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Motherson Sumi Systems' Q4FY19 results (Outperformer) - SMP disappoints; pressure persists

Q4FY19 result highlights

• PAT below estimates; Operating performance weak: Motherson Sumi’s adjusted consolidated Q4FY19 PAT at Rs 4.1bn (down 24% yoy on an adjusted basis) was 6% below estimates. The operating performance at the European subsidiaries, particularly SMP was weaker than expected.
• Standalone: Revenues of Rs18.5bn (-12% yoy) seems to reflect the weak volume growth within the passenger car segment. EBITDA margins at 18.1% (down 140bps yoy on an adjusted basis) was stronger than expected. While gross margins showed a sharp decline, this was offset by lower other expenses. SMR revenues at EUR 422mn was up 4% yoy, while EBITDA margins at 11.6% remained steady.  SMP’s revenue was up 35% yoy to EUR 1.03bn 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. Further, EBITDA margins of 1.9% (down 480bps yoy) remained stressed. On an EBIT basis SMP registered a decline. PKC: Revenues showed a growth of 14% reflecting the still strong class 8 truck build growth. While EBITDA margins 8.5% improved nearly 240bp qoq, it was flat qoq. Consolidated revenues at Rs171.7bn (+11% yoy) was aided by the Rydel acquisition and Euro depreciation. The weakness in SMP margins led to consolidated margins of 7.1% (down 250 bps yoy; est: 8.8%)

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. In the recent quarter there have been cost escalations beyond expectations (b) (c) The debt has come down by 18% sequentially as a consequence of working capital management and lower capex. (d) The management indicated that the global environment was tough on the back of global trade wars, WLTP led delays and so on. (e) The capex for FY20 will be ~Rs20bn with SMRPBV’s capex at EUR 200mn. (f) The orderbook stands at EUR 18.2bn (including EUR 2.3bn from the Rydel acquisition).

Key positives: Reduction in debt; increase in order book

Key negatives: Weak SMP margins, slow SMR revenue growth

Impact on financials: We cut our FY20/FY21 estimates by ~5%/7% 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 the coming quarters could show an improvement in as customer programs ramp up and new plants are brought on stream. We believe the stock with its inherent strengths (scale, deep relationships with OEMs) offer a favourable risk return ratio. Maintain Outperformer with a TP of Rs135 (~17xFY21E EPS).​