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Strong recovery in seasonally weak quarter

Order book at EUR18.2b with EVs contributing 37%

* MOTHERSOs’ 2QFY23 performance was above estimates, driven by rebound in the auto production across geographies and the benefits of partial cost inflation pass-through. MOTHERSO will benefit substantially from easing supply side pressures and receding cost headwinds, thereby driving strong growth and balance sheet deleverage.

* We cut our FY22E/FY23E EPS by 4%/5.5%, respectively, to factor in for lower share of profit from associates, higher interest and tax rate. We reiterate our Buy rating on the stock with a TP of INR95 (premised on Sep’24 SOTP).

Strong revenue traction

* Consol business performance: Consolidated revenue/EBITDA/adj.PAT grew 27%/30%/2.2x YoY to INR182.6b/INR14b/INR3b (v/s est. INR168.4b/INR11.1b/ INR1.6b), respectively. 1HFY23 revenues grew 16% YoY while EBITDA/Adj.PAT remained flat in 2QFY23.

* Wiring business revenues grew 22% YoY to INR63.9b (v/s est. INR60b) and EBITDA margins declined 150bp YoY to 8.2% (v/s est. 8%). Revenue growth was driven by India PV business, as global commercial vehicle and China markets remained subdued. Margins were adversely impacted by one-off start-up costs in India, diluted by commodity price savings.

* Modules & Polymer business revenues grew 27% YoY to INR97.4b (v/s est. INR87b) and EBITDA margins declined 30bp YoY to 6.2% (v/s est. 5.4%). Revenue growth was driven by premiumization in key markets. Margins expansion on a QoQ basis was a result of pass through of some cost inflation. This is the most energy-intensive business in SAMIL’s portfolio and elevated energy costs adversely impacted performance.

* Vision systems business revenues grew 32% YoY to INR39.4b (v/s est. INR32.4b) and EBITDA margins expanded 80bp YoY to 9.1% (v/s est. 8.2%). While revenue growth was driven by strong growth in the US and China, margin improvements were driven by partial pass-through of cost and operating leverage.

* Other business revenues grew 8% QoQ at ~INR17.5b (vs est INR15.4b) and EBITDA margins declined 90bp YoY to 10% (in-line) in 2QFY23.

* SMRPBV order book increased to EUR18.2b (v/s EUR16.1b as of Mar-22), with the share of EV at 37% (vs 27% as of Mar-22).

* 1HFY23 CFO improved to INR8.1b (v/s cash outflow of INR4.4b in 1HFY22), thereby reducing FCFF outflow to INR230m (v/s outflow of INR16.25b in 1HFY22). Capex in 1HFY23 was lower at INR8.3b (v/s INR11.8b in 1HFY22).

* Net debt (excl. lease liabilities) increased QoQ to INR85.5b (v/s INR82.7b in 1QFY23 and INR76.3b in 2QFY22) due to higher working capital.

Highlights from the management commentary

* Strong growth in revenues was backed by increasing production volumes and premiumization. This, coupled with partial benefit of cost pass-through and operating leverage, drove profitability.

* SMRPBV order book increased to EUR18.2b (v/s EUR16.1b as of Mar-22), with the share of EV at 37% (vs 27% as of Mar-22).

* In the Aerospace business (part of Others), the company witnessed 30% QoQ growth in booked business (order book + business under execution) to USD400m in the quarter.

* Working capital expenses has increased in the post-covid era due to supply chain volatility necessitating higher inventory of INR20b (inventory days higher by 10 days). As supply chain issues normalize, working capital expenses should moderate.

Valuation & view

* Our preference for MOTHERSO remains intact based on – industry recovery, execution of strong order book of SMRPBV, and receding cost inflation. The stock trades at 33x/17.8x FY23E/24E consolidated EPS. We reiterate our Buy rating with a TP of ~INR95 (premised on Sep’24 SOTP).

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