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Q2 EBITDA-miss on one-time costs and lag in inflation pass-through

Q2FY23 EBITDA declined by 3% YoY to Rs1.8bn, at 25% below our estimates owing to one-time costs relating to new capacities and extraordinary increase in imported components, freight & employee costs. Management expects margins to normalize on capacity ramp-up in new plants and pass-through of cost increases to customers. Revenue increased by 31% to Rs18.4bn, broadly in line with our estimates. We have reduced our FY23E EPS by 16% and FY24-25E EPS by 3-4%, factoring-in cost pressures. We retain our positive stance, led by MSUMI’s enduring outperformance over the underlying industry, on the back of premiumization and EV transition. We retain BUY on the stock, with DCF-based TP of Rs100/share (unchanged), implying a multiple of 35x on Dec-24E EPS (earlier, Sep-24E EPS). Key downside risks: Lowerthan-expected growth in the underlying auto segments, increased competitive intensity, weak performance of large clients, and adverse currency/commodity pricemovement

Q2 EBITDA missed estimate, on one-offs: Revenue grew 31% YoY to Rs18.4bn, broadly in line with our estimate of Rs18.2bn. Revenue growth was supported by rise in the underlying industry production across PVs, CVs and 2Ws. EBITDA declined by 3% to Rs1.81bn, coming in 25% below our estimate owing to: 1) One-time cost of Rs300mn relating to manpower additions, new tools/molds and other plant-related expenses, for new programs at its Bengaluru & Chennai plants. 2) Steep cost-increases due to higher import costs (global inflationary conditions), premium freight costs, increase in minimum wages, etc. Overall, adjusted PAT declined by 13% to Rs1.16bn, coming in below estimate of Rs1.6bn, due to lower operating profit. What we liked: 1) Strong revenue performance. 2) Customer additions continue for EV wiring harnesses in the 2W, PV and CV categories. EV revenues are likely to increase, with ramp-up of new capacities at its Bengaluru & Chennai plants. What we did not like: 1) Margin hit due to lag in pass-through of cost pressures. However, management has indicated it is in discussions with customers for one time compensation and alignment to the new cost structure, for mitigating current and future impact.

Earnings Call KTAs: 1) There were one-time costs relating to new programs at the company’s Bengaluru and Chennai facilities. Ramp-up of these facilities, expected in 2-3 quarters, would result in overall margin improvement. 2) MSUMI saw cost increases due to higher import costs, premium freight costs, increase in minimum wages, etc. Company is in discussions with customers for pass-through of such costs. 3) Price of Copper as well as JPY movement are usually passed-on with a lag of 1-2 quarters, contingent on agreements with customers. 4) Capex of Rs0.9bn has been incurred in H1FY23, mainly towards new programs at Bengaluru and Chennai which are almost complete. For FY23, capex guidance remains at Rs1.25-1.5bn. 5) Company continues to add customers for supply of Hybrid and EV wiring harnesses in the PV, 2W and CV segments. These segments represent a small portion of current revenues.

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