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Strong performance in a tough quarter

* Samvardhana Motherson (MOTHERSO) reported a strong 65.5% YoY growth in earnings (in line with estimates) despite muted automotive production growth in 1Q. It reported an 18% annualized RoCE in 1Q and management expects the same would continue to improve in FY25, aided by synergy benefits of acquisitions.

* Our positive view on MOTHERSO remains intact based on the ramp up of new businesses in non-auto, execution of a strong order book for SMRPBV, and capacities in place for growth. We reiterate our BUY rating on the stock with a revised target price of INR218 (25x Jun’26E EPS).

Sequential net debt increases by INR30b due to M&A closure

* Consol. revenue grew 28.5% YoY to INR288.7b (est INR291b) largely led by inorganic growth. Contribution from the acquisitions to its revenue/EBITDA stood at INR62.5b/INR6.88b. Consol. EBITDA grew 44% YoY to INR27.7b (est. INR26.8b) and consol. adj. PAT rose 65.5% YoY to INR9.9b (est. INR9.3b).

* Wiring harness business grew by 9% YoY to INR83.3b (est. INR82.35b) and EBITDA margin improved 150bp YoY (+60bp QoQ) to 11.7% (vs. est. 10.3%). Growth was supported by increased intake in truck OEMs in North and South America. Content increase in India also supported growth.

* Modules & Polymer business revenues grew 27% YoY to INR151.9b (est. INR151.7b) and EBITDA margin improved 120bp YoY (-210bp QoQ) to 8.7% (est. 8.5%). The full impact of the Yachiyo 4W business was seen in 1Q. There was a strong growth on the low base of last year, as Dr. Schneider business was not there in 1QFY24.

* Vision system business revenue grew 8% YoY to INR50b (est. INR51.3b), while EBITDA margin remained stable YoY (-340bp QoQ) to 9.5% (est. 9.4%). Growth was partly supported by Ichikoh’s mirror business (which was not there in 1QFY24) and volume growth in China. However, it was offset to some extent by the delayed EV launches in the EU/NA.

* Integrated assemblies business revenue grew 6% QoQ to INR25.2b. Margin stood at 10.1% (-270bp QoQ). The sluggishness in EVs hurt growth.

* Emerging business grew 42% YoY to ~INR25.9b (est. INR21.7b) and EBITDA margin expanded 100bp YoY (-480bp QoQ) to 12.2% (est. 12.0%).

* Net debt (ex-lease liabilities) grew QoQ to INR133.7b (vs. INR103.7b in 4QFY24). The increase in debt of INR30b QoQ was on account of the payout for closure of acquisition (~INR17.5b) and the increase in working capital due to the Red Sea crisis.

Highlights from the management commentary

* Automotive production: 2Q automobile production to remain muted due to holidays in Aug’24. For FY25, global light vehicle production is likely to decline a bit or remain flat YoY.

* Reduction in RM costs on a YoY basis was due to: a) improved mix (integrated assemblies integration that has lower RM and remained a high-margin business), b) repriced products with customers, c) RM cost pass through.

* Consumer electronics: It would initially invest ~INR26b over a period of time. These investments would be utilized for the JV with BIEL Crystal (leading supplier of smartphone glass) and assembly of components. Manufacturing with the JV partner would start by end-2HFY25 and would see a ramp-up in FY26.

* MOTHERSO posted an 18% annualized RoCE in 1Q, and management expects the same would continue to improve in FY25, aided by synergy benefits of acquisitions.

Valuation and view

* Given its well-diversified presence across components, geographies, and customers, MOTHERSO is emerging as the key beneficiary of the growing popularity of EVs and the rising trend towards premiumization across segments. This is evident in a significant ramp-up in its order book, with its booked business scaling up to USD83.9b.

* The stock trades at reasonable valuations of 28x/22x FY25E/FY26E consolidated EPS. Our positive view on MOTHERSO remains intact based on the ramp up of new businesses in non-auto, execution of a strong order book for SMRPBV, and capacities in place for growth. We reiterate our BUY rating with a revised TP of INR218 based on 25x Jun-26E EPS.

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