IGI Logo

In-line performance; profitability improvement is key

Motherson Sumi Wiring India’s (MSWIL) Q4FY23 EBITDAM at 11.2% was up 62bps QoQ, driven by operating leverage with revenues rising 11% QoQ. Gross margin surprised negatively with ~260bps QoQ decline (lowest since MSWIL got demerged) due to a combination of change in mix, copper price fluctuations, adverse currency hedges, etc. With new launches lined up in both ICE and EV segments across key OEMs, we are factoring-in revenue growth for FY24E/FY25E at 18%. However, we have reduced EBITDAM by 50bps/100bps to ~13% for the same years resulting in ~5% cut in earnings. The EBITDAM cut is due to the slower rate of execution in terms of profitability. With the ramp-up phase for new facilities over and increase in utilisation expected in the coming quarters along with commodity prices, currency rates and chip supply stabilising, we expect MSWIL to execute steady long-term EBITDAM of ~13% and deliver a revenue CAGR of ~17% in next 5 years. Maintain BUY with a DCF-based target price of Rs64 (earlier: Rs66), implying ~32x FY25E earnings.

MSWIL conference call key takeaways and our views:
* MSWIL reported ~11% QoQ revenue growth, which we believe was largely driven by volume growth and mix as there was limited scope for cost-pass during the quarter. Also, MSWIL is present across e-2W makers (serving 2 of the top-5 players), catering to their complex wiring harness needs, thus pushing the case for faster- than-market volume and revenue growth. MSWIL is taking care of the high-voltage EV car programmes (catering to 2 of the top-3 players) and is serving 7 of the top-12 PV models. Thus, keeping profitability in consideration and gaining new projects based on its design capabilities (other than ability to deliver new projects in short timespans), MSWIL is focused towards executing profitable growth ahead, instead of merely focusing on market share across PVs, CVs and 2Ws. Within the EV segment, MSWIL is serving across CV, bus, PV and 2W segments and is open to adding new projects with better value-addition.

* On the profitability front, gross margin (GM) remained volatile and the company reported its lowest GM since getting demerged. GM contracted 260bps QoQ driven by a combination of change in mix, copper price fluctuations, currency hedges, etc. Though MSWIL was able to mitigate the impact of lower GM and improve EBITDAM by ~60bps QoQ, staff costs would face inflationary pressure in the coming quarters, we believe, which may compress EBITDAM. We therefore believe it is time we see MSWIL making its GM more stable and streamlined (hence more predictable), instead of allowing the volatility to continue. We expect MSWIL to deliver Rs7.5bn of FCF p.a. on an average in FY24E-FY25E, push RoCE beyond 50% and become net-debt-free in FY24E itself as capex need would also decline to facilities already being up and running.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

Above views are of the author and not of the website kindly read disclaimer