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Weak quarter; Sales ramp-up and cost pass-through to aid growth ahead+

*  For Q1FY23, SAMIL’s revenue grew by 3% qoq to Rs176bn, slightly above estimates, due to better sales in SMR PBV. EBITDA fell by 11% to Rs10.8bn, 8% below estimates, mainly due to miss in standalone. Management expects margin benefits due to lower commodity prices and energy cost pass-through to reflect in the quarters ahead.

* OEM production across regions is expected to improve in the next two years, aided by improving chip supplies and healthy demand. We expect a revenue CAGR of 13% over FY22-24E, driven by 22% growth in standalone and 12% in SMR PBV.

* We have reduced FY23-24 EBITDA forecast by 2-4% owing to cost pressures. Following the revision, we have built in EBITDA CAGR of 30% over FY22-24E. Net debt/EBITDA is likely to reduce from 2.3x in FY22 to 0.9x in FY24E, led by strong cash flows.

* Retain Buy with an SOTP-based TP of Rs143 (Rs145 earlier), based on Sep’24E estimates (Jun’24E earlier). Our target P/E multiples for the standalone operations stand at 32x, Motherson Wiring at 32x, and SMR PBV at 15x, based on DCF valuation.

* Q1 EBITDA below estimates: Consolidated revenue for Q1FY23 grew by 3% qoq to Rs176bn, marginally above estimates due to better sales in SMR PBV. EBITDA declined by 11% to Rs10.8bn, 8% below estimates due to lower profitability in standalone. Overall, adjusted PAT was lower by 16% to Rs1.4bn (estimate: Rs2.9bn), owing to lower operating profit, other income, and share of profits from associates. SMR PBV’s results were above estimates, as both revenue/EBITDA grew by 7% qoq to EUR1.4bn/EUR79mn. Standalone results were below estimates, with a 1% decline in revenue to Rs16.2bn and 33% fall in EBITDA to Rs1.4bn, owing to adverse mix and higher employee expenses. Performance of the associate entity (Motherson Wiring India) was also below estimates, with revenue growing by 1% to Rs16.7bn and EBITDA declining 7% to Rs2bn.

*  We maintain our positive view on expectations of sales upcycle in domestic and overseas auto markets, increasing content per vehicle and margin expansion owing to pass-through of cost pressures and scale benefits. We build in revenue/EBITDA CAGRs of 13%/30% over FY22-24E.

* Recommend Buy with a Sep’23E TP of Rs143 (Equity Value: Rs646bn), based on: 1) value of Rs221bn for the standalone at 32x P/E (DCF-based), 2) Rs74bn for a 33.4% stake in MSWIL at 32x P/E (DCF) post a 20% holding company discount, 3) Rs270bn for SMR PBV at 15x P/E (10% discount to DCF), 4) Rs36bn for PKC at 15x P/E, and 5) Rs45bn for others. We retain a 10% discount to DCF for SMR PBV, taking into account geopolitical supply chain issues. Key downside risks: Demand contraction in target markets, weak performance of large clients, and adverse commodity/currency rates.

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