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CNG models gaining traction after price caps

* MSIL’s 4QFY23 miss was led by a weak product mix and FX impact. Driven by new products, MSIL is expected to outperform underlying industry growth of 5-7% in FY24, resulting in market share gains and margin recovery. Chip shortages and commodity inflation could pose risks to our estimates.

* We marginally lower our FY24E/FY25E EPS by 1%/3% to factor in high capex and resultant lower treasury income. The stock trades at 24.3x/21.1x FY24E/FY25E consolidated EPS. Maintain BUY with a TP of INR10,100/share (premised on 25x Mar’25E consolidated EPS).

Unfavorable mix and FX hurt performance

* 4QFY23 revenue/EBITDA/PAT grew 20%/38%/43% YoY to ~INR320.5b/ INR33.5b/INR26.2b. FY23 revenue/EBITDA/adj. PAT grew 33%/93%/ 113% YoY.

* Volumes grew 5% YoY (+10% QoQ), while net realization was flat QoQ (+14% YoY) at INR622,400 (v/s est. INR644,100) due to a weak mix.

* Gross margins declined by 60bp QoQ (up 20bp YoY) to 26.7% (v/s est. 27.6%) due to an adverse mix and  FX.

* However, operating leverage drove EBITDA margin expansion of 70bp QoQ (+140bp YoY) to 10.5% (v/s est. 10.9%).

* EBITDA grew 38% YoY to INR33.5b (v/s est. INR36.1b). Adj. PAT grew 43% YoY to INR26.2b (v/s est. INR28.4b).

* The company has declared a dividend of INR90/sh (v/s INR60/sh

Highlights from the management commentary

* As per SIAM estimates, the PV industry is expected to grow 5-7% in FY24. But MSIL expects to grow much ahead of the industry thanks to new product launches. MSIL expects small car volumes to remain flat in FY24.

* Chip shortages resulted in a volume loss of 170,000 units in FY23. MSIL expects chip shortages to ease in the next three quarters.

* The current order backlog stands at 412,000 units (v/s 366,000 units in Dec’22), of which CNG is 33%.

* CNG sales have seen traction after the recent change in CNG prices. CNG penetration was at ~20% in FY23 for MSIL.

* Commodity costs were stable in 4Q, but MSIL expects to see inflation in steel prices (50% of commodity basket) going forward. Though precious metals have corrected.

Valuation and view

* Stable growth in domestic PVs and a favorable product lifecycle augur well for MSIL. We expect market share gains and margin recovery in FY24, led by an improvement in supplies, a favorable product lifecycle, mix and operating leverage.

* The stock trades at 24.3x/21.1x FY24E/FY25E consolidated EPS. We maintain BUY with a TP of INR10,100/share (premised on 25x Mar’25E consolidated EPS).

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