Samvardhana Motherson: Margin recovery may be faster than estimates

22 May 2023 , 11:48 AM

Recommendation: Buy

Target Price: Rs. 96

If we exclude energy costs, Q3FY23 margin was at a 6-year high. This, combined with continued revenue outperformance by Motherson versus underlying industry growth, implies that business fundamentals are quite intact. In recent months, prices of natural gas and electricity in Europe have come off substantially. As these lower costs start flowing into the P&L, analysts at IIFL Capital Services expect margins to get to normalized levels of 9-10% in the coming quarters. Their FY24/FY25 EPS estimates are 11-15% above Street.

Energy costs hurt margins in 9MFY23; margins (ex-energy) at 6-year high

Motherson has lost 120 basis points of EBITDA margin (Q3FY23 versus FY22) to energy costs in the last 3 quarters. This is primarily driven by sharp rise in energy costs in SMRPBV (accounting for 2/3^rd of Motherson’s Consolidated revenue), following outbreak of Russia-Ukraine conflict. If we exclude energy costs, Motherson’s Consolidated EBITDA margin in Q3FY23 was at a 6-year high, implying that business fundamentals are quite intact.

Energy price has fallen sharply; now below FY22 average

In recent months, prices of natural gas and electricity in Europe have come off substantially. Current natural gas and electricity prices are below the FY22 average. Price of Resin (often cited by management as a cause for margin pressure) has also come off. As these lower costs flow into the P&L in the coming 1-2 quarters, there is a high likelihood of reported EBITDA margin getting to normalized levels of 9-10% versus 7.8% in Q3FY23.

Margin normalization a much bigger earnings driver than revenue growth

Motherson has been outperforming the underlying volume growth of the global Auto industry. Flow of new orders has also been strong, with EUR4.9 billion new order wins in H1FY23. Yet, there have been concerns on Street with respect to growth outlook, given the possibility of global economic slowdown. Analysts at IIFL Capital Services are highlighting that margin normalization is a much bigger earnings driver for Motherson, than revenue growth. A 100 basis points upgrade to FY24 margin assumptions can lead to 22% EPS upgrade. On the other hand, a 5% change to revenue assumptions would only impact EPS by 7-8%.