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Start-up costs in greenfield plants hurt profitability

Share of revenue from EVs/hybrids at 5% in 1QFY25

* Motherson Wiring’s (MSUMI’s) 1QFY25 result was below estimate, mainly due to start-up costs of two new plants, resulting in lower-than-estimated EBITDA/PAT of INR2.4b/INR1.5b (est. INR2.7b/INR1.8b). Nonetheless, MSUMI reported a healthy revenue growth of ~17% YoY, notably outperforming the underlying domestic industry volumes led by content increase.

* To factor in high operating expenses, we cut our FY25E/26E EPS by 6%/5%. Despite this, we remain optimistic about margin expansion in the coming quarters, led by improved product mix, declining copper prices, and increasing localization. Reiterate BUY with a TP of INR80 (based on 36x Jun’26E EPS).

Greenfield start-up costs hurt margins

* In 1QFY25, revenue/EBITDA/adj. PAT grew ~17%/15%/21% YoY to INR21.8b/ INR2.4b/INR1.49b (est. INR22.1b/INR2.7b/INR1.8b). EV revenue grew ~50% YoY, and the share of EV and hybrid in overall revenue was ~5%.

* Gross margin improved 10bp YoY (flat QoQ) to 34.9% (vs. est. 34.8%). LME copper prices have risen 15% YoY/QoQ but signs of tapering down are visible. Despite the increase in RM prices, gross margin remained stable largely due to better product mix and localization efforts.

* There were some under-recoveries in copper prices, where there is a pass through over 3-6 months. Copper started moderating, and the impact of the same should be visible in the coming quarters.

* However, start-up costs for the greenfield facilities have led to higher employee costs and other expenses. These dented the EBITDA margin, which stood at 10.9% (-20bp YoY/-210bp QoQ vs. est. 12.4%).

Highlights from the management commentary

* Revenue growth in 1QFY25 was led by an increase in volumes as well as content. Overall, the long-term outlook is positive for the industry, as the OEMs are announcing new capacities and introducing new models. ? Hybrid volume for the industry grew ~34% YoY, while it grew ~11% for EVs.

* Facilitating improved customer demand with two greenfields, one commenced operations in Jul’24 and is likely to fully ramp up by 2Q-3QFY25, while the other is likely to come on stream by 1QFY26. There was a delay in SOP at the customer end, and hence, this plant got delayed by a couple of quarters.

* Gross margin has remained stable QoQ despite higher copper prices due to better product mix and localization. However, start-up costs for these two greenfields have led to higher employee costs and other expenses.

* The company has maintained its capex guidance of INR2b for FY25.

* The company is not taking the benefits of PLI as it is a pass-through given that OEMs would be taking the same. ? The royalty payment for the company was in INR denomination.

Valuation and view

? We expect the EBITDA margin trajectory to continue expanding, led by a better product mix, moderating commodity costs, localization efforts, and rising utilization rates in the new facilities starting from FY26 onwards.

? 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 42x/33x FY25E/26E EPS. Reiterate our BUY rating with a TP of INR80 (premised on ~36x June-26E EPS).

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