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Lower gross margin offset by operating leverage

New facilities ramped up to 70-80% capacity utilization

* 2QFY24 results miss estimate as EBITDA margin came in at 11.8% (vs. est 12.7%). This shortfall was due to lower gross margins and the gradual rampup of new orders, where operational efficiencies are still being established. However, we expect EBITDA margin to improve by 100bp over the next two quarters and reach close to FY22 levels, led by cost pass-through and ramp up in new facilities.

* We cut FY24E/25E EPS by 6%/3% to account for the adverse impact of increase in RM cost and lower efficiencies. We reiterate our BUY rating on the stock with a TP of INR70 (35x Dec’25E EPS).

Capacity rampup coupled with operational efficiencies to drive margins

* 2QFY24 revenue/EBITDA/adj.PAT grew 15%/37%/34% YoY to INR21.05b/INR2.5b/INR1.6b (vs. est.INR20.8b/INR2.6b/INR1.7b). 1HFY24 revenues/EBITDA/adj.PAT grew 13%/15%/15% YoY.

* Gross margins declined 50bp QoQ (flat YoY) to 33.8% (vs. est. 35%). This is despite favorable LME copper prices on QoQ constant currency basis.

* However, operating leverage benefited EBITDA margins, which expanded 190bp YoY/60bp QoQ to 11.8% (vs. est.12.7%).

* EBITDA grew 37% YoY to INR2.5b (vs. est. INR2.6b).

* Further adj. PAT grew 34% YoY to INR1.6b (vs. est.INR1.7b).

* 1HFY24 FCFF stood at INR3.85b (vs. outflow of INR259m in 1HFY23) due to strong operating cashflow of INR4.1b (vs. INR591m in 1HFY23) and lower capex of INR265m (vs. INR850m in 1HFY23).

Highlights from the management commentary

* EBITDA margin is likely to improve in the coming quarters, driven by the ramp-up of new models where there is potential for increased efficiencies, as well as some RM cost pass-through mechanisms. This coupled with other activities such as cost reduction, localization, and customer recoveries should help margins.

* Increase in RM- There is a pass-through arrangement in place with the customers, operating with a quarter lag, and it is anticipated to be settled regularly going forward.

* New facilities- A few have been ramped up to 70-80%, while others are ramping up at a few locations.

* Maintained a capex guidance of 1.25b for FY24. Incurred capex of INR0.26b in 1HFY24.

* The EV program contributes to 3.5-4% of the total revenues, encompassing covering all segments including PVs, CVs, and 2Ws.

Valuation and view

* We expect gradual recovery in the operating performance starting from 2HFY24, primarily led by the increased production and utilization of the new plants. We believe it deserves rich valuations, driven by a) its strong competitive positioning, b) top decile capital efficiencies, and c) it being a beneficiary of EVs and other mega trends in Autos.

* The stock trades at 42.9x/33.6x FY24E/25E EPS. We reiterate our BUY rating with a TP of INR70 (~35x Dec’25E EPS).

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