Denso Earnings: Margin Recovers as Improvement Initiative Starts Paying Off; Lift Fair Value 11%

Narrow-moat Denso reported fiscal 2024 revenue of JPY 7.16 trillion, or 0.2% year-on-year growth, which aligns with our previous estimate. Operating margin marked 7.2% in fiscal 2024, lower than our estimate of 7.8%. The deficit is mainly due to quality-related costs of JPY 65 billion recognized this year. The adjusted operating margin, excluding the one-off impact, is 8.2%, indicating the company is making faster-than-expected progress on rationalization initiatives and the passing on of costs to customers. As for fiscal 2025, we maintain our companywide sales of JPY 7.49 trillion, or 5% year-on-year growth assumption. However, we lift companywide operating profit by 3% to JPY 660 billion, or an operating margin of 8.8% compared with our previous estimate of 8.5%, as we raise our operating margin estimate for the Japan business to 8% from 7%, due to the absence of quality-related costs, and the utilization rate improvement given the forecast of 2% year-on-year growth in Japanese manufacturers’ vehicle production for 2025 announced by Denso.