Samvardhana Motherson International Stock Research Report

Operational performance below expectation; M&As to add to profitable growth ahead…..

Samvardhana Motherson International’s (SAMIL) EBITDAM at 8.8% in Q2, down ~80bps QoQ was below consensus’ estimate of 9.9%. Consol. revenue was up 18% YoY, mostly led by inorganic growth amidst muted industry volumes; revenue from organic business only grew in low single-digits. We expect SAMIL to continue its growth momentum aided by increasing content/vehicle, growth in non-automotive business and inorganic growth. We build in a revenue CAGR of 13% for FY24–26E, including inorganic revenue addition for SAMIL, resulting in FY26E revenue of ~USD 15bn. Maintain BUY with a revised DCF based TP of INR 185 (earlier INR 171), implying ~28x FY26E earnings. Change in TP is mainly due to ~16%/4% cut in FY25E/FY26E EPS to factor in demand weakness in key geographies.

Q2FY25 conference call takeaways, and our views

• Revenue increased 18% YoY, mostly led by inorganic growth amidst muted industry volumes; revenue from organic business grew only 4-5% above market. Sluggishness in EV demand in Europe and North America impacted most key segments. In India, SAMIL is working on nine greenfield sites to be added to its fixed assets.
The company would utilise these for revenue growth execution from FY25, dedicated mainly across non-auto spaces. SAMIL expects H2FY25 performance to be better vs. H1 with: 1) ramping up of few delayed projects in H2, and margin improvement post upfronting of start-up costs for a few projects in H1. We build in a revenue CAGR of 13% for FY24–26E, including inorganic revenue addition for SAMIL, resulting in FY26E revenue of ~USD 15bn.

• SAMIL reported EBITDAM of 8.8%, below consensus’ estimate of 9.9%, mainly due to weaker gross margins. With Yachiyo, a superior margin business, being added recently and SAMIL turning around profitability of acquired entities (SAS and Dr. Schneider), we believe SAMIL can sustainably operate at ~9% margin and above, assuming no major volatility in input commodity cost. SAMIL is investing towards large capacity addition in the non-auto business and aims to increase emerging business contribution (which reported revenue of ~USD 1bn and margin at 13.5% in FY24 (vs. 11.3% in FY23) to ~25% in the long term.
The company guides for capex of INR 50bn in FY25 (H1 capex at ~INR 20bn), with a variance of 5% vs. earlier variance of 10%; 70% of this capex would be for non-automotive. SAMIL’s net debt decreased by ~INR 30bn QoQ in Q2; thus, reducing its leverage ratio to 1x EBITDA, down 0.5x QoQ. Part of the QIP proceeds (total of INR 64.4bn) were used to pare debt.