Motherson Sumi Systems rating – Buy: Strong FCF sped up cut in debt in FY21

Workers assemble wire harnesses at the Motherson Sumi Systems Ltd. wiring harness plant in Faridabad, India, on Thursday, Feb. 28, 2013. Motherson Sumi Systems Ltd., 25 percent owned by Sumitomo Electric Industries Ltd. and India's biggest auto parts maker, supplies rear view mirrors, bumpers and body panels to clients including Porsche Automobil Holding SE, Bayerische Motoren Werke AG and Volkswagen AG. Photographer: Brent Lewin/Bloomberg

Motherson Sumi Systems’ (MSS’) Q4FY21 operating earnings were in line with consensus estimates as Ebitda margin came in at 10.1% (up 154bps y-o-y). However, FCF generation for FY21 positively surprised consensus at ~Rs 30.3 bn leading to net debt reduction (ex-leases) at Rs 48 bn (down ~Rs 21 bn y-o-y/ lowest ever debt/Ebitda: 1.2x). Management expects SMP’s greenfield plants to reach PBT breakeven soon (we expect FY22); this is likely to boost earnings growth in FY23.

DWH business is likely to unlock value (post restructuring) as one of the best proxies of electrification/hybrid theme in India. Japanese partnership, technological strength and top-quartile financials are likely to create scarcity premia for it. Overall, we continue to like the FCF generation construct; stock remains attractive with FCF yield of ~4%/6%/11% for FY21/FY22/FY23, respectively. Maintain Buy.

Key highlights of the quarter: Overall consolidated revenues stood at ~Rs 169 bn (up ~18% y-o-y) led by PKC (up ~27% in EUR terms). The standalone business reported revenue growth of ~28% to ~Rs 12.7 bn as margins were lower at 13.7% (down 78bps) due to quarter lag of RM pass-through. PKC and SMR witnessed 15bps and 166bps y-o-y contraction in reported margins at 8% and 12.9%, respectively, while SMP reported 411bps expansion at 8.7%. Strong cashflows aided debt reduction (net debt down by ~Rs 14 bn q-o-q).

Key takeaways from earnings call: (i) Orderbook size reached EUR15.6 bn (25% from EVs) with EUR4.5 bn of new orders in H2FY21; EV order execution to be ramped up as customer programmes gather pace; (ii) SMRPBV witnessed strong working capital improvement (down from 11 to 5 days); overall capex for MSS to be Maintain Buy: The robust orderbook growth (20% jump over H1FY21) at EUR15.6 bn increasing BEV content (share of pure BEV orderbook at 25% vis-a-vis 21% in H1), is likely to support content per vehicle increase thesis.

The current plants would be adequate to execute this expanding orderbook, thus leading to faster asset-sweating and RoCE improvement. We revise our earnings estimates by -0.7%/5.1% for FY22E/FY23E. We value the company on SOTP basis, with a revised TP of Rs 310/share (earlier: Rs 253).