Denso Earnings: Further Quality Costs Dent Margins, but Profitability to Improve in 2024

We raise our fair value estimate for Denso to JPY 2,700 from JPY 2,375, after revising our margin assumptions based on a more favorable mix of electrification product sales and progress in restructuring. In the December quarter, sales of electrification systems and mobility electronics, which contain more high-end components, were stronger than expected, growing 23% and 19%, respectively, driven by the robust demand for its largest customer Toyota’s hybrid and high-end automobiles. We raise our fiscal 2024 (ending March 2025) and 2025 operating margin assumptions to 9.5% and 10.2%, respectively, from 9.1% and 9.8% previously, as we expect a better product mix to continue, driven by higher-margin electrification component sales outpacing other commoditized components. We believe Denso’s shares are fairly valued.