Denso Affected by Toyota's Weak Production but Expects Further Operating Income Growth in 2023

We maintain our fair value estimate of JPY 9,100 per share for Denso, even though December-quarter operating income of JPY 108 billion, for an operating margin of 7.0%, fell short of our projection by about JPY 39 billion. We attribute this to capacity utilization hurt by Toyota Motor’s weak production and slow progress in passing through components/logistics costs in North America, where negotiations have been lagging. However, our longer-term outlook is intact. We think the market is underestimating Denso’s ability to meet its midterm operating margin target of 10.0% in fiscal 2025, ending March. We expect this target will be met by improved product mix from new-generation products and the restructuring of its low-margin North America business.