Motherson Sumi Systems - Improvement across verticals drives outperformance - ICICI Securities

Motherson Sumi Systems' (MSS) Q2FY21 operating performance was a beat on consensus estimates across verticals as EBITDA margin came in at 9.3% (up 139bps) even as revenues were down 2% YoY. The elephant (Tuscaloosa plant) has started to turn around as EBITDA turned positive at EUR 3mn (FY20: EBITDA loss EUR 175mn). Management expects further improvements in 2H, delivery on this could cause a hockey stick impact on earnings (we partially modelled it). Ramp-up of plants, productivity improvement and continued debt reduction (Net debt down QoQ: ~RS16bn) is likely to be the key thesis in 2H/FY22. We continue to like MSS due to: a) strong competitive position across segments (M&HCV / PV / 2W) and products (interiors / exteriors / wiring harness); b) rising content per vehicle; and c) potential of non-linear improvement in earnings. Maintain BUY.

- Key highlights of the quarter: Overall consolidated revenue stood at ~Rs150bn (down 2% YoY), dragged down by SMRPBV (down 10% in EUR terms) and PKC (down 14% to ~EUR263mn). The standalone business reported a revenue growth of ~3% at ~Rs10bn as margins were slightly lower at 14% (down 36bps). SMP and SMR witnessed 237bps and 297bps margin expansion in reported margins at 13.4% and 7.2%, respectively, while PKC reported 298bps decline at 8.7%. As part of restructuring, DWH business has been classified as discontinued operations which also witnessed ~7% PAT growth at Rs 861mn.

- Key takeaways from earnings call: a) Currently, ~80% of plants globally are operating at more than 75% capacity; b) MSS has repaid US$375mn of debt and is focusing on deleveraging through internal accruals; interest cost reduction is likely in H2 as blend of cost of debt may reduce; c) cost reductions have been implemented meaningfully in greenfield plants; no impact of lockdown 2.0 in Europe on production schedules or plant operations yet; future manpower support from Mexico for US plants is likely to be easier with potential regime change in US; d) PKC business is performing extremely well in China with new JVs with DongFeng, Jiangsu Huakai-Daimler, Foton, and VW; SMP Tuscaloosa plant is expected to grow revenues further even as low-hanging benefits on the cost side have been claimed and more productivity-led improvements are now kick-starting; and e) SMRPBV order book (EUR 13.1bn) would not need any new greenfield investments.

- Maintain BUY: We revise our earnings growth estimates by ~70%/-0.7%/4.7% for FY21E/FY22E/FY23E as we factor in improving greenfield performance and strong FCF yield (5.5%/15% in FY21E/22E respectively). We value MSS on SoTP basis and value India (Ex-DWH/DWH) at 23x/25x respectively while maintaining multiple for international subsidiaries at 12x Sep'22E EPS. We maintain our BUY rating on the stock with a revised target price of Rs162/share (earlier: Rs158).

Shares of MOTHERSON SUMI SYSTEMS LTD. was last trading in BSE at Rs.129.75 as compared to the previous close of Rs. 130. The total number of shares traded during the day was 60919 in over 1427 trades.

The stock hit an intraday high of Rs. 131.6 and intraday low of 129.55. The net turnover during the day was Rs. 7941629.

Source : Equity Bulls

Keywords