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Motherson Sumi Systems' Q4FY18 results (Outperformer) - In-Line quarter; Focus to be on order conversion

Q4FY18 result highlights

• PAT in-line with consensus estimates; Operating performance steady: Motherson Sumi’s adjusted consolidated Q4FY18 PAT at Rs 5.4bn (down 6% yoy) was in-line with consensus estimates (est: Rs5.5bn).  While operating performance (EBITDA up 21% yoy) was steady, higher depreciation and amortization on a yoy basis(+50%) as a consequence of the goodwill amortisation from the PKC merger led to fall in profit.
• Standalone: Total Revenues of Rs21bn (up 21% yoy) grew on the back of strong volume growth as well as pass through of higher copper prices . Standalone EBITDA margins excluding forex at 18.5% w (+110 bps qoq;-200bps yoy) were negatively impacted by a stronger commodity cycle. SMR revenues at EUR 406mn declined 3% yoy on account of forex impact of EUR 26.1 mn, while EBITDA margins at 13.1% improved 170 bps qoq (+100 bps yoy).  SMP: Revenue growth at a 11% was reasonable on the back of the execution of new orders  while EBITDA margins of 6.7% (down 30bps qoq, 90 bps yoy) were a bit weak on higher startup costs. The startup costs showed a sharp increase to EUR 20mn(Q4FY17: EUR 11mn, Q3FY18: EUR 16.7mn).  PKC: Revenues showed a sharp growth of 27% possibly reflecting the strong class 8 truck growth. Consolidated revenues at Rs154bn (+37% yoy) were aided by the PKC acquisition and Euro depreciation. with  EBITDA margins at 9.7% (up 100 bps qoq, down 130 bps yoy) in-line with our estimates. Minority interests increased as certain JVs turned more profitable(China).

Concall highlights: (a) The company has an order book of EUR 17.2bn (b) Slower revenue growth in SMR is partially a result of slower volume growth in a few OEM models (c) The management expects startup costs to show a sharp downturn by Q4FY19 (d) The company has three new large plants coming on stream in the next year.  

Key positives: Strong SMR margins, domestic revenue growth

Key negatives: Weak SMP margins, slow SMR revenue growth

Impact on financials: We broadly maintain our estimates

Valuation & view

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. The domestic business seems to be well placed with MSS supplying to models with strong volume growth. Further, strong synergies with MSS could potentially lead to surprises from the PKC acquisition. We believe the stock with its high earnings growth (25%+ between FY18-20) and inherent strengths (scale, deep relationships with OEMs) offer a favourable risk return ratio. Maintain Outperformer with a target price of Rs415.