Broker's call: Motherson Sumi (Buy)

CMP: ₹86.85

Target: ₹102

Motherson Sumi Systems Ltd (MSSL) came out with a statement to assuage concerns over the impact of Covid-19 on its operations. Key highlights of the statement are as follows:

a) Order book status remains intact, as most customers have communicated their plans to scale up production once the crisis abates to cater to pent up demand; b) Demand in China is evolving positively, with the company’s plants in the region almost functioning at pre-Covid19 levels; c) Indian, European & American plants remain closed at present. The company has received re-opening dates for a vast majority of these facilities for April/May. MSSL is preparing to resume production in-line with the plans of their customers.

Valuation: Going forward, over FY20-22E, we expect sales, EBITDA CAGR of 5.5 per cent & 12.7 per cent respectively. The agility shown by the company in resumption of production at their Chinese plants provides comfort with respect to the company’s ability to scale up operations quickly. The stock has corrected about 78 per cent over the last one year pricing in the turbulences in the industry. Given the healthy order book, expected recovery in the markets and attractive valuations we maintain a ‘buy’ rating on the stock with a revised price target of ₹102; valuing the company at a P/E 16xFY22E EPS.

Risks: Unabated spread of Covid with lockdowns extending beyond 1QFY21, adverse cross currency movement and slower than expected improvements in new plants.

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