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In 2QFY23, MSIL’s EBITDA margin came in at 9.3% (+510bps YoY,+210bps QoQ), broadly in-line with street estimates. Sequential improvement in margin was led to lower RM costs (favorable currency movement, correction in steel prices, etc.) partially offset by higher royalty and new product launch related expenses. MSIL lost c.35k units due to chip shortage during 2QFY23. Management highlighted that the situation on chip supply remains volatile. Order inflow continues at strong pace with over 410k+ units of pending bookings. Grand Vitara and new Brezza have been received well with bookings at c.75k/55k units with over 35% bookings for strong hybrid/premium variants. Product launch pipeline remains strong and we expect three more SUV launches to bolster MSIL’s presence in the B-segment. Benefit of recent softening commodity costs and favorable currency movement will continue in 3QFY23. We estimate revenue / EPS CAGR of 18% / 57% over FY22-25E. After two consecutive years of volume decline, we believe that MSIL is at the cusp of a new upcycle. New model launches in the coming months, healthy order book and commodity/currency tailwinds will further support strong performance going ahead. We ascribe 25x PE to arrive at Sept’23 fair value of INR 11,000. Maintain BUY.

2QFY23 - margin broadly in-line: MSIL reported net revenue of 299bn (+46% YoY, +13%QoQ), 2% above JMFe. 2Q wholesales stood at c.517k units (+36 YoY, +11%QoQ). Sequential rise in volume was led by improvement in chip supplies. Realization increased c.8.5%YoY and 2%QoQ. Discount during the quarter stood at INR 13.8k vs. INR 12.8k in 1QFY23. EBITDAM came in at 9.3% (+510bps YoY, +200bps QoQ), broadly in-line with street. Sequentially, RM and employee cost was lower by c.150bps and c.60bps, respectively. Adj. PAT for the quarter was INR 20.6bn (+4.3x YoY, +2x QoQ), 4% lower than JMFe

Demand environment: Pending order book as at Sept’22 stands at c.410k+ units of which c.130k units are pre-bookings for Brezza and Grand Vitara. 2QFY23 witnessed lost sales of c.35k units owing to shortage of electronic components. The Company indicated that though chip supplies have improved, situation continues to remain uncertain. MSIL expects strong festive sales to drive lower inventory by the end of 3Q. Overall, the company remains upbeat on sales momentum going ahead backed by new SUV launch pipeline.

Update on new product launches: As per the company, Grand Vitara has been received well with order book reaching c.75k units including c.35% of bookings for the Strong Hybrid variants. Basis the customer adoption, MSIL is evaluating introduction of Strong Hybrid in other models. Recently launched Brezza continues to do well with high share of bookings for top two variants

Margin outlook: EBITDA margin improved by 210bps QoQ led by lower RM costs, operating leverage partially offset by unfavorable model mix, higher royalty, marketing and energy costs. Management indicated that benefit of lower RM costs will continue in 3Q. Marketing costs will continue to remain high owing to new product launches. Overall, the company expects higher volumes to drive margins going ahead. Financial Summary 

Other highlights: 1) During 2Q, CNG segment contributed over 20% to total sales despite rise in CNG prices. 2) Production at SMG stood at c.31% of total volumes. 3) Royalty increased from 3.5% in FY22 to 3.8% in 2QFY23. 4) Current production capacity stands at c.2.25mn units. First phase of 250k units capacity at new Haryana plant will be come on-stream in 1QCY25. The company is planning an additional make-shift capacity of c.100k units at Manesar plant to meet the demand in the medium-term.

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