Analyst corner: Buy on Motherson Sumi with target price of Rs 163

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Published: February 14, 2019 3:35:32 AM

SMP’s plant at Tuscaloosa (USA) has begun operations during the quarter.

SMP’s plant at Tuscaloosa (USA) has begun operations during the quarter. (Website screenshot)

Motherson Sumi’s (MSS) Q3FY19 consolidated revenue was a slight beat, but Ebitda margin at 8.5% missed our/consensus est of 9/9.5%. This was mainly due to poor India margin (at 14.9%; -250 bps y-o-y; -200 bps q-o-q).

SMP revenue growth was strong (+11% y-o-y) considering the weak global OEM volumes. Further, the US plant has started production and with that, all the key greenfield projects are completed. As a result, there were no start-up costs this quarter.

Overseas performance can improve too with 3 new plants ramping up (can add $1bn to top line). We cut FY20 estimates by 10% to factor in soft global demand (continued WLTP impact) and weak India margin, but maintain ‘Buy’ with a TP of Rs 163 (18x FY21E P/E). Revenue growth for standalone/SMR# (EUR)/SMP (EUR)/PKC (EUR) was at -4%/ -2%/ 11%/ 8% y-o-y; adjusted Ebitda margin was at 14.9%/ 11.6%/ 5.4%/ 8.6% vs. our expectation of 15.8%/ 11.4%/ 5.5%/9.0%.

Standalone margin was mainly hit by higher employee costs. SMP’s financials now include Reydel with the acquisition complete in August.

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SMP’s plant at Tuscaloosa (USA) has begun operations during the quarter.

SMP’s plant in Neustadt, Germany also became operational in Q3. With this, all the key greenfield projects for SMP have been completed. Apart from the key plants in USA and Hungary, construction of 4 plants (3 in India and 1 in Thailand) is almost completed and trial runs/shifting are in progress. These will commence full scale operations as planned (likely in Q4).

In Q3, PBT at SMRPBV stood at € 44 m (vs. € 58 m last year) despite Ebitda being higher at €96 m (vs. € 94 m last year). Lower PBT was on account of higher depreciation levels due to new plants at Hungary and USA becoming operational. Interest expense was also higher y-o-y (albeit lower on a q-o-q basis) which led to the decline in PBT.

Margin continued to be impacted by the difficult business environment. European OEM demand has been impacted by WLTP, which weighed on SMP’s business and margins. SMP’s plants in Hungary and USA are still ramping up which also weighed on margins. However, the ramp up schedule remains on track.

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