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Easing supplies & commodity costs to drive earnings

In 2QFY23, SAMIL reported EBITDA margin of 7.7% (+100bps YoY, +160bps QoQ), 70bps above JMFe. Sequential improvement in margin was led by pass-through of inflationary costs, cost control initiatives and positive operating leverage. Management highlighted that demand remains strong in North America and China while premiumization is helping offset muted growth in Europe. Order book continues to grow, led by rising share of EVs (37% vs. 27% in Mar’22). Semi-conductor led supply constraints have started receding and the company expects momentum to continue in the coming quarters as the demand remains healthy. Going ahead, sustained recovery in global auto sales, further cost recovery from its customers and softening of commodity prices (benefit from 3Q onwards) is likely to drive earnings. We expect revenue/EPS CAGR of 11%/55% over FY22-25E. We maintain BUY rating with a Sept’23 TP of INR 115 (25x forward earnings). Global slowdown and continued inflationary pressure are the key risks.

* 2QFY23 – margin beat: In 2QFY23, SAMIL reported consol. net sales of INR 183bn (+30% YoY, +4% QoQ), in-line JMFe. EBITDA stood at INR 14bn (+49%YoY, +30% QoQ), 10% above JMFe. EBITDA margin stood at 7.7% (+100bps YoY, +160bps QoQ), c.70bps above JMFe. SMRPBV posted an EBITDA margin of 6.4% (flat YoY, +80bps QoQ), 30bps ahead of JMFe. Margin for Wiring Harness, Modules & Polymer and Vision Systems improved sequentially by 20bps/160bps/70bps to 8.2%/6.7%/9.1%. Standalone EBITDA margin stood at 11.4% (+130bps YoY, +250bps QoQ), 40bps lower than JMFe due to higher than expected employee cost. Consol. PAT for the quarter was INR 3.9bn (+ 4.6x YoY, +2.1x QoQ).

* Operational highlights: Performance during 2QFY23 improved led by easing supply chain issues. Management highlighted that semi-conductor shortages are gradually starting to recede leading to volume recovery. Performance at Wiring Harness division was led by strong demand in India even as CV demand remained muted globally. Modules & Polymer business was led by premiumization despite challenging situation in Europe. Vision Systems business’ strong double-digit QoQ growth was led by robust demand from North America and China whilst Europe remained muted. Partial pass-through of inflationary costs was received during 2Q and the company remains hopeful of further benefit going ahead. Benefit of softening RM prices is expected to start from 3Q. Overall, the company remains optimistic on improvement in performance going ahead.

* Order book: During 1H, SMRP BV won new orders worth €4.9bn, taking its total new order book to €18.2bn (vs. €16.1bn as on Mar’22 end). Share of EV orders jumped to 37% vs. 27% as on Mar’22. Current share of EV revenue stands at over 5%.

* Other highlights: Consolidated net debt increased from INR 83bn (Jun’22) to INR 85bn (Sept’22) due to higher working capital. The company highlighted that working capital has increased by INR20bn compared to pre-covid due to increase in inventory owing to customers’ request amid supply uncertainty. However, the same is expected to normalise going forward on receding supply challenges. Capex spends for 1H were controlled at INR 8.5bn. However, capex guidance for FY23 is maintained at INR25bn.

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