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Q2 EBITDA in-line; demand outlook remains intact

Q2FY23 EBITDA grew 224% YoY (3-yr CAGR at 20%) to Rs27.7bn, in line with our estimates. Revenue increased by 46% (3-yr CAGR at 21%) to Rs299.3bn, coming in 3% above our estimates, on better realizations. The pending order book is large, at ~412,000 units, which includes ~130,000 units for new models Brezza and Grand Vitara. The upcoming product pipeline is strong, with expected launches of Jimny off-roader, a below-4m micro SUV and a mid-size SUV. We expect FY23E revenue growth to be robust at 39%, and the uptrend is likely to endure with FY23-25E revenue CAGR at 14%. Driven by better scale and pricing, we expect EBITDA margin to expand, from 6.5% in FY22 to 9.5% in FY23E and to 11.5% in FY25E. We retain BUY with TP of Rs11,000/share (unchanged), based on 27x core P/E on Dec-24E EPS (Sep-24E EPS earlier) and cash of Rs1,251/share (0.80x book). Key downside risks include lower-than-expected volumes, failure of new products, higher competitive intensity and adverse movement in commodity/currency rates

EBITDA in-line: Revenue grew by 46% YoY (3-yr CAGR at 21%) to Rs299.3bn (Emkay est.: Rs290.9bn), slightly above our estimates. Volume grew by 36% to 517,395 units. Negative impact of supply constraints stood at 35,000 units. Realization grew by 7% to Rs551,677/unit, above our estimates, on better mix within models. EBITDA grew by 224% (3-yr CAGR at 20%) to Rs27.7bn, in line with our estimates. EBITDA margin expanded by 510bps to 9.3%. Other income grew 17% YoY to Rs6.1bn. Overall, adjusted PAT grew by 334% (3-yr CAGR at 15%) to Rs20.6bn (Emkay est.: Rs19.8bn), beating estimates owing to higher other income. What we liked: 1) Strong revenue and margin performance. 2) Production ramp-up continues, as supply-chain issues get resolved gradually. 3) Robust growth of >40% in the recently concluded festive season. 4) Strong order-book at 412,000 units. What we did not like: 1) Q3 commodity costs are expected to be broadly stable QoQ, in comparison to our earlier expectation of further reduction. Benefits of lower steel and precious metal prices are being offset by increase in price of crude derivatives

Earnings Call KTAs: 1) Management expects new products (recent and future models) to help company attain a dominant position in UVs; 2) As of Sep-22, MSIL’s order-book stands at 412,000 units. Of this, 130,000 units entail recently-launched models and 130,000-140,000 units are for CNG vehicles; 3) Grand Vitara’s order book stands at 75,000 units, and 35% contribution is from strong Hybrid. Company is evaluating launch of Hybrids in other existing models; 4) Q2 EBITDA margin expanded QoQ on higher scale, commodity easing benefits and forex gains (Rs1.6bn); 5) Q2 advertising/marketing spends increased QoQ by Rs1.5bn; 6) Direct/indirect imports stand at 4%/11% of revenues; 7) Capacity of 100,000 units will be added at the Manesar plant by Apr-24 and 250,000 units at the Kharkhoda plant (phase 1) by Mar-25; 8) FY23 capex is expected to be Rs70bn.

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