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Motherson Sumi: Ramp up of latest flowers, debt reduction & BS-VI key income drivers; accumulate

Motherson Sumi Systems (MSSL), India’s biggest automobile wiring harness employer and considered one of the most important domestic vehicle ancillary players, posted in-line set of Q3 FY19 earnings at the back of a call for slowdown in each domestic and worldwide markets and margin contraction for Samvardhana Motherson Peguform (SMP) and its India enterprise.

The capex cycle is coming to an quit and ramping up of recent plant life is predicted to result in an increase in operating leverage. This, coupled with the frenzy toward electric automobiles (EV) and transition toward Bharat Stage-VI (BS-VI) emission norms ought to result in wholesome boom within the topline and slow growth in margin. MSSL is presently trading at affordable valuations, which warrants investor interest.

While the agency published a 12 months-on-year (YoY) growth of 14.5 percent in its consolidated internet sales, earnings before hobby, tax, depreciation, and amortization (EBITDA) margin became marred with the aid of terrible operating overall performance for SMP, Samvardhana Motherson Reflectec (SMR) and its Indian commercial enterprise.

Segment-sensible, the standalone enterprise witnessed a 3.6 percent sales decline, led by a 6.Nine percent decline in the home enterprise, which turned into on the again of subdued home patron sentiment. International commercial enterprise, but, saw a 15.5 percentage boom in revenue.

EBITDA margin shrunk one hundred twenty basis points (one hundred bps=1 percentage point) to 14.9 percentage, that’s at multi-region lows. The contraction becomes led by using a weaker dollar-rupee and rise in uncooked fabric fees, which got partly offset by using fee manage measures taken by the control.

SMP, that’s into modules and polymer element enterprise is a main worldwide dealer of door and device panels and bumpers. The enterprise noticed its sales decline 2. Three percentage in euro terms, on subdued demand post-implementation of Worldwide Harmonised Light Vehicle Test (WLTP) norms. EBITDA margin fell 30 bps due to the price of placing new plants and negative working leverage.

SMR, a leading international supplier of exterior mirrors, noticed its sales develop 1.Five percent in euro phrases and EBITDA margin contract 40 bps YoY.

In euro terms, sales for PKC, a Finland-based wiring harness specialist organization) grew 7.7 percent. The commercial enterprise turned into impacted with the aid of vulnerable demand from the eurozone. EBITDA margin contracted 20 bps on poor running leverage.

Factors to observe out for
Expansion on course

The organization has installation 33 new flora in the ultimate four years to meet its developing order e-book. The management stated production will commence at Tuscaloosa in Q4 and that each one key greenfield tasks are actually entire and are in a ramp-up segment now. Once the ramp-up is entire, operating leverage will kick-in, as a result contributing to margin enlargement.
PKC: The key future growth motive force

Integration of PKC has been going on easily as is evident from the robust increase during Q3 on the returned of healthful traction coming in from the North American (NA) and European truck market. It instructions a sixty-two percent market percentage in NA Class 8 (without a doubt heavy trucks) truck wiring harness and fifty-four percent of its sales accrue from there. PKC is also aggressively targeting the China truck marketplace and has already ventured into 3 joint-ventures catering to unique customers. It has acquired a 280 million euro order from Bombardier and is in dialogue with various original equipment manufacturers to broaden and supply electric machine.
EVs an crucial increase driving force

Given the worldwide recognition of EVs, this section could be an important boom motive force for the enterprise going forward. As according to the control, battery pushed motors could need extra wiring components, which could growth content in step with automobile with the aid of close to 10-20 percent. Other corporations related to polymer and replicate-based totally products are proof against the shift to EVs.
India enterprise outlook

Demand outlook remains muted for the passenger vehicle (PV) segment in India. Wiring harness call for, but, is expected to outperform PV enterprise growth driven via boom in content per automobile and new product launches. In fact, implementation of BS-VI emission norms would result in complexity in the wiring harness and consequently fee. MSSL is in a strong function to take gain of the growth accruing within the home PV segment.
Debt starts offevolved to fall

Rising debt tiers on the returned of its amplified capex plans and the quest to grow the business inorganically has been a challenge for MSSL. With the capex cycle coming to an cease, the organization has commenced paying off its debt and repaid Rs 1,600 crore in Q3. Its net debt has now fallen to Rs nine,705 crores as of December-quit.
Valuations

In light of subdued call for and outlook, the inventory has corrected pretty extensively and down forty-eight percent from its fifty-two-week excessive, making valuations reasonable. The inventory currently trades at 21.7 times FY19 and 17 instances FY20 projected profits. We endorse buyers to accumulate this commercial enterprise in staggered way.

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