Buy Motherson Wiring Ltd For Target Rs.45 by Motilal Oswal Financial Services Ltd
Earnings beat due to strong top-line performance Strong growth in FY27; margins to remain stable
* Motherson Wiring’s (MSUMI) 2Q PAT at INR2.2b(+35%) beat our estimates due to a strong revenue growth and margin expansion. Copper prices rose 6% sequentially, but higher customer volumes and ramp up of greenfield projects supported a 160bp QoQ margin expansion to 9.2% (vs est. of 8%).
* On account of stronger-than-expected topline and margin performance in 2Q, we have raised our earnings estimates by 31%/17% for FY27/FY28. Optimal capacity utilization across greenfields and sustained demand momentum would likely keep margins stable. Overall, we estimate MSUMI to post a CAGR of 21% in revenue/EBITDA/PAT each over FY26-28. The company’s premium valuations at 29x/25.4x FY27E/FY28E EPS seem justified, given its strong competitive positioning, top-decile capital efficiency, and benefits of EVs and other mega trends in autos. We reiterate our BUY rating with a TP of INR45 (based on 32x FY28E EPS).
Margins expand sequentially despite commodity pressures
* 2QFY27 revenue grew ~47% YoY to INR41b (16% ahead of est.) vs PV industry growth of 25% YoY, aided by higher customer volumes, increasing content per vehicle, and participation in new model launches across both EV and ICE platforms. EV’s revenue share has now increased to 10% in 2Q.
* Copper inflation was steep, with prices rising ~6% QoQ (+54% YoY) and averaging INR1430/kg in 2Q.
* Despite lower gross margins, higher customer volumes and ramp up of greenfield projects supported 160bp QoQ margin expansion to 9.2% (vs est. of 8%). As a result, EBITDA grew ~34% YoY to INR3.7b, 33% higher than est.
* Due to higher working capital requirements, MSUMI turned from net cash in 1Q to having net debt of INR580m (ex-lease liabilities), leading to higher interest costs and lower other income.
* Due to strong top-line growth, PAT grew 35% YoY to INR2.2b (41% higher than est.).
Highlights from the management commentary
* EVs contributed 10% of revenue in 2QFY27 and 9.3% in 1HFY27, with the company participating in new model launches across both EV and ICE platforms.
* Management expects healthy industry growth to continue, supported by sustained demand, premiumization and new model launches. However, growth rates in 2HFY27 are expected to moderate YoY due to a higher base following last year's GST reduction.
* 3Q is seasonally a strong quarter due to festive demand, and management remains optimistic about sustaining the growth momentum, supported by improved capacity readiness and program ramp-ups.
* Copper prices increased ~54% YoY and 6% QoQ. Copper is largely a pass-through item, with recovery from most customers typically occurring with a three-month lag, although certain customers have a lag of up to six months. The company is negotiating with customers to recover higher copper and minimum wage costs, with management expecting improved financial performance within FY27 as these recoveries materialize.
* Management continues to focus on cost optimization, operational efficiencies, and maintaining a lean cost structure to improve operating leverage. It is also pursuing localization of imported components to improve cost competitiveness.
* The three greenfield plants at Kharkhoda, Gujarat, and Pune have ramped up well and reached optimal utilization levels, with their performance now being considered alongside the company's established manufacturing facilities.
* FY27 capex is expected to be approximately INR2b, broadly in line with the previous year. FY28 capex will depend on customer production schedules and capacity requirements, with the company yet to finalize the expansion programs and quantify the investment.
Valuation and view
On account of stronger-than-expected topline and margin performance in 2Q, we have raised our earnings estimates by 31%/17% for FY27/FY28. Optimal capacity utilization across greenfields and sustained demand momentum would likely keep margins stable. Overall, we estimate MSUMI to post a CAGR of 21% in revenue/EBITDA/PAT each over FY26-28. The company’s premium valuations at 29x/25.4x FY27E/FY28E EPS seem justified, given its strong competitive positioning, top-decile capital efficiency, and benefits of EVs and other mega trends in autos. We reiterate our BUY rating with a TP of INR45 (based on 32x FY28E EPS).
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