Motilal Oswal Suggests Buy This Automobile Sector Stock, Sees 27% Potential Gains

Motilal Oswal has initiated a "buy" call to Motherson Sumi Wiring India Limited with a target price of Rs 105 apiece. It sees a potential upside of up to 27% from its current level with the given target price. Motherson Sumi Wiring India is an Automobile Sector company having a market cap of Rs 26,147.70 crore.

According to the brokerage, 2QFY23 performance was adversely impacted by one-time costs incurred for new plants. While the new plants will weigh on near-term performance, strong demand is expected to drive strong revenue/PAT growth from FY24 onwards.

Stock Outlook & Returns

The current market price (CMP) of the stock is Rs 82.45 apiece on NSE at the time of writing. Today, it opened at Rs 82.70 apiece, currently trading 0.24% down from the previous close. The stock's 52-week low is Rs 56 recorded in March 2022, and the 52 week high is Rs 94.05 recorded in September 2022, respectively.

The stock was recently listed on the stock exchange, in March 2022. Since March, the stock has given 33.09% positive returns on investments. In 6 months it has given 18.53% positive returns, in 3 months it has given 6.39% positive returns. In 1 week it has fallen 4.46%, whereas, in the past 1 month it has fallen 5.71%.in the past 1 month, declined 5.64%.

Higher RM and one-time costs hurt margins

Revenue/EBITDA/Adj.PAT grew 31%/2%/2% YoY to INR18.35b/ INR1.8b/INR1.2b, respectively. 1HFY23 revenues/EBITDA/adj.PAT grew 39.5%/ 33.5%/38.5% YoY. Gross margins eroded 130bp QoQ (down 180bp YoY) to 33.8% (v/s estimated 35.2%), due to weaker mix and higher RM costs (YoY). EBITDA margins eroded 220bp QoQ (down 280bp YoY) to 9.9% (v/s estimated 13.9%) due to start-up cost of new plants and extra costs for meeting higher demand. EBITDA grew 2% YoY (down 11% QoQ) to ~INR1.8b (v/s estimated INR2.55b). Further higher-than-estimated 'other income' and lower tax boosted PAT to INR1.2b (but still below estimated INR1.6b) - a growth of 2% YoY (down 8% QoQ). 1HFY23 CFO improved to INR591m (v/s INR60m in 1HFY22) but higher capex (INR850m v/s INR316m in 1HFY22) led to FCFF declining to INR259m (v/s a decline to INR255.4m in 1HFY21).

Highlights from the management commentary

Operating performance was adversely impacted by a) start-up costs of new programs at Bengaluru and a new Chennai plant, and b) additional costs (freight, manpower) to meet increased volumes. These costs expected to get absorbed as these new program/plant ramp up production over the next 2-3 quarters. Overall, the management indicated a start-up cost of ~INR300m. It is in discussion with customers for one-time compensation (for the above costs) as well as for higher inflation in wages and other costs. RM costs and Fx is passed through to customers with a quarter lag, hence, the benefit of a ~15% QoQ decline in spot copper prices in 2QFY23 does not reflect in the P&L yet. For high voltage wiring harness, most of the connectors and cables are currently imported; however, localization will increase as volumes rise. Capex for FY23 is expected to be INR1.25-1.5b. While capex for Bengaluru and Chennai has already been incurred, considering strong demand, the company may invest further in the cities for growth opportunities.

Valuation and view

The stock trades at 53.8x/33.5x FY23E/24E EPS. We believe it deserves rich valuations due to a) its strong competitive positioning, b) top decile capital efficiencies, and c) being a beneficiary of EVs and other mega trends in Autos. "We reiterate our Buy rating with a TP of INR105 per share (~35x Dec'24E EPS)," the brokerage said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.