Denso Earnings: Temporary Factors Affect Operating Income, but Recovery Expected for Fiscal 2024

Denso’s fiscal 2023 (ended March 2024) operating income of JPY 381 billion, down 11% year on year, was significantly below our estimate of JPY 432 billion and guidance of JPY 495 billion. This was largely due to temporary factors including quality costs related to past recalls of fuel pumps, delayed cost pass-throughs, and the impact of production cuts by Daihatsu and Toyota Industries (not to be confused with Toyota Motor), which had engaged in misconduct. We do not expect these issues to materially affect Denso going forward and therefore maintain our fiscal 2024 operating income estimate of JPY 712 billion, implying operating margin of 9.6%, in line with the company’s guidance. Denso's largest customer, Toyota Motor, plans to increase production by 3% year on year to 10.3 million vehicles for calendar 2024. In addition, we expect cost pass-throughs and further sales of Denso’s high-margin electrification components like inverters to contribute to margin expansion. Hence, we expect an operating income compound annual growth rate of 6.6% between 2024 and 2028. Despite the better outlook, we believe narrow-moat Denso’s shares are fairly valued now.