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In-line; chip shortage impacts all businesses in 2Q…

but OEMs indicating improvement going forward; M&A pipeline very strong

* Motherson Sumi (MSS)’s 2QFY22 performance was impacted across businesses by the chip shortage, sharp copper price inflation, and nonrecurring expenses at PKC. However, the chip shortage seems to be easing. MSS is well-positioned to benefit from cyclical recovery in its key businesses as well as from a strong order book and improving efficiencies in SMRPBV.

* We cut our FY22E EPS estimates by 7%, factoring in the semiconductor shortage as well as higher tax, but maintain our FY23 estimates. We maintain Buy, with TP of INR295 (Sep’23E-based SOTP).

Chip shortage, RM cost inflation, one-offs at PKC hurt performance

* 2QFY22 consol (incl DWH) revenue / EBITDA / adj PAT declined 4%/22%/42% YoY to INR150.2b/INR12.1b/INR2.2b.

* India S/A business (incl DWH) revenues grew 29% YoY (+21% QoQ) to INR22b (v/s est INR18.9b). EBITDA margins declined 130bp YoY to 15% (v/s est 15.2%). Dividend income boosted adj. PAT to ~INR3.8b (v/s est INR1.7b), growth of 120% YoY.

* SMP revenues declined 12% YoY (+17% YoY) to ~EUR801m (est. EUR778m). EBITDA margins contracted 80bps YoY (-90bp QoQ) to 6.4% (v/s est 6%).

* SMR revenues declined 14% QoQ (+77% YoY) to EUR289m (est. EUR277m), and EBITDA margins declined 580bps YoY (-370bp QoQ) to 7.6% (est. 10%).

* PKC revenues grew 8% YoY (-12% QoQ) to EUR283m (est. EUR302m). EBITDA margins declined 4.8pp YoY (-10bp QoQ) to 3.9% (est. 7%), impacted by copper price inflation and one-off costs (~3pp).

* SAMIL’s business performance (on a pro-rata basis) grew robustly by 36% YoY (+19% QoQ) to INR6.7b, and EBITDA margins came in at 12.4% (flat YoY, +550bp QoQ). Net debt stood at INR12.7b (v/s INR14b in 1QFY22).

Highlights from management commentary

* Chip shortage: Despite strong underlying demand across businesses, 2QFY22 performance was severely impacted by the chip shortage. The supply of chips is improving gradually, although not very strongly.

* The SMRPBV order book as of Sep’21 stood at EUR15.3b (v/s EUR15.6b as of Mar’21), with gross new order wins of EUR2.1b and the start of production of orders worth EUR2.4b.

* The share of EVs in the order book stood at 27% (v/s 25% in Mar’21). MSS supplies to 7 of the top 10 EVs globally. The pure EV platforms come with advanced features, resulting in higher content for the same components of MSS.

* M&As: All of the support from the government is now drying up, resulting in a very strong M&A pipeline (the strongest in the recent past)

Valuation and view

Our positive view on MSS remains intact (cyclical recovery + turnaround in greenfield plant + execution of strong order book of SMRPBV). It trades at 48.1x/22.3x FY22/FY23E consol. EPS. Maintain Buy, with TP of ~INR295 (Sep’23E SOTP).

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