Denso Earnings: Automobile Production Decline by Toyota Dents Operating Income

Denso’s operating income in the June quarter of JPY 121 billion fell short of our estimates as a result of weaker-than-expected sales/capacity utilization in Japan and delays in cost pass-throughs. Although the quarterly companywide revenue increased 2% year on year, sales in Japan declined 4.5% because of weaker automobile production volumes by its largest customer by sales, Toyota Motor. Toyota’s monthly domestic production volume declined 19% year on year in June as it had to cut production as a result of misconduct related to its vehicle certification procedures for certain models. We expect this to affect Denso’s near-term domestic sales, so we cut our operating income estimate for fiscal 2024 (ending March 2025) by 7% to JPY 668 billion, backed by 3% revenue growth and a 9.1% operating margin. However, this does not affect our fair value estimate of JPY 2,700, as our longer-term outlook remains unchanged.