Motherson Sumi Rating ‘Buy’; demand recovery drove Q2 showing

Motherson Sumi’s (MSS)’s Q2FY21 operating performance was driven by strong demand recovery and improved efficiencies. SMP’s greenfield plants achieved Ebitda breakeven. MSS is well-positioned to benefit from demand recovery as well as efficiency improvement at the greenfield plants. We upgrade our FY22e EPS by 7%, factoring in stronger recovery in SMRPBV and PKC. MSS is our preferred bet to play global recovery in Auto. Maintain Buy, with TP of Rs 150 (Dec’22 SOTP).

Operating performance led by global demand recovery: MSS reported financials, excluding the DWH (Wiring Harness) business, and classified it as discontinued operations in the wake of restructuring. All of our numbers are like-to-like and include DWH to showcase the complete picture. Q2FY21 consolidated revenues/Ebitda/adj PAT changed by -2/ 18/3% y-o-y to Rs 156.7/15.5/3.72 bn. H1FY21 consol revenues/Ebitda declined ~26/64%, and reported adj. loss stood at Rs 4.4 bn.

India business sales/Ebitda/ adj. PAT changed by ~4/12/-1% y-o-y to ~Rs 17/2.8/1.7 bn. SMP revenues declined 9.5% y-o-y to ~EUR915 m. Ebitda margins expanded 300bp y-o-y to 7.2%. Greenfield plants turned Ebitda-positive, with EUR3 m Ebitda (EUR19 m loss in Q1FY21; EUR175 m loss in FY20).

SMR revenues fell 10% to EUR350 m and Ebitda margins expanded 240bp to 13.4%. PKC revenues declined 14% y-o-y to EUR263 m and Ebitda margins contracted 300bp to 8.7%. However, demand is picking up on the back of an increase in Class-8 truck orders. Net debt declined on a q-o-q basis to ~Rs 75.2 bn (v/s Rs 90.8 bn).

Highlights from commentary
Status of operations: Neither plant shutdowns (due to lockdown), nor any changes in schedule by clients were reported. ~80% of plants are running at capacity of >75%. Strong demand has been cited for Q3FY21; mgmt expects EU demand recovery to continue despite the second wave of lockdown. SMP: Greenfield plants could see further revenue growth, driven by new model and variant launches. PKC: The off-take was lower during the quarter for the US (-40% y-o-y), Europe (-30%), and Brazil (-39%); only China was positive. However, demand is picking up on the back of an uptick in NA Class-8 orders.

Valuation and view
Our positive view on MSS remains intact (turnaround in greenfield plant + execution of strong order book of SMRPBV + industry recovery). Maintain Buy.