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Below est.; Higher RM, one-off costs hurt performance

Investing for growth, driven by strong demand

* 2QFY23 performance was adversely impacted by one-time costs incurred for new plants. While the new plants will weigh on near-term performance, strong demand is expected to drive strong revenue/PAT growth from FY24 onwards.

* We lower our FY23E EPS by 16% to factor in for the one-off/transitory costs, but maintain our FY24 EPS estimates as new plants ramp up. We reiterate our Buy rating with a TP of ~INR105 (~35x Dec-24 EPS).

Higher RM and one-time costs hurt margins

* Revenue/EBITDA/Adj.PAT grew 31%/2%/2% YoY to INR18.35b/ INR1.8b/INR1.2b, respectively. 1HFY23 revenues/EBITDA/adj.PAT grew 39.5%/ 33.5%/38.5% YoY.

* Gross margins eroded 130bp QoQ (down 180bp YoY) to 33.8% (v/s estimated 35.2%), due to weaker mix and higher RM costs (YoY).

* EBITDA margins eroded 220bp QoQ (down 280bp YoY) to 9.9% (v/s estimated 13.9%) due to start-up cost of new plants and extra costs for meeting higher demand. EBITDA grew 2% YoY (down 11% QoQ) to ~INR1.8b (v/s estimated INR2.55b)

* Further higher-than-estimated ‘other income’ and lower tax boosted PAT to INR1.2b (but still below estimated INR1.6b) – a growth of 2% YoY (down 8% QoQ).

* 1HFY23 CFO improved to INR591m (v/s INR60m in 1HFY22) but higher capex (INR850m v/s INR316m in 1HFY22) led to FCFF declining to INR259m (v/s a decline to INR255.4m in 1HFY21).

Highlights from the management commentary

* Operating performance was adversely impacted by a) start-up costs of new programs at Bengaluru and a new Chennai plant, and b) additional costs (freight, manpower) to meet increased volumes. These costs expected to get absorbed as these new program/plant ramp up production over the next 2-3 quarters. Overall, the management indicated a start-up cost of ~INR300m.

 It is in discussion with customers for one-time compensation (for the above costs) as well as for higher inflation in wages and other costs.

* RM costs and Fx is passed through to customers with a quarter lag, hence, the benefit of a ~15% QoQ decline in spot copper prices in 2QFY23 does not reflect in the P&L yet.

* For high voltage wiring harness, most of the connectors and cables are currently imported; however, localization will increase as volumes rise.

* Capex for FY23 is expected to be INR1.25-1.5b. While capex for Bengaluru and Chennai has already been incurred, considering strong demand, the company may invest further in the cities for growth opportunities.

Valuation and view

* The stock trades at 53.8x/33.5x FY23E/24E EPS. We believe it deserves rich valuations due to a) its strong competitive positioning, b) top decile capital efficiencies, and c) being a beneficiary of EVs and other mega trends in Autos

* We reiterate our Buy rating with a TP of INR105 per share (~35x Dec’24E EPS).

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