Buy Motherson Wiring Ltd For Target Rs.65 by Motilal Oswal Financial Services Ltd
Startup costs of greenfield plants dent profitability
New greenfield plants have peak annual revenue potential of INR21b
* Motherson Wiring’s (MSUMI) 3QFY25 profitability missed our estimate, as start-up costs of new plants affected EBITDA/PAT by INR400m/INR320m. Adjusted for these costs, EBITDA margin would have been 12.1% in 9MFY25.
* To factor in start-up costs of greenfield facilities, we cut our FY25E/FY26E EPS by ~6% each. We believe MSUMI deserves rich valuations, given its strong competitive positioning, top-decile capital efficiency, and benefits of EVs and other megatrends in autos. Reiterate BUY with a TP of INR65 (premised on ~35x Dec’26E EPS).
Greenfield start-up costs hurt margins
* In 3QFY25, revenue grew ~9% YoY to INR23b (est. INR24.2b), while EBITDA/adj. PAT declined 9%/17% YoY to INR2.4b/INR1.4b (est. INR2.7b/ INR1.7b). 9MFY25 revenue/EBITDA grew 12%/1% YoY, while adj. PAT inched lower by 1% YoY.
* The company’s growth outpaced industry volume growth of 6% YoY, led by a favorable product and content mix. The growing premiumization trend augurs well for the company. The PV industry, which accounts for almost 60% of MSWIL’s revenues, was up just 3% YoY in 3Q and the CV industry (~12% contribution) was also up only 1% YoY.
* Revenue from the greenfield plants in 3Q stood at INR800m. Even after excluding this revenue, MSUMI posted 5% YoY growth in 3Q.
* Gross margin expanded 80bp YoY to 35.1% (est. 34.8%). JPY appreciation has a temporary impact on financials as the pass-through to customers happens with a lag of a quarter or a half year.
* The impact of start-up costs for the new greenfield plants stood at INR400m in EBITDA and INR320m in PAT (for YTDFY25, INR950m impact at EBITDA level and INR760m at PAT level).
* As a result, EBITDA margin contracted 210bp YoY/40bp QoQ to 10.3%. Adjusting start-up costs, EBITDA margin would have been 12.1% in 9MFY25.
Highlights from the management commentary
* MSUMI is in various stages of completion for the three new greenfield plants as below: 1) Pune plant – SOP for EV + ICE plant has begun in 2Q, while the same for EV only plant will begin in 4QFY25; 2) Navagam (Gujarat) plant – SOP for EV only plant by 1QFY26 and the same for EV + ICE plant by 2QFY26; 3) SOP for Karkhoda plant by 2QFY26.
* These are sizeable plants with a peak combined revenue potential of INR21b, i.e., ~25% of MSUMI’s FY24 revenue. They have secured business from large Indian OEMs, including MSIL, MM and TTMT, for their upcoming new model launches in coming years. Management has indicated that MSUMI remains the preferred supplier for new-age vehicles by MSIL, MM and TTMT.
* EV mix of total revenue stands at 3-4%.
* Capex guidance for FY25 stands at INR2b. MSUMI has so far invested INR1.2b in 9MFY25. It has invested about INR400-600m in each plant, excluding the cost of land and building, which MSUMI has taken on lease from SAMIL.
* For high-voltage wiring harness, the company has localized the cables and few connectors. However, based on OEM plans, the target would be to continue to drive up the localization going forward.
Valuation and view
* We expect EBITDA margin to improve in FY26E, led by a better product mix, ramp-up of the new greenfield plants, moderating commodity costs, and localization efforts.
* We believe MSUMI deserves rich valuations, given its strong competitive positioning, top-decile capital efficiency, and benefits of EVs and other megatrends in Autos. The stock trades at 34.2x FY26E/28.5x FY27E EPS. Reiterate our BUY rating with a TP of INR65 (premised on ~35x Dec’26E EPS).
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