Hold Motherson Sumi; target of Rs 125: ICICI Direct

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ICICI Direct's research report on Motherson Sumi

Motherson Sumi (MSL) reported a steady set of Q3FY19 numbers Consolidated revenues in Q3FY19 came in at Rs 16,473 crore (up 14.4% YoY). Net sales from the standalone business were down 4.0% YoY to Rs 1,722 crore. Further, among its subsidiaries, SMR revenue grew 1.5% YoY to €398 million (~Rs 3,270 crore) while SMP revenue increased 10.7% YoY to €993 million (~Rs 8,160 crore) Revenue from PKC operations grew 8% YoY to €292 million Consolidated EBITDA increased 10.6% YoY to Rs 1,393 crore. EBITDA margins contracted 29 bps YoY & 15 bps QoQ to 8.5% EBITDA margins of the standalone business declined 295 bps YoY to 14.5% mainly impacted by negative operating leverage amid a decline in sales. EBITDA margins of SMR expanded 25 bps YoY to 11.55%. Margins of SMP contracted 27 bps YoY to 5.4%. Margins of PKC business expanded ~230 bps YoY to 8.6% Consequent PAT increased 6.7% YoY to Rs 389 crore MSL has informed that its SMP plant at Tuscaloosa in the US has commenced operations. A majority of capex on greenfield projects is now almost over. During Q3FY19, on a consolidated basis, the company reduced its gross debt by Rs 1,757 crore to Rs 12,436 crore, while its cash & bank balance was at Rs 2,731 crore. Thus, its net debt was at Rs 9,705 crore as of 9MFY19.

Outlook

MSL is a capital efficient player with core RoICs>20% and has prudently grown over the past decade through the inorganic route. It has a steady balance sheet with absolute debt at ~Rs 10,000 crore and debt: equity at ~1.0x. Given the headwinds over demand prospects and limited scope for margin improvement amid a challenging demand scenario at its key OEM clients, we hold a cautious stance on the stock. Going forward, in FY18-20E, we expect sales, PAT to grow at a CAGR of 12.4%, 17.6%, respectively. We value MSL at Rs 125 i.e. 18x P/E on FY20E EPS of Rs 7.0 with a HOLD rating on the stock.

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