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Motherson Sumi Systems' Q1FY20 results (Outperformer) - SMP disappoints; pressure persists

Q1FY20 result highlights

Disappointing quarter:  Motherson Sumi’s consolidated Q1FY20 PAT at Rs 3.3bn (down 25% yoy) was ~10% below estimates. The operating performance at SMP came in significantly weaker than expected.  

Standalone: Revenues of Rs17.8bn (-9% yoy) seems to reflect the weak volume growth within the passenger car segment. EBITDA margins (adjusted for INDAS 116) at 16.7% (down 40bps yoy on an adjusted basis) was stronger than expected. On a sequential basis, gross margins showed a sharp improvement; this was however offset by higher staff costs/other expenses. SMR revenues at EUR 403mn were flat yoy, while EBITDA margins at 10.7% remained steady.  SMP’s revenue was up 13% yoy to EUR 1.07bn largely due to the amalgamation of Rydel. Excluding Rydel, SMP’s revenues likely showed a decline – this is disappointing considering the commissioning of new plant. With EBITDA margins of 2% (down 410bps yoy, flat qoq), SMP registered an EBIT loss for the second consecutive quarter. PKC: Revenues showed a growth of 10% reflecting the still strong class 8 truck build growth. However, EBITDA margins 9.1% came off a bit.

Consolidated revenues at Rs167.9bn (+14% yoy) were aided by the Rydel acquisition. The weakness in SMP margins led to weak consolidated margins of 6.7% (down 290 bps yoy; est: 7.7%). Notably, even excluding the impact of INDAS 116, the consolidated interest costs rose sharply by ~35% on a qoq basis.

Management comments: (a) SMP: The ramp up for the new plants is still in progress –volume growth will be stronger in the next 2-3 quarters. The management expects to stabilise the new plants in USA/Hungary in H2. (b) The global outlook remains weak with growth rates slowing across markets (c) The debt in the current quarter showed an uptick largely on foreign currency movements. (d) The capex for FY20 will be ~Rs20bn with SMRPBV’s capex at EUR 200mn.  

Key positives: Steady standalone margins

Key negatives: Weak SMP margins, slow SMR revenue growth

Impact on financials: We cut FY20/FY21 EBITDA by ~16%/8% respectively on weak SMP margins.

Valuation & view

There are clear issues for MSS in the near term with the company ramping up capacity at a time when global demand has weakening. The cost escalations at SMP’s new plant add to concerns. Nonetheless, we believe the company maintains its inherent strengths (scale, deep relationships with OEMs). With a potential recovery in SMP’s margins in H2FY20, we believe the stock offers a favourable risk return ratio. Maintain Outperformer with a TP of Rs110. (~17xFY21E EPS).