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Below our estimate; higher RM cost hurts margin; order backlog strong

Higher cost inflation to keep margin under pressure in 1HFY22E

MSIL’s 4QFY21 operating performance was impacted by higher commodity costs, partially offset by price hikes and lower discounts. Near-term challenges (of COVID-19 and commodity) notwithstanding, there are drivers in place for sustained volume and margin recovery from 2HFY22E.  We lower our FY22E/FY23E EPS by 11%/3% to factor in some negative impact of the COVID-led lockdown on volumes as well as higher cost. Maintain Buy with a TP of INR8,450/share (27x Mar’23E consolidated EPS).

Higher cost impacts margin; greater other income supports PAT

* Revenue grew to ~INR240.2b (+32% YoY) in 4QFY21, while EBITDA/PAT grew 29%/-10% to INR19.9b/INR11.7b. Revenue/EBITDA/PAT fell 7%/27.6%/25% YoY in FY21.

* Net realizations grew 3% YoY (+3% QoQ) to INR488k (v/s our estimate of INR483.9k) due to price hikes and lower discounts (at INR16.6k/unit v/s INR20.1k in 3QFY21).

* Gross margin declined 140bp QoQ (-360bp YoY) to 26.1% (v/s our expectation of 27%), impacted by RM cost impact of slightly less than 300bp QoQ (+400bp YoY) in 4QFY21, partially offset by price hikes (~0.8% QoQ) and lower discounts (~0.9%).

* EBITDA margin declined by 20bp YoY (-120bp QoQ) to 8.3% (v/s our estimate of 9.7%), impacted by a weaker gross margin and higher other expenses. EBIT margin rose 120bp YoY (-110bp QoQ) to 5.2% (v/s our expectation of 6.5%) due to lower depreciation. Lower other income (-90% YoY/QoQ) resulted in PAT declining by 10% YoY to INR11.7b (v/s our estimate of INR17.5b).

Highlights from the management commentary

* Demand: The current demand environment is holding out with decent inquiries as well as a substantial order book of ~200k units. Lockdown in nine states (which constitute 35% of company sales) will impact demand in 1QFY22.

* Inventory: Current dealer inventory stands at 85-90k units (v/s 32k units as of Mar’20 end v/s normal inventory levels of 135-140k units).

* Retail market share in FY21 stood slightly less than 50% excluding Toyota supplies and over 51% including supplies to Toyota. This compares with wholesale market share of 47.7% excluding Toyota supplies and 49.2% including Toyota supplies.

* The impact of commodities cost inflation was slightly less than 300bp QoQ (+400bp YoY) in 4QFY21. This was diluted by price hikes (~0.8% QoQ) and lower discounts (~0.9%). The management expects further impact from commodity price inflation (steep increase in steel and rhodium) in 1QFY22, but not as high as in 4QFY21.

* Margins: It expects margins to be volatile in 1HFY22. The management expects to dilute the impact of cost inflation by price increases (full benefit of 4QFY21 rise as well as a 1.25% increase in 1QFY22), focus on improving yield, and reduced consumption of precious metals as a large part of operating leverage has already reflected in 2HFY21.

Valuation and view

* While MSIL has seen a strong demand recovery, sharp commodity cost inflation and the recent lockdown have delayed a margin recovery. We expect 2HFY22 recovery for both market share and margin, led by favorable product lifecycle and mix, and price action/cost-cutting.

* The stock trades at 27.8x/21x FY22E/FY23E consolidated EPS. Maintain Buy with a TP of INR8,450/share (27x Mar’23E consolidated EPS).

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