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Sansera Engineering’s (SEL) Q4FY23 EBITDA margin at 15.3% was down ~30bps QoQ, and lower than consensus estimate of 17%, due to higher RM costs and ~100bps impact of one-time year-end adjustments including inventory provisions and customer-related costs. We believe SEL is entering a period where major business drivers in the form of domestic 2W market, exports and aerospace segment, are going to turn favourable in unison other than improved margin outlook driven by improving mix and scale. Overall un-executed orderbook stands at Rs13.3bn with ~59% of orderbook being from tech agnostic + EV and non-auto segments. Capex for FY24 is planned at ~Rs2.50bn, mainly for projects in new orderbook for non-auto, non-ICE categories. We believe rising mix of high margin aerospace/defence business and EV along with recovery in export markets should increase EBITDA margin, asset turns and in turn RoCE for SEL, in FY24-25E to ~20% from current ~14%. We maintain BUY rating on the stock with a revised DCF-based target price of Rs1,001 (earlier: Rs939), implying 17x FY25E earnings.

Q4FY23 conference call key takeaways

* SEL is expecting FY24 to be the year where recovery in domestic 2W business, exports business and aerospace business would coincide and thus help revenue grow purely driven by volume growth and mix improvement. Domestic ICE 2W revenue mix in FY23 was ~44% with scooters at ~8% and motorcycles at ~36%, implying limited risk of revenue loss from electrification of scooters. EV revenue mix was 6.6%, up 100bps YoY, and we believe, bulk of this is driven by e-2W. With rising volume of key e-2W customers like TVS, Ola etc. along with higher than ICE vehicle value addition per vehicle for e- 2Ws, SEL is expecting EVs to contribute ~12% of revenue in next 2-3 years other than engine-agnostic auto products at ~8% of revenue by then (currently ~5-6%). Exports revenue mix declined to 28% in FY23 vs 37% in FY22, with 400bps of revenue mix decline from non-Swedish sub EU revenue. With demand returning, SEL is expecting overall ex-India revenue to grow ~40-50% in FY24 and take ex-India revenue mix back to above ~35% in FY24, on a higher revenue base. In aerospace segment, SEL is maintaining its outlook of Rs2.5bn revenue by FY25 vs ~Rs1bn revenue in FY23. Second leg of aluminium forging expansion would also give visibility to revenue growth in FY24-25, with SEL sitting on orderbook to fully utilise the incremental capacity.

* From a profitability perspective, SEL is confident of delivering EBITDAM in the range of ~18-20% in coming quarters, with scale, mix, commodity price benefits to work in unison. Aerospace and exports businesses work with higher-than-domestic margin, we believe, and thus a strong revival in these segments should help SEL revive margin towards ~18%. We believe post incurring chunky capex in last three years w.r.t new projects in aerospace, aluminium forging and rest of Bidadi plant (in Karnataka), it is high time for SEL to do asset sweating and reap the benefits of the recently incurred capex and improve its RoCE from sub-15% levels towards ~18%+ levels. Thus, improved profitability would also push RoCE improvement other than higher asset turns.

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