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Strong execution in a challenging environment

Samvardhana Motherson International’s (SAMIL) Q2FY23 EBITDA margin at 7.7%, up 160bps QoQ, was a positive surprise led by 180bps QoQ reduction in manpower cost, as start-up cost for new facilities was included in the base of Q1FY23. SAMIL reported its all-time high quarterly revenue at Rs183bn in challenging market conditions amidst chip-supply issues, EU geopolitical challenges and China lockdown impacting demand. SAMIL’s continued focus on new EV solutions (high-voltage wiring harness, telematics and BDLC motors for e2Ws) is visible in its orderbook with 37% share from EVs (27% in FY22-end). With easing chip supply, input costs cooling off, gradual cost pass-through amidst geopolitical tensions easing off, we expect SAMIL’s margins to rise to >9% levels by FY24E. We maintain BUY on the stock with an unchanged DCF-based target price of Rs110 (adjusted for bonus issue), implying 25x FY24E earnings.

Key highlights of the quarter:

* Strong revenue momentum continued despite macro headwinds led by rise in share of premium cars, improved production under Vision Systems business in China QoQ with lockdown impact receding partially other than continued substitution of small scale component suppliers succumbing to the extreme cost inflationary environment in EU. With improved orderbook at EUR18.2bn by Q2FY23 end vs EUR16.1bn as of FY22 end, SAMIL is confident on continuity of executing robust growth in coming quarters too despite macro challenges. EVs are now at 37% of orderbook as against 27% at FY22 end. Higher value of EV components would also add on to potential revenue growth ahead, that too with better profitability

* With scale benefits across businesses, receding input commodity prices as against adverse power/fuel costs, elevated freight costs, manpower cost inflation pressures, SAMIL was able to improve EBITDAM across key business areas and is looking forward for further improvement as cost pass on is yet to happen for several customers who indulge in annual pricing contracts. With gas prices being highly volatile, SAMIL is not planning to hedge it in order to fix the input cost, as it can result in huge losses potentially

* With scale and margin improving on the existing capital employed and SAMIL operating with annual capex plans of Rs20bn p.a., we believe unwinding of the stuck inventory to the tune of Rs20bn would help SAMIL ease off in terms of net debt reduction substantially from present level of ~Rs85bn.

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