Stock corner: ‘Buy’ on Motherson Sumi, Q2 results were ahead of estimates

Standalone revenue declined 17% y-o-y due to weak OE production; however, other subsidiaries reported modest growth–revenue up 2.4% for SMR, 12% for PKC and 20% for SMP.

Q2Fy20 consolidated Ebitda at Rs 13.2 bn (margin 8.3%) was ~6% higher than Nomura (margin 7.8%) and 9% higher than consensus (margin 7.4%). While standalone Ebitda margins disappointed at 15.1% (Nom 16.7%), other subsidiaries surprised positively (SMP 3.6%; SMR 11.1%; PKC 11.7%).

> Standalone revenue declined 17% y-o-y due to weak OE production; however, other subsidiaries reported modest growth–revenue up 2.4% for SMR, 12% for PKC and 20% for SMP.

> Given the steep slowdown in the PV industry, we now factor in 4% y-o-y revenue decline for the standalone business in FY20F (2% earlier). Management indicated content per vehicle can jump in double digits under BS-6; hence, we expect revenue growth to improve to ~14%/17% y-o-y in FY21F/22F, also as industry recovers.

> We maintain SMP’s revenue CAGR at ~5% for FY20-22F, as new plants ramp up. SMP’s margin (ex-SMRC and new plants) was at 9.8% in Q2FY20 (up 120bps q-o-q/50 bps y-o-y). Hence, as new plants turn around, we expect overall SMP margins to touch ~8% in FY22F (7.5% earlier).

> Overall, our Ebitda is largely unchanged in FY20/21F but revised up by 4% in FY22F. However, our EPS is revised up by 5%/ 8%/16% over FY20-22F to factor in lower tax rate of 25% in India business.

> MSS’ capex cycle is largely over in FY19, and we expect healthy Rs 16 bn/22 bn of FCF in FY20-21F. This implies 4%/5% FCF yields in FY20-21F, which is attractive.

Valuation: The stock currently trades at ~19.7x FY21F EPS of Rs 6.8. We raise our TP to Rs 158 (Rs 131 earlier) based on target P/E of 20x on FY22F EPS, discounted to Sep-20F (Jul-20F earlier).