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Motherson Sumi Systems's Q3FY19 results (Outperformer) - Another weak quarter; pressure persists

Q3FY19 result highlights

• PAT below estimates: Motherson Sumi’s consolidated Q2FY19 PAT at Rs 3.9bn (up 6% yoy) was 7% below estimates. The disappointment was on a weak operating performance particularly at the standalone business.
• Standalone: Revenues of Rs1.72bn (-1% yoy) seems to reflect the weak volume growth within the passenger car segment. EBITDA margins at 14.9% (down 30bps qoq; -280bps yoy) was negatively impacted by a stronger commodity cycle and negative operating leverage. SMR revenues at EUR 398mn was up 2% yoy, while EBITDA margins at 11.5% remained steady.  SMP’s adjusted revenue was up 31% yoy to EUR 993mn largely due to the amalgamation of Rydel. Excluding Rydel, SMP’s revenues showed a decline – this is disappointing considering the commissioning of new plant. Further, EBITDA margins of 5.4% (down 150bps yoy) remained stressed. PKC: Revenues showed a growth of 8% reflecting the still strong class 8 truck build growth. While EBITDA margins 8.5% improved nearly 130bp qoq, it was flat qoq. Consolidated revenues at Rs164.7bn (+24% yoy) was aided by the Rydel acquisition and Euro depreciation. Consolidated margins at 8.5% (down 10 bps qoq) were a tad disappointing.
• Management comments: (a) SMP: The ramp up for a number of plants is still coming through – Q2FY20 will be the quarter when volume growth will be stronger (b) For SMR, the management  expects focus on profitability will continue to be more important than the topline (c) Maintains 2020 vision targets – hopes the current turmoil will throw up more inorganic opportunities as the current valuations for acquisitions is extremely high (d) The debt has come down by 15% sequentially as a consequence of working capital management and lower capex. (e) The management indicated that the global environment was tough on the back of global trade wars/WLTP led delays that have contributed to a weaker growth sentiment.

Key positives: Reduction in debt

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

Impact on financials: We cut our FY19/FY20 estimates by ~8% on weak margins/lower revenue growth.

Valuation & view

There are clear issues for MSS in the near term with SMP being impacted by startup/rampup 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 inherent strengths (scale, deep relationships with OEMs) offer a favourable risk return ratio. Maintain Outperformer with a TP of Rs150 (~18xSept2020).