Q2FY24 Review: SJS Enterprises: Organic business steady; WPI margins collapse

9 Nov 2023 , 10:34 AM

SJS’ Q2 Consol. Ebitda (adjusted) came in 2% below est. The organic rev/earnings growth was low, but better than the underlying 2W industry. Analysts of IIFL Capital Services expect organic growth to pick up in coming quarters, led by higher YoY growth in 2W production. Medium-term revenue drivers are growth in auto volumes, increase in content per vehicle and addition of new customers. In Q2, SJS received new orders from Lear Corp, Neolync, GDN Enterprises and Foxconn. The negative surprise in Q2 came from WPI (acquired in July), which saw a collapse in margins due to a customer-specific issue. This is expected to normalise by Q4FY24. SJS commenced amortisation of “intangible assets on acquisition of WPI”; this will recur going forward. While there is no cash-flow impact, it drags down earnings materially. Analysts of IIFL Capital Services cut FY24/FY25/FY26 EPS by 15%/12%/10%, primarily due to the amortisation effect. 

Consol. Ebitda 2% below estimate, excl. one-off: 

Q2FY24 Consol. revenue grew 40% YoY, led by WPI acquisition. Gross margin came off 500bps QoQ to 51.9%, due to customer-specific issues at WPI. Reported Ebitda margin dipped 200bps QoQ to 22.1% (280bp miss). Reported Ebitda came in 8% below estimates. If analysts of IIFL Capital Services exclude one-off costs related to WPI acquisition, Ebitda margin came in at 23.5% (140bp miss) and absolute Ebitda miss was only 2%. Reported PAT came in 12% below expectations (adjusted miss 5%). 

Organic growth low, but better than underlying industry: 

Organic revenue growth came in 6%, with standalone growth at 7% and growth in Exotech (acquired in Apr 2021) at 6%. In comparison, 2W production was flattish YoY and car production was up 6% YoY. SJS has relatively higher revenue dependence on 2Ws than on cars. Ebitda margin (organic) was largely stable YoY; hence, Ebitda growth was ~7% (ex one-off). 

WPI margin collapse, intangible assets amortisation leads to EPS cuts: 

WPI saw a collapse in Ebitda margin from ~30% pre-acquisition to 12.5-13.0% in Q2FY24. Mgmt. attributed the margin collapse to a temporary delay in changeover of 3 models of one OEM. WPI’ Q2 revenue included low-margin tooling revenue, instead of the regular component rev. As the new models ramp up, mgmt. expects mix and margins to normalise. Another negative surprise in WPI was commencement of amortisation of “intangible assets on acquisition’ at ~Rs29mn/qtr.