Samvardhana Motherson: Reasons why Jefferies upgraded the stock to 'buy' from 'hold'

Jefferies has upgraded auto component maker Samvardhana Motherson (SAMIL) to ‘buy’ from ‘hold’ earlier. The brokerage has a target price of ₹115, indicating an upside of 21 percent from the current market price of ₹95 (as on July 13).

"After four tough years, SAMIL's operating performance has started to improve in FY23, and we see its EBITDA doubling and EPS trebling over FY23-26E, led by a supportive operating environment and profit accretion from acquisitions. We upgrade FY24-25E EPS by 18-42 percent and are 10-17 percent above Street. Despite a 26 percent CYTD rally, the stock has underperformed Nifty50 by 40 percent in the last 2 years. Its 15x FY25E PE is reasonable," Jefferies explained.

The brokerage pointed out that FY19-22 was a tough phase for SAMIL as the combined effect of global auto slowdown, Covid, ramp-up issues at new plants, and cost inflation impacted operating performance, pulling down recurring PAT (including MSWIL) by 41 percent over 4 years. However, business started to turn around in FY23, and the brokerage expects strong growth ahead led by improving core business and incremental contribution of recent acquisitions.

In the base case scenario, the brokerage assumes a consolidated revenue rise of 29 percent, 18 percent and 7 percent in FY24E, FY25E, and FY26E. It also sees the EBITDA margin improving to 9.3 percent, 9.8 percent, and 9.9 percent in FY24E, FY25E and FY26E, respectively, and EPS rise to ₹4.6 in FY24E and further to ₹6.4 and ₹7.3 in FY25E and FY26E, respectively.

Bull and bear case scenarios

In the bull case scenario, the brokerage has a target of ₹130 for the stock, implying a 37 percent potential upside. In this case, the brokerage assumes a consolidated revenue rise of 31 percent, 21 percent and 9 percent in YoY in FY24E, FY25E and FY26E, respectively. It also sees FY24-26E EBITDA margin higher by 50 bps versus base case and EPS rise to ₹5.2 in FY24E and further to ₹7.4 and ₹8.6 in FY25E and FY26E, respectively.

Meanwhile, in the bear case scenario, the brokerage has a target of ₹80, indicating a downside of 16 percent. In this case, it assumes, the firm's consolidated revenues to rise 27 percent, 16 percent, and 5 percent YoY in FY24E, FY25E and FY26E, respectively. It sees FY24-26 EBITDA margin lower by 50 bps versus base case and EPS rise to ₹4.0 in FY24E and further to ₹5.4 and ₹6.0 in FY25E and FY26E, respectively.

Stock Price Trend

The stock has risen 21 percent in the last 1 year and 26 percent in 2023 YTD. Meanwhile, it jumped 43 percent in the last 4 months, since April, giving positive returns in 4 consecutive months.

It has soared 12 percent just in July after an 8.4 percent, 7.7 percent, and 9.4 percent, rise in June, May and April. However, it shed 15.7 percent in March. In Jan and Feb as well, the stock gained 1.8 percent and 5.5 percent, respectively.

Meanwhile, in the long term (3 years), the stock has advanced around 85 percent.

Investment Rationale

Supportive environment: The brokerage's European auto team believes that the operating environment has turned supportive for suppliers and the post-Covid earning downgrade cycle is ending (Stars Better Aligned). Car sales for the last 3 years in US and Europe have been 20 percent below pre-Covid averages. With interest rates peaking and used car prices supported by low liquidity, any net price adjustment on new cars from OEMs (original equipment manufacturers) should provide support for pent-up demand, making suppliers beneficiaries of volume recovery, it said. Jefferies further noted that the sales volume YTD in both Europe (+18 percent YoY) and US (+13 percent YoY) have surprised positively. While OEMs may not fully compensate suppliers for wages and energy, Jefferies believes that stronger than initially expected volume growth could offset the impact.

Acquisitions to boost earnings: SAMIL has announced two large acquisitions in 2023: 1) SAS and 2) 81 percent stake in Yachiyo's 4W business, which it expects to complete in Q2FY24 and Q1FY25 respectively. In FY23/CY22, these businesses generated net revenue of €0.8-0.9 billion and EBITDA of €94-103 million each (11.5 percent margin), informed the brokerage. It estimates the two acquisitions together can add 15 percent and 19 percent to SAMIL's FY25E revenue and EBITDA, respectively. These also provide SAMIL opportunities to in-source more components at SAS and to strengthen the group’s presence in Japan as well as with Honda, it added.

Earning cycle inflecting up: SAMIL's FY23-24 consensus EPS was cut by 40-60 percent over mid-2021 to mid-2023, and Jefferies' were mostly below consensus in that phase. It has now upgraded the FY24-25E EPS by 18-42 percent factoring better core outlook and acquisitions. It sees EBITDA doubling and EPS trebling over FY23-26E.

Mergers and Acquisitions

SAMIL, in February 2023, entered into an agreement to acquire a 100% stake in SAS Autosystemtechnik (SAS) from Faurecia. SAS is a global provider of cockpit module assembly and logistics services for the automotive industry, with strong exposure to the premium vehicle segment. SAS gets 32 percent of its revenues from a leading American EV OEM, 29 percent from Volkswagen, 12 percent from Skoda and 5-8 percent from Mercedes, Porsche and Audi each.

Then, in July 2023, SAMIL entered into an agreement to acquire an 81 percent stake in Yachiyo’s 4W business, housed under Japan-headquartered Yachiyo Industries (7298 JP). Yachiyo 4W is engaged in the production of sunroofs (48 percent of revenues) and fuel tanks (41 percent), and is a strategic supplier to Honda.

Earnings

The auto component maker's consolidated net profit soared by a massive 436 percent for the quarter ended March (Q4FY23) to ₹654 crore, compared with ₹122 crore in the same period last year.

Meanwhile, revenue from operations, during the quarter under review, jumped 30 percent to ₹22,477 crore as against ₹17,241 crore in the corresponding quarter of the previous year. The revenues reported in the fourth quarter were the highest ever for the company.

The company said it has a strong booked business of nearly ₹5.70 lakh crore from the automotive segment.

“With the support of our customers and the hard work of our teams, the company has ended the year with strong performance. The robust booked business of nearly $70 billion is a reflection of customer trust in Motherson," said Vivek Chaand Sehgal, Chairman, Samvardhana Motherson. The company also informed that it has a strong booked business of nearly ₹5.70 lakh crore from the automotive segment.

For the full year, the company's revenue increased 23 percent to ₹78,701 crore, which is also the highest-ever yearly revenue for the company. Meanwhile, profit jumped 193 percent to ₹1,496 crore in FY23.