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Motherson Sumi Systems' Q3FY18 results (Outperformer) - Weak Quarter; Fundamentals intact

Q3FY18 result highlights

• Weaker than expected performance: Motherson Sumi’s adjusted consolidated PAT at Rs 3.7bn (down 12% yoy) was sharply below consensus estimates (est: Rs5.1bn). The variance was on account of weaker standalone margins, lower revenue growth at SMR, higher startup costs and an increase in minority share.
• Standalone: Total Revenues of Rs17.6bn (up 17% yoy) were in-line with estimates. However, standalone EBITDA margins excluding forex at 17.4% were disappointing (down 220 bps qoq, down 110 bps yoy after adjustments). SMR revenues at EUR 407mn declined 4% yoy on account of forex impact of EUR 15.7 mn, while EBITDA margins at 11.3% improved 120 bps qoq (flat yoy).  SMP: Revenue growth at a 18% was strong while EBITDA margins of 5.7% (down 10bps qoq, 30 bp yoy) were a tad bit weak on higher startup costs. The startup costs showed a sharp increase to EUR 16.7mn (Q3FY17: EUR 6.6mn, Q2FY18: EUR 14mn).  PKC: Revenues showed a sharp growth of 27% possibly reflecting the strong class 8 truck growth. Consolidated revenues at Rs143bn (+35% aided by PKC) were a bit disappointing while EBITDA margins at 8.7% (down 60 bps qoq, down 170 bps yoy) were weak. Minority interests increased as certain JVs turned more profitable(China)

Concall highlights: (a) The management continues to believe that with the new plants likely to ramp up volume growth will pickup. This should also lead to a reduction in startup costs. (b) Given that the upcoming plants can cater to the current order book, the capex in the coming years could come off (c) The raw material cost increases are typically passed on to the OEMs with a 3-6 month lag

Key positives: Strong revenue growth of SMP

Key negatives: Weak standalone EBITDA margins, Slower revenue growth in SMR, Higher share of minorities

Impact on financials: We cut our FY18 estimates by ~12% on weaker EBITDA margins while we tweak FY19/20 EPS by ~3% each

Valuation & view

While the current quarter has been weak on multiple operating fronts, nonetheless we expect a recovery in the coming quarters as customer programs ramp up and commodity inflation is passed on. 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 FY17-20) and inherent strengths (scale, deep relationships with OEMs) offer a favourable risk return ratio. Maintain Outperformer with a target price of Rs415 (27XFY20 EPS – broadly inline with our target multiple for Bharat Forge).