4% and 7.2%, respectively, while PKC reported 298bps decline at 8.7%. As part of restructuring, DWH business has been classified as discontinued operations which also witnessed ~7% PAT growth at Rs 861mn.

* Key takeaways from earnings call: a) Currently, ~80% of plants globally are operating at more than 75% capacity; b) MSS has repaid US$375mn of debt and is focusing on deleveraging through internal accruals; interest cost reduction is likely in H2 as blend of cost of debt may reduce; c) cost reductions have been implemented meaningfully in greenfield plants; no impact of lockdown 2.0 in Europe on production schedules or plant operations yet; future manpower support from Mexico for US plants is likely to be easier with potential regime change in US; d) PKC business is performing extremely well in China with new JVs with DongFeng, Jiangsu HuakaiDaimler, Foton, and VW; SMP Tuscaloosa plant is expected to grow revenues further even as low-hanging benefits on the cost side have been claimed and more productivity-led improvements are now kick-starting; and e) SMRPBV order book (EUR 13.1bn) would not need any new greenfield investments.

* Maintain BUY: We revise our earnings growth estimates by ~70%/-0.7%/4.7% for FY21E/FY22E/FY23E as we factor in improving greenfield performance and strong FCF yield (5.5%/15% in FY21E/22E respectively). We value MSS on SoTP basis and value India (Ex-DWH/DWH) at 23x/25x respectively while maintaining multiple for international subsidiaries at 12x Sep’22E EPS. We maintain our BUY rating on the stock with a revised target price of Rs162/share (earlier: Rs158).

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