Buy Motherson Sumi Wiring India Ltd for the Target Rs 45 by Emkay Global Financial Services Ltd
MSUMI delivered a robust 2Q, with revenue growing 47% yoy (8% above our estimate), with sustained outperformance vs key client MSIL (21% on revenue basis). EBITDA grew 34% yoy, with EBITDAM improving by ~160bps qoq to 9.2% (~150bps above our estimate), despite gross-margin contraction due to higher copper prices, offset by operating leverage from lower employee and other expenses. Growth was supported by higher customer volumes (PV industry volumes grew ~24% yoy), new program launches, premiumization, and optimal utilization of greenfield capacities. Management expects PV industry growth to sustain in 2H, despite a higher base; while percentage growth will be on a higher base, absolute volume should stay healthy. Sustained program launches and ramp-up of 3 greenfield plants, now operating at optimum levels, provide additional growth lever. MSUMI has a ~3-6M pass-through lag, and is actively engaging with customers to recover incremental copper costs and minimum wage revisions. Ongoing cost control initiatives and localization of imported components should further support margin improvement. We raise FY27-29E EPS by ~4-5%, factoring in strong topline growth. MSUMI’s valuations remain attractive at below -1SD on 1YF PER, with a strong ~20% FY27-29E EPS CAGR, healthy return ratios (FY24-26 ROCE: ~40-50%), and an attractive dividend yield of ~1.3-1.6% over FY24-26. We lower our target multiple to 25x (30x earlier), as the high-growth phase (following GST cuts) is behind and macroeconomic risks (fuel prices, interest rates, etc) increase. We retain BUY while cutting TP by 10% to Rs45 from Rs50, based on 25x Sep-28E PER (rolled forward).
Strong 2Q; beat across parameters
Revenue was up ~47% yoy (8%/12% above our/street estimates) at Rs40.5bn. EBITDA came in at Rs3.7bn, with EBITDAM of ~9.2% (~150/60bps above our/street estimates), despite 120bps gross-margin contraction, offset by 220bps/60bps improvement in employee costs/other expenses. APAT grew ~35% yoy, at margin of ~5.5%.
Earnings call highlights
1) Revenue grew 47% yoy, with sustained outperformance vs key client MSIL (21% on revenue basis).
2) Growth was supported by higher customer volumes (PV industry volumes grew ~24% yoy), new program launches, premiumization, and optimal utilization of greenfield capacities.
3) 3Q is seasonally strong because of the festive period and the GST cut continues to give a strong boost; management expects PV industry growth to sustain in 2H, despite a higher base; while percentage growth will be on a higher base, absolute volume should stay healthy.
4) Sustained program launches and ramp-up of 3 greenfield plants, now operating at optimum levels, provide additional growth lever.
5) EVs were 10% of 2Q revenue.
6) Copper is a 100% pass-through item, though with a ~3-6M lag, and management expects recovery of the 2Q copper price increase in upcoming quarters.
7) Minimum wage impact persisted in 2Q; pass-through is under negotiation, and MSUMI hopes to reach an agreement that is beneficial over the long term.
8) Capacity is built ahead of customer demand (expansion starts at ~80% utilization), and management is fully ready for the 2H festive period.
9) FY27 capex is guided at ~Rs2bn, and MSUMI will announce further capex plans over coming quarters (based on volume forecasts and production schedules given by OEMs).
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