Q3FY24 Review: Samvardhana Motherson: Strong performance in organic and acquisitions

13 Feb 2024 , 12:45 PM

Motherson’s Q3 results were ahead analysts of IIFL Capital Services estimate (10% Ebitda beat). The results saw two positives: i) sharp improvement in margins in the organic business, and ii) profitability of acquired business (especially, Dr. Schneider) being much higher than at the time of announcement of acquisition. The margin normalisation in the organic business is playing out faster than expected. Management mentioned that most of the headwinds (mainly on cost side) have now stabilised; mgmt. is focussed on generating further improvements in coming quarters. Of the announced acquisitions, ones aggregating to EUR1.5bn rev have been completed. Further acquisitions with rev of EUR1.0-1.1bn would be completed in Q4FY24/Q1FY25. Analysts of IIFL Capital Services have upgraded Ebitda estimates by 4-6%. Retain BUY with TP of Rs140 (22% upside). 

Q3 results ahead of estimates with 10% Ebitda beat: 

Q3 revenue grew 27% YoY and came in 2% above analysts of IIFL Capital Services estimate. Reported Ebitda margin came in at 9.2%, 70bp higher than their estimate. Reported Ebitda came in 10% above analysts of IIFL Capital Services estimate. Had it not been for provision for ‘hyperinflation in Argentina’, Ebitda margins would have been further 30bp higher. Adjusted for above, Ebitda beat is 14% and PAT beat is 9%. 

Sharp margin improvement in organic business: 

Organic revenue growth was about 7% YoY, largely reflecting moderate growth in the global auto market. Growth was hurt by Auto workers’ strike in US; analysts of IIFL Capital Services expect growth to pick up in Q4 as the strike ended in Oct 2023. Organic Ebitda margin improved 100bp QoQ to 9.4%. Mgmt. mentioned that the business has stabilised; mgmt. would look to improve the metrics further. 

Acquired companies’ margins much better than at the time of announcement of acquisitions: 

The large acquisitions, which were built into Q3 results, name SAS, Ichikoh and Dr. Schneider had aggregate rev of ~EUR1.5bn and a blended margin of 7.6%, when the acquisitions were announced. However, these acquisitions contributed EUR1.8bn (annualised) with an Ebitda margin of 10.3% in Q3FY24. Revenues have scaled up and the combined margin profile of the companies has improved substantially. As further acquisitions (announced, not completed, not in analysts of IIFL Capital Services est.) come through, growth and earnings would get further fillip.