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Decent set of numbers, multiple benefits to be seen in coming quarters

Q2 FY23 numbers of MSIL were decent on all fronts. Top-line grew by 12.9% qoq and 45% yoy as the base quarter was impacted severely by the chip shortage. Therefore yoy comparison does not make sense. Volumes grew by 11% qoq, while realisations increased by 2.1% qoq. Margins in the quarter jumped by 210 bps qoq to 9.3% on easing of input costs, higher capacity utilization rate, favourable foreign exchange variation and higher cost reduction efforts. Steel, aluminium, noble metals etc witnessed fall in their prices, while oil, power etc saw a surge. There was also a slight rise in discounts. Supply chain problem remained an issue during this quarter as well, however it eased somewhat as compared to the preceding quarter. There was a noticeable rise in other income due to significantly low base of Q1, which assisted bottomline growth, which was reported at ?20.6 bn, a growth of 103% qoq.

Order book swells, chip shortage issue to resolve soon, demand outlook remains robust on new launches

Vehicle demand in Q2 FY23 grew by 11% qoq. MSIL highlighted that Q2 FY23 demand was strongly driven by new launches (Brezza and Grand Vittara variants), new Alto launch and the CNG variants of Ertiga, Celerio and Wagon R. Even the demand for strong hybrid variants of the new launches lie the new Grand Vitarra was ~35% of the total demand. With monsoon panning out well, we believe rural markets (~44% of volumes for MSIL) to perform even better. Reviving economy as well should fuel demand for 4 wheelers. The only issue which has been persisting since a year now is the supply side issue which we believe to settle down in the short term. Due to this issue, the order book has jumped and is currently more than 4,10,000 units, while the bookings of the All New Brezza and Grand Vitarra stood collectively at 1,30,000 units. Even the CNG order book out of 4,10,000 units is about 1,30,000 units. We believe the chip shortage issue to get resolved well by Q4 FY23, therefore fulfilment of this order book may surely lead to a surge in H2 FY23 and FY 24 volumes.

Capacity expansion to accommodate increasing demand

MSIL has laid out a plan for capacity expansion in the coming quarters anticipating robust demand and quick catering to the burgeoning order book. In line with this, they have already started expansion at their Manesar (Haryana) plant. The total capacity collectively at Haryana and Gujarat now stands at 22.5 lakh units, which is to be further increased by 1 lakh units at Haryana plant immediately and 2.5 lakh units at their upcoming plant in Karnataka(first phase in H1 CY25).

Margin tailwinds to get starker by Q3

MSIL reported a good margin performance at 9.3% in Q2 FY23 as commodity costs were down a (76.7% of sales v/s 78.2% qoq) offsetting the impact of higher discounts (?13,840 v/s ?12,750 qoq). Positive impact of commodity prices softening should be felt more in the ensuing quarters due to lag effect. Also the indigenousness was high during the quarter with direct import dependence now reduced to just 4%. Higher utilization rates with higher volumes should further impact margins positively as chip shortage issue gets resolved. Continuation of better cost management s seen in Q2 should further aid margins. Higher contribution of SUVs (17% market share currently) though new launches should enable better product mix as well. We expect 8.6%/10.3% margins in FY23E/24E respectively.

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