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Volumes to jump post supply issues get resolved

Q1 FY23 numbers of MSIL were expectedly disappointing on the back of weak margin performance. Top-line grew by 10.3% yoy and declined by 0.9% qoq as volumes decreased by 4% qoq and increased 32% yoy, while realisations excelled by 3.5% qoq and 13.75% yoy. Margins in the quarter jumped by 260 bps yoy and fell by 190 bps qoq to 7.2% on firming of input costs in Q1. Steel, synthetic rubber, noble metals etc witnessed rise in their prices. There was also a slight rise in discounts. Supply chain problem remained an issue during this quarter as well. There was a noticeable fall in other income which led to further decline in bottom-line on low base at 44.5% qoq to ?10.13 bn.

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

Vehicular demand in Q1 FY23 grew by 32% yoy mainly on exports which were highest ever at ~69K, while domestic demand grew by 29.3% yoy which indicates demand is still good in the PV segment. Exports zoomed due to robust demand from Africa, Latin America and Asia. Also the chip shortage did not impact exports since export models require lesser number of chips. MSIL highlighted that Q1 FY23 demand was strongly driven by new launches (Brezza and Grand Vittara variants), higher first time car buyers and CNG variants. Similarly, sales of mild Hybrid vehicles also grew at a good pace in the year (40-45% of the new Grand Vitarra). Our interactions with dealers across country voices that demand for PVs is on a high with increasing footfalls, enquiries and demand for MSIL’s Alto, Wagon R, Ertiga CNG, Baleno, Swift and the new variants of Brezza aand Grand Vitarra. With monsoon panning out well, we believe rural markets (43.6% 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 3,50,000 units on the retail side, while the bookings of the All New Brezza and Grand Vitarra are 70K and 20K respectively. We believe the chip shortage issue to get resolved well by Q3 FY23, therefore fulfilment of this order book may surely lead to a surge in H2 FY23 and FY24 volumes.

Resumption of new product launches to drive growth ahead

After a gap of two years, management has given a robust outlook on new product launches, with a mix of complete product upgrades and new model launches. Main focus shall be on SUVs (40% of the total PV industry) where MSIL has a weak presence. Non SUV market share of MSIL is about 67%, while including it is just above 43%. The company has already launched the above mentioned two variants in the SUV segment, but there are many more to come in this segment. With new launches, we expect a good upliftment of volumes, market share and a margin recovery led by high margin SUVs.

Margin tailwinds to get starker by Q2 MSIL hit a low margin performance at 7.2% in Q1

FY23 as commodity costs went northwards (78.2% of sales v/s 77.1% qoq) coupled with higher discounts (?12,750 v/s ?11,130 qoq). The company has been taking price hikes on its various models in cognizance with the demand pick up. Also after regular intervals MSIL has been taking price hikes to mitigate input cost headwinds in Q1 FY23. Input costs have however started softening by the end of Q1 FY23 which may positively impact margins in Q2 FY23 with a lag of one quarter. With sharp rise in demand, company will keep on taking price hikes which will augur well for the margins. Currency in the form of Yen depreciation and weakening rupee should drive the high margins in exports which are growing at a faster rate (contributing 15% now to the total volumes).

Outlook and Valuation

MSIL reported a weak margin performance in the quarter on higher input costs and discounts. The demand is going quite strong driven by personal mobility theme, first time buyers, new variant launches and CNG variants. Going forward, with supply issues getting resolved sooner or later, we believe that the strong order book, newer launches, digitization of sales, expanding dealer network, higher capacity utilization rates, softening of commodities, favourable currency movement and price hikes should trigger a superior volume and margin profile in the ensuing years. An aggressive EV + Hybrid plan of the management led by ?104 bn capex at Gujarat and new capacity outlay of 250K vehicles in FY25 entails a big bang volume growth. With ability to combat competition coming from EV shift and opening up of rural markets which were severely impacted by Covid Wave #2, company is poised for a healthy growth here-on. With multiple positive drivers in place, we remain sanguine on the stock with a raised target of ?9,739.

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