Samvardhana Motherson Shares Hit 52-Week High As Jefferies Raises Rating To 'Buy'

Shares of Samvardhana Motherson International Ltd. hit a 52-week high on Thursday after its rating was raised to 'buy' by Jefferies on expectations of strong growth led by improved core business and the incremental contribution of recent acquisitions.

The auto parts manufacturing company's business seems to have started to turn around in fiscal 2023 after a tough phase through FY19-22 as the combined effect of the global auto slowdown, Covid-19, ramp-up issues at new plants, and the cost of inflation impacting operating performance pulled recurring profit-after-tax lower by 41% over four years, the research firm said in a July 12 note.

The research firm has set a target price of Rs 115 apiece on the stock, implying an upside return potential of 19.72%.

Shares of Samvardhana Motherson rose 2.95% to Rs 95.90 apiece as of 09.38 am, compared to a 0.62% rise in the NSE Nifty 50. The stock rose 4.19% to hit a 52-week high during opening trade.

The total traded volume stood at 5.4 times its 30-day average. The relative strength index was at 80, implying that the stock may be overbought.

Out of the 21 analysts tracking the company, 19 maintain a 'buy' rating, one recommends a 'hold' and one suggests a 'sell', according to Bloomberg data. The average calculated 12-month consensus price target implies a potential upside of 4.4%.

The two large acuquisition announced by Samvardhana Motherson International in 2023 are SAS, which the company expects to complete in the second quarter of FY23, and acquiring an 81% stake in Yachiyo's four-wheeler business, which is expected to be completed by Q1 of FY25, forging a global partnership with Honda Motor Co.

"We estimate the two acquisitions together can add 15% to 19% to Samvardhana Motherson International's FY25E revenue and Ebitda, respectively," Jefferies said.

These acquisitions also provide opportunities to in-source more components at SAS and to strengthen the group's presence in Japan as well as with Honda, the brokerage said.

The company's FY23-24 consensus earnings per share were cut by 40–60% from mid-2021 to mid-2023, the note said.

"We now upgrade FY24–25E EPS by 18–42%, factoring in a better core outlook and acquisitions, and are 10–17% above the street. We see Ebitda doubling and EPS trebling over FY23–26E," Jefferies said.

The operating environment has turned supportive for the suppliers, and the post-Covid earning downgrade cycle is ending, according to Jefferies' European auto team.

Car sales for the last three years in the U.S. and Europe have been 20% 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 should provide support for pent-up demand, making suppliers beneficiaries of volume recovery, it said. Sales volume year-to-date in both Europe (more than 18% year-on-year) and the U.S. (13% plus year-on-year) has 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.

Despite the global slowdown in manufacturing growth, the company has an all-time high order book of $70 billion, with electric vehicles accounting for 20% of the total, Samvardhana Motherson International's Chief Financial Officer Kunal Malani told BQ Prime in a recent interview.

The company aims to achieve a gross revenue of $19–20 billion by the first quarter of FY25, with a "clear target of $36 billion" for the fiscal, Malani said.