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MSUMI posted 12% YoY revenue growth and ~60bps QoQ margin increase to 11.2% (driven by cost efficiencies) in Q4, leading to a ~35% YoY rise in PAT. The slight miss in margins (our est. 12%) was on account of adverse commodity prices and forex, which should normalize in the coming quarters; underlying operating efficiency improvement has started to flow through. We continue to like MSUMI for 1) its dominant positioning (esp. PVs); 2) content per vehicle tailwinds from premiumization and electrification (upto 2x higher ASPs), and 3) strong parentage (refer our recent report). Accordingly, we have built in 13%/33% revenue/EPS CAGR in FY23-25E and maintain BUY, valuing MSUMI at 34x its FY25E P/E for an unchanged TP of Rs66/share.

Margin expands QoQ; though a bit below expectations: Q4FY23 revenue grew by 12% YoY (11% QoQ) to Rs18.6bn, above our estimates. Sequentially, the company marginally outperformed MSIL’s (the anchor client) ~10% QoQ revenue growth. EBITDA declined by 4% YoY to Rs2.09bn, ~4% below our estimates due to lower-than-expected gross margin, which declined by 260bps QoQ mainly due to higher copper prices and adverse currency fluctuations. Nevertheless, underlying EBITDA margin improvement by ~60bps QoQ to 11.2% reflected benefits from higher scale and better operating efficiencies. Adjusted PAT grew by 35% YoY to ~Rs1.4bn (our est:1.45bn); the miss was on account of lower-than-expected operating profit.

What we liked: EBITDA improvement, led by cost efficiencies and strong presence in FY23 industry launches; What we did not like: Lower-than-expected gross margins.

Key downside risk: Weak performance of large clients/auto industry.

Earnings Call KTAs: 1) MSUMI has been part of 23 new launches and 17 facelifts in India in FY23 across PV, CV and 2W segments; 2) MSUMI is supplying to two out of the top three electric vehicle PV OEMs and to two out of the top five electric vehicle 2W OEMs in India currently; the company is present across established and new-age players in EVs; 3) While localization levels in high-voltage harnesses for EVs are now low, with larger volumes in the future, the industry would begin heading towards 50% localization levels; 4) Inflationary pressures continue to be present but based on customer schedules and cost improvements, management anticipates additional improvement in margins in Q1FY24E, as guided earlier; 5) Management expects ramp up of new models and greater cost efficiencies to help reduce inventories going ahead; 6) The company usually considers further capacity expansion upon reaching 80% utilization; given the current orders in hand, there could be further capacity expansion in coming times; 7) Capex for FY24E is expected at ~Rs1.25bn (ex-land and building); 8) MSUMI achieved 44% RoCE in FY23.

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