IGI Logo

Transient costs drive PAT miss, to normalize in 2H

Margins likely to revive from 3Q onward

* Samvardhana Motherson’s (SAMIL) 1QFY26 adjusted PAT at INR6.2b was well below our estimate of INR9.7b, falling 37.5% YoY as its margins were under pressure due to multiple headwinds. Management has clarified that the bulk of these increased costs are transient in nature and expects its performance to revive from 3Q (2Q being seasonally weak in Europe).

* Given the weak 1Q performance and an adverse near-term macro in key regions, we have lowered our earnings estimates by 9%/2% for FY26/FY27. While the ongoing tariff issue may lead to a near-term slowdown in some of its key geographies, we expect SAMIL to be the least impacted by these tariffs as it has all its facilities close to its customers and can effectively realign supplies as per customer needs. We reiterate our BUY rating with a revised TP of INR114, based on 24x Jun’27E EPS.

Weak operating performance led by multiple headwinds

* Consolidated revenue grew 4.7% YoY to INR302.1b (in line with our estimate of INR305.9b). Adjusted PAT at INR6.2b was well below our estimate of INR9.7b, down 37.5% YoY as its margins were under pressure due to multiple headwinds.

* EBITDA margins fell 150bp YoY to 8.1%, below our estimates of 9.1%. Margin impact was led by the inflationary pressure in Europe, timing difference in tariff-related pass-through of costs, greenfield-related start-up costs in non-auto segment, and early-stage integration adjustments for certain newly acquired assets.

* Among segments, the overall performance was dragged down by Modules and Polymers (margin down 230bp YoY to 6.4% vs. our est. of 7.9%) and Emerging business (margin down 380bp to 8.4% vs. our est. of 13%). Modules and Polymers were primarily impacted by structural issues in Europe, while the Emerging business was hit by start-up costs of new facilities and early-stage integration adjustments for certain newly acquired assets. The non-auto business posted strong 40% growth YoY, which should further accelerate once its large greenfield in Consumer Electronics is operational from 3QFY27.

* Most of the other segments’ performance was largely in line: wiring harness margin declined 30bp YoY to 11.4%; Vision Systems margin fell 30bp to 9.2%; and Integrated Assembly margin improved 130bp to 11.4%.

* Interest burden was higher than expected at INR4.3b and was impacted by a forex loss of INR930mn due to high forex volatility.

* Net debt increased to INR112b from INR9.8b QoQ due to higher working capital on tariff-led uncertainties. As a result, net debt-to-EBITDA ratio increased to 1.1x from 0.9x QoQ.

Highlights from the management commentary

* EBITDA margin stood at 8.1% (vs. 9.6% YoY), reflecting structural challenges in Western/Central Europe, FX volatility, geopolitical tensions and greenfield startup costs. Management believes that this impact is transient in nature and expects a much better performance in 2H and FY27 once the impact of its costcutting measures (mainly in modules and polymers business) is visible and the greenfields ramp up (Consumer Electronics).

* Emerging business margins declined 380b YoY to 8.4% due to: 1) start-up costs of greenfields at Consumer Electronics division; 2) seasonally weak quarter for aerospace division, CVs and metals; 3) integration of Atsumitec, which is margindilutive, but the performance would start improving as integration benefits kickin in the coming quarters

* Three greenfield plants were operationalized in 1QFY26 (two automotive, one non-automotive); 11 more are under various stages of completion. Consumer Electronics greenfield (phase 1) received customer approval in 2QFY26, with production schedules awaited. Other SOPs include Wiring Harness (2QFY26), Technology & Industrial Solutions (4QFY26), Aerospace (two plants in 4QFY26), and multiple Modules/Elastomer facilities in FY27.

* The second facility in the Consumer Electronics division is expected to commence production in a couple of weeks. These two facilities together would ramp up to 16-17mn units p.a. by FY26 end. This will position the segment as a key growth driver in the company’s non-automotive portfolio. SAMIL has not seen any reduction in orders from OEMs in this business despite the uncertainty around US tariffs.

* Capex guidance is maintained at INR60b for FY26 aimed at capacity addition and backward integration, which should aid margins in the future. Additionally, SAMIL is undertaking certain business transformative measures in Europe to realign operations to the challenging macro, which should drive cost savings worth EUR50m p.a. once fully completed over the next three years.

* The direct impact of US tariffs on SAMIL is minimal as most of its products supplied to USA are USMCA-compliant and for the non-USMCA compliant parts, discussions with OEMs are ongoing for the pass-through of these costs.

Valuation and view

Given the weak 1Q performance and an adverse near-term macro in key regions, we have lowered our earnings estimates by 9%/2% for FY26/FY27. Management aims to increase its revenue to whopping USD108b in the next five years. We expect SAMIL to continue to outperform global automobile sales, fueled by rising premiumization and EV transition, a robust order backlog in autos and non-autos, and successful integration of recent acquisitions. While the ongoing tariff issue may lead to a nearterm slowdown in some of its key geographies, we expect SAMIL to be the least impacted by these tariffs, as it has all its facilities close to its customers and can effectively realign supplies as per customer needs. Further, this is likely to lead to industry consolidation, with players like SAMIL likely to emerge as key beneficiaries in the long run. Given the long-term growth opportunities, we reiterate our BUY rating with a revised TP of INR114, based on 24x Jun’27E EPS.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412