Motherson Sumi Systems - Greenfield plants loss reduction a key positive - ICICI Securities

Motherson Sumi Systems' (MSS) Q1FY21 performance missed consensus estimates higher than expected revenue drop (~50%) exacerbated the negative operating leverage effect. However, over recent past the key monitorable for MSS's stock has been greenfield plant loss trends which showcased marked improvement (Refer chart:1) even as revenues dropped (>40% QoQ). The key has been fixed-cost optimisation, productivity improvement during shutdown. We expect greenfield plants to turn EBITDA positive by Q4FY21. We continue to like MSS due to: a) its strong competitive position across regions, segments (M&HCV / PV / 2W) and products (interiors / exteriors / wiring harness); b) rising content per vehicle (e.g. wiring harness, mirrors) aiding gross margins; and c) non-linear improvement in earnings as greenfield plants turn EPS-accretive. Maintain BUY.

- Key highlights of the quarter: Overall consolidated revenues stood at Rs85bn (down ~49% YoY), dragged down by SMRPBV (down 50% to EUR731mn) and SMR (down 55% to ~EUR180bn). The standalone business reported a revenue decline of 76% at ~Rs4.4bn as margins slumped 4,332bps to -26.3%. SMP witnessed 1,096bps YoY contraction in reported margins at -8.3% while PKC reported 198bps decline at 8.1%. Consolidated net debt rose Rs2.16bn QoQ to Rs9bn in order to maintain sufficient cash for working capital while total liquidity remained flat at Rs100bn.

- Key takeaways from earnings call: a) Current capacity utilisation stands at ~80% as majority of the plants (~85%) globally are operating at more than 50% capacity; b) cashflow position declined in Q1 as working capital increased by Rs9bn and exchange rate fluctuation led to benefit of Rs1.8bn; c) the April-May lockdown period helped the company to focus on profitability in greenfield plants through re-layouting, reorganising and training of manpower, which are expected to expedite breakeven; d) SMP Kecskemet plant is expected to reach peak revenues in FY21; the Tuscaloosa plant is likely to peak in FY22 as focus on cost-cutting has led to ~30% headcount reduction; e) for PKC, China plants are operating at >100% capacity while Europe is recovering at a fast pace; and f) company has received grants for furlough benefits, which aided in maintaining debt levels; capex for FY21 is expected to be Rs20bn;.

- Maintain BUY: We revise our earnings growth estimates by -59% in FY21E due to Q1 impact and raise FY22E estimates by 2.2%. We continue to like the stock (even after the recently rally) as its FCF yield remains strong (~7%/12% in FY21E/22E respectively). We value MSS on SoTP basis and maintain our multiple for India at 24x while raising multiple for international subsidiaries to 14x (earlier: 12x) FY22E EPS considering improving outlook on greenfield plants. Maintain BUY with a revised target price of Rs126/share (earlier: Rs122).

Shares of MOTHERSON SUMI SYSTEMS LTD. was last trading in BSE at Rs.107.45 as compared to the previous close of Rs. 104.9. The total number of shares traded during the day was 2111264 in over 9240 trades.

The stock hit an intraday high of Rs. 109.3 and intraday low of 101.2. The net turnover during the day was Rs. 221787518.

Source : Equity Bulls

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