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Margin disappointment continues

Motherson Sumi Wiring India’s (MSUMI IN) reported healthy Q4 revenue of INR 33.3bn, around 11.7% ahead of our estimates, including Greenfield, up ~33% YoY and ~16% QoQ. Revenue growth was led by OEM traction and commodity inflation, outpacing the underlying PV industry growth of 11% YoY in Q4. However, Q4 EBITDA grew 1% YoY to INR 2.7bn, with margin at 8.2%, down 260bp YoY, dragged by copper inflation and cost associated with Greenfield plants. Excluding Greenfield plants, revenue grew 21% YoY to INR 28.9bn with EBITDA margin down 250bp YoY to INR 10% in Q4. Margin has disappointed consistently for the past eight quarters and the new plant revenue is likely to be lower margin than existing ICE margin. We cut our FY27E-28E EPS by ~3-7%, primarily due to startup cost and copper inflation dragging profitability. We retain Sell with a lower TP of INR 37 on 25x FY28E P/E.

Margin drag on commodity and forex headwinds: MSWIL gross margin contracted by 290bps QoQ to 29.5% in Q4FY26, primarily driven by sharp 18% QoQ jump in copper prices (24-28% of RM basket), along with marginal adverse impact from JPY depreciation. In Q4, MSWIL reported a contraction in EBITDA margin of ~90bps sequentially to 8.2% due to drag in operating performance. While both commodity and currency movements are pass through in nature, 3-month lag (extendible to 6 months for certain customers) in cost recovery led to a ~2-2.5% impact on profitability.

Greenfield ramp-up cost continues to drag profitability: MSUMI reported healthy top-line growth (including Greenfield)  of 33% YoY in Q4FY26 to INR 33.3bn, outpacing the underlying PV industry growth of 11% YoY, driven by content gains, strong OEM traction, and commodity increase. Revenue from Greenfield plants stood at INR 4.4bn (2.7x growth YoY) in Q4FY26 (projected annualized turnover of INR 20bn) amid continued ramp-up. However, profitability remains subdued due to underutilization (Pune ~50%, Navagam ~60% & Kharkoda at ~80%) and delays in OEM model ramp-up, particularly at the Pune facility. Management expects profitability from Greenfield plants to be similar to existing business once volume ramps up and capacity utilization reaches 80% along with recovery in ramp-up cost. Capex is set to be rangebound at INR 2bn for FY27E, directed toward Greenfield plant expansion and replacement capex for existing plants.

Retain Sell with a lower TP of INR 37: MSUMI has disappointed on the margin front for the past eight quarters, owing to higher RM and the impact of cost related to the new plant (Q4 margin of 8.2% vs our estimates of 8.8%). Increased content per vehicle in EV may benefit MSUMI in the initial years, but risks associated with technology & platform changes remain; wiring harness content is set to reduce in OEM globally as it tries to trim the overall vehicle weight, which will remain an overhang on multiples, in our view.  Also, MSUMI is now a single product and geography play, restricting potential for a re-rating despite industry-leading return ratios. Our framework of auto ancillaries suggests historically, auto ancillaries have outperformed in terms of financials and valuation when they were beneficiaries of: 1) product expansion, 2) segment expansion, 3) geographic expansion, and 4) inorganic expansion. We believe MSUMI scores low on all these parameters. We cut our FY27E-28E EPS by ~3-7% after factoring in headwinds from copper inflation and startup cost. We retain Sell with a lower TP of INR 37 from INR 39 based on 25x (unchanged) FY28E P/E as we roll forward. We introduce FY29 estimates

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