Margins to enter a new orbit with cost reduction and premiumization. Action, maintain ‘buy’; raise target price to Rs 252, implying close to 28% upside.
MSS management has utilised the lockdown well to structurally reduce costs, which should also benefit medium-term margins.
Q3FY21 consolidated rev/ebitda of Rs179.2 billion/ Rs20.4 billion were sharply ahead of our forecasts (Rs 171 billion/ Rs 16.5 billion) and Bloomberg consensus (Rs167.3 billion/ Rs 16 billion) estimates. The strong show was across segments. Ebitda margins at 11.4% were higher than our (9.6%) and consensus (9.6%) estimates. Standalone revenue was at Rs 20.7billion +26% y-y and margins were quite strong at 18.4% (Nom 15.5%). Ebitda margins for SMP/SMR/ PKC also beat estimates at 9.5% /13.2% /9.4% (Nomura: 7.6% / 11.5% / 8.5%).
Our view: EV order-book mix stands at ~21% for SMRPBV as of September 2020. This increases our confidence that medium-term earnings growth for MSS can be much higher as EVs will rapidly gain industry share; and content per car and profitability will rise as most of the upcoming EVs are feature-rich premium vehicles. In India as well, there will likely be a more rapid race amongst car makers to differentiate their vehicles by continuously adding new features. Thus, MSS will keep growing well ahead of the industry, in our view. MSS management has utilised the lockdown well to structurally reduce costs, which should also benefit medium-term margins.
Semiconductor shortage is a short-term risk, but we believe that there is strong pent-up car demand globally, and production should rebound strongly. Estimates: We now expect revenue growth and margins for FY21-23F at standalone (-7%/+32%/15%, 14.2%/17.6%/19.6%), 2) SMP: (-10%/+23%/+8%, 6.1%/ 9% / 10.5%, 3) SMR (-15%/ +20%/+6%, 11.1% /12.5%/13%), PKC (-11/ 23%/+12%, 7.4%/ 9.3% /9.8%). Overall, we raise consolidated revenue by ~4% /9% /9% and EPS by 118% /44% /42% over FY21-23F. This implies a strong 46% EPS CAGR for FY20-23F.
Valuation: Raise target price to Rs252, based on 22x FY23F EPS. The stock trades at ~17.2x FY23F EPS of Rs 11.5. We raise our target P/E from 20x to 22x on Mar-23F, which is the mid of the expected trading band of 20-25x to factor in MSS’s ability to grow ahead of the industry, to arrive at our higher TP of Rs 252. Acquisitions can give further upside. MSS is our top pick in auto components.