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Motherson Sumi Systems' Q2FY19 results (Outperformer) - Another Weak Quarter; Production Ramp Up key

Q2FY19 result highlights

• PAT below estimates; Operating performance weak: Motherson Sumi’s adjusted consolidated Q2FY19 PAT at Rs 3.7bn (down 15% yoy on an adjusted basis) was 22% below estimates. The disappointment was on a weak operating performance (consol EBITDA margins declined 100bps qoq) with revenue growth (ex Rydel) of 11% was below par.
• Standalone: Revenues of Rs1.95bn (up 8% yoy) seems to reflect the weak volume growth within the passenger car segment. EBITDA margins at 16.8% (down 30bps qoq; -280bps yoy) was negatively impacted by a stronger commodity cycle and higher cost pressures. SMR revenues at EUR 380mn was flat yoy, while EBITDA margins at 11.1% remained steady.  SMP: Adjusted for the Rydel acquisition the accounting policy change, SMP’s revenue was flat. This was disappointing considering the commissioning of new plants in the quarter. However, EBITDA margins of 5% (down 70bps qoq) was weaker than expected. PKC: Revenues showed a growth of 12% possibly reflecting the strong class 8 truck growth. While EBITDA margins 8.5% improved nearly 130bp qoq, it was down 100bp qoq. Consolidated revenues at Rs150bn (+19% yoy on an adjusted basis) were aided by the Rydel acquisition and Euro depreciation. Consolidated margins at 8.6% (down 20 bps qoq) disappointed.

Concall highlights: (a) The current quarter revenue growth was partially affected by the seasonality (it is holiday season in Europe) (b) For SMP, the management expects startup costs to show a sharp downturn by Q4FY19 as the new plants come on stream. However, ramp up costs (due to low utilisation levels) of the new plants will continue to impact profitability in the next 4 quarters (c) The standalone business profitability is being impacted due to the lagged pass through of the increased copper costs. (d) The sharp increase in debt (up to Rs113bn from Rs83bn in Q1FY19) was on account of the Rydel acquisition and currency movements. 

Key negatives: Weak SMP/ Standalone margins, slow SMR revenue growth

Impact on financials: We cut our FY19/FY20 estimates by ~18%/15% on weak margins/lower revenue growth. We factor in the Rydel acquisition.

Valuation & view

There are clear issues for MSS in the near term with SMP being impacted by startup costs and SMR’s revenue growth hitting bump at a time when protectionism could impact volumes for OEMs. Nonetheless, for SMRBV we expect the coming quarters to show an improvement in volumes as customer programs ramp up and new plants are brought on stream. We believe the stock with its high earnings growth (25%+ between FY18-20E) and inherent strengths (scale, deep relationships with OEMs) offer a favourable risk return ratio. Maintain Outperformer with a TP of Rs180.