Samvardhana Motherson: Margin normalisation to drive EPS growth

18 Jan 2024 , 11:32 AM

Recommendation: Buy; Target price: Rs 126

Motherson is one of IIFL’s top mid-cap BUYs for 2024. The buy case for Motherson is based on: i) Normalisation of sub-optimal margins, which should drive high earnings growth over FY24-26, ii) Acquisitions, which should in aggregate add USD2bn to revenue by FY25, and iii) Reasonable valuation, especially when seen relative to the rest of the Auto industry. Analysts of IIFL Capital Services expect margin normalisation to be driven primarily by SMP. SMP is currently clocking 2.5% Ebit margin (H1FY24) and not meeting bareminimum ROCE thresholds. Margins should recover with the end of US Auto workers’ strike, favourable seasonality in H2 and continued price negotiations with customers. Overall, analysts of IIFL Capital Services expect consolidated margins to improve from the current 8.0-8.5% closer to historical normalised levels of 9.5-10.0%. Analysts of IIFL Capital Services value the stock at 18x FY26 EPS to arrive at TP of Rs 126. 

Strong order-book and acquisitions to support growth, even as end market growth may be moderate: 

Motherson has an order-book of ~USD77bn, of which 22% are for EV programs. In Q2FY24, Motherson completed acquisitions that would add >USD1bn to revenues. Further acquisitions (announced, not completed) would add USD1bn to FY25 revenue (not in analysts of IIFL Capital Services estimates). Based on the acquired companies’ margin profiles, accretion to Ebitda should be commensurate to the addition to revenue.

SMP at sub-optimal margins, ROCE; due for turnaround: 

SMP clocked Ebitda margin of ~6.5% in H1FY24, translating to Ebit margin of about 2.5%. At such low Ebit margin, analysts of IIFL Capital Services estimate ROCE may be sub10%, clearly sub-optimal. Cost pressure from energy cost in EU and global plastic/resin prices have eased. In Q2FY24, margins were hurt by US Auto workers’ strike and summer holidays in Europe. Analysts of IIFL Capital Services expect these to ease from Q3. Meanwhile, the company is in negotiations with customers for price escalations, which should gradually bear fruit. 

Expect strong EPS growth, driven by margin uptick and acquisitions: 

Analysts of IIFL Capital Services expect consol. margins to improve from 8.0-8.5% to historical levels of 9.5-10.0%, with easing inflation and price negotiations with customers, especially in SMP. Analysts of IIFL Capital Services forecast >30% EPS Cagr over FY24-FY26. Although debt levels have risen post acquisitions, so will Ebitda. Strong FCF should drive down debt in FY25/FY26.