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Q3 EBITDA in line with estimates; sales rampup, cost pass-through to aid growth

* For Q3FY23, SMIL’s consol. revenue grew by 25% YoY to Rs202.3bn, above our estimates due to better revenues in SMRPBV and the standalone divisions. Consol. EBITDA grew by 46% YoY to Rs15.8bn, in line with our estimates. Management expects margin expansion ahead, on cost pass-through, energy cost deflation and better scale. We expect 10% revenue CAGR over FY23-25E, driven by the industry upcycle across regions and better wallet share due to premiumization/ electrification. We expect EBITDA margin to expand, from 7.5% in FY23E to 9.6% in FY25E, driven by better scale, improved net pricing and cost savings. We retain BUY on the stock, with SOTP-based TP of Rs97/share (Rs94 earlier), based on FY25 estimates (Dec-24E earlier). Our target P/E for the standalone operations stands at 30x, for Motherson Wiring at 34x, and for SMRPBV at 15x, based on DCF valuation. Key downside risks: Demand contraction in target markets, weak performance of large clients, and adverse commodity/currency rates.

* Q3 EBITDA in line with estimates:Consol. revenues grew by 25% YoY to Rs202.3bn (Emkay est.: Rs193.3bn), above our estimates owing to better revenues in SMRPBV and the standalone divisions. Consol. EBITDA grew by 46% to Rs15.8bn, broadly in line with our estimates. EBITDA margin expanded by 110bps to 7.8%. Overall, consol. PAT grew by 388% to Rs4.5bn (Emkay est.: Rs4.5bn), meeting our estimates. SMRPBV revenues beat our estimates, but EBITDA was below our forecast due to higher energy cost – Revenue grew by 23% YoY to Rs138bn and EBITDA grew by 14% to Rs9.2bn. Standalone results above estimates – Revenue grew 36% to Rs18bn and EBITDA grew 54% to Rs2.03bn. What we liked: Strong revenue & earnings performance in Q3 and expectations of further improvement ahead. What we did not like: Energy costs increased in Q3 which should, however, reduce ahead on decline in spot prices.

* Earnings-Call KTAs:1) Q3FY23 industry production volumes for global light vehicles grew by 2% YoY and that for commercial vehicles declined by 6%. Management expects further improvement in industry production due to better supplies, though the pace of improvement is uncertain. 2) Revenues should improve ahead, with execution of the pending order-book. EV share in revenue stands at ~6% currently which is expected to see further increase. 3) Profitability is expected to improve ahead, on reduction in energy costs and receipt of pass-through of inflation from customers. Reduction in crude prices could lead to lower input costs in the Modules division with a lag. 4) FY23 capex could be in the Rs22.5-25bn range. 5) Net debt (excluding lease liability) reduced to Rs84.4bn in Dec-22 vs Rs85.5bn in Sep-22. Further reduction in net debt is expected ahead, on decrease in working capital.

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