1. Motherson Sumi rating Reduce; Stepping on the gas

Motherson Sumi rating Reduce; Stepping on the gas

Net debt declines despite high capex; valuations rich

Updated: August 12, 2016 1:53 PM

Good quarter, but priced in: Motherson Sumi Systems’ consolidated Q3FY15  Ebitda (R8.3 bn, +5% year-on-year) was 20% above our estimates. Standalone revenue growth was strong at 12% y-o-y; in euro terms, it was 13% y-o-y in SMR (Samvardhana Motherson Reflectec) and 19% y-o-y in SMP (Samvardhana Motherson Peguform). It is likely to start production at 14 new plants over the next two years to support customers, which is likely to result in strong revenue growth. Valuations are rich and are capturing the company’s strong growth prospects. We revise our target price to R420 (from R370 earlier).

Strong growth in its SMR and SMP: Motherson’s Q3FY15 consolidated Ebitda (R8.29 bn, +5% y-o-y) was driven by a 12% y-o-y growth in standalone revenue and a 13% y-o-y and 19% y-o-y revenue growth respectively in SMR and SMP business in euro terms, which was partially offset by a 30 basis point y-o-y decline in Ebitda margin.

SMP reported a strong 19% y-o-y growth in euro revenues while Ebitda margin rose to 6.9% in Q3 FY15 versus 5.9% Q3FY14.

SMR reported a 13% growth y-o-y in euro revenues while Ebitda margin remained flat at 10.2% in Q3FY15 vs Q3FY14. Standalone revenue growth was driven by 13% y-o-y growth in domestic sales and 7% y-o-y growth in export sales.

Adjusted Ebitda margins at the consolidated level were muted at 8.8% vs 9.6% in Q3FY14. The company attributed higher costs to under-construction plants at various locations. Consolidated net debt declined to R4.71 bn at the end of Dec 2014 versus R5.13 bn at end of Sep  2014, although the company spent R6 bn in capex in Q3 for expanding its global operations.

Acquisition of Scherer and Trier: Motherson acquired Scherer & Trier group (S&T), Germany, in Q3 for 36m euros. S&T is a leading specialist supplier of extruded and injection-moulded exterior and interior components. S&T had net sales of 240m euros in FY13 and has a diverse customer base, including Daimler, BMW, VW, Ford and GM. Maintain Reduce on rich valuations.

By Kotak Institutional Equities

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