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JM Financial Services
Motherson Sumi Systems (Buy)
CMP: ₹101.55
Target: ₹118
In 4QFY20, Motherson Sumi System’s (MSSL) consolidated EBITDA margin improved 130 bps q-o-q to 9.2 per cent supported by 400 bps sequential improvement at SMR. Domestic business also witnessed 190 bps q-o-q improvement in margins with EBITDAM of 16.9 per cent, 360 bps above our estimate, supported by effective cost control and benign RM cost.
As per MSSL, major OEMs have asked the company to be prepared for ramping up production as early as July 20. Sales are likely to draw support from shift towards personal mobility and purchase incentives announced by EU governments. The company also highlighted that it is soon going to share its next five-year plan with possible diversification into aerospace, defence and healthcare.
We believe that similar to the situation during global financial crises, recent scrapping incentives announced by major EU countries could revive demand for cars in the near term and support sales of MSSL.
We estimate 33 per cent CAGR in consolidated earnings over FY20-22E. Maintain ‘buy’ with a revised March 21 TP of ₹118 (18x forward earnings).
Risks: Failure of EU auto stimulus to revive demand and slower-than-expected ramp up at greenfields are key risks.
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