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In 3QFY23, MSIL’s EBITDA margin came in at 9.8% (+300bps YoY, +50bps QoQ), 50bps above JMFe. Sequential improvement in margin was led by lower RM cost, favourable currency and better product mix. MSIL lost c.46k units due to chip shortage (and fewer working days due to annual maintenance shutdown) during 3QFY23. Management highlighted that the situation on chip supply remains volatile. Order inflow continues to remain healthy with over 363k+ units of pending bookings led by recent launches. With the launch of Jimny and Fronx, MSIL intends to strengthen its presence in the B-segment and aim for leadership position in SUVs. Benefit of lower commodity cost will continue during 4Q. We estimate revenue / EPS CAGR of 20% / 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, healthy order book and commodity/operating leverage tailwinds will further support strong performance going ahead. We ascribe 25x PE to arrive at Mar’24 fair value of INR 12,000. Maintain BUY.

* 3QFY23 - margin beat estimates:

MSIL reported net revenue of INR 290bn (+25% YoY, - 2%QoQ), 5% above JMFe. 3Q wholesales stood at c.466k units (+8% YoY, -10%QoQ). Sequential decline in volume was due to supply constraints and planned maintenance shutdown in Dec’22. Realization increased c.16%YoY and 8%QoQ owing to better mix. Discount during the quarter stood at INR 18.2k vs. INR 13.8k in 2QFY23. EBITDAM came in at 9.8% (+300bps YoY, +50bps QoQ), 50bps above JMFe. RM cost was lower by c.260bps YoY and c.40bps QoQ. Adj. PAT for the quarter was INR 23.5bn (+2.3x YoY, +14% QoQ), 24%/ 27% above than JMFe/ street.

* Demand environment:

Pending order book as at Dec’22 stands at c.363k+ units of which c.119k units are for recently launched Grand Vitara and new Brezza. 3QFY23 witnessed lost sales of c.46k units owing to shortage of electronic components. The Company indicated that though chip supplies have improved, situation continues to remain uncertain. Dealer inventory was c.5 days at the end of Dec’22. Overall, the company remains upbeat on sales momentum going ahead backed by healthy demand for new SUV launches. Management expects MSIL to grow ahead of the industry growth during FY24.

* Update on new product launches: The company launched two new SUVs (Fronx and Jimny) and showcased EV concept ‘eVX’ at the Auto Expo’23. Both these products are open for bookings and deliveries for the same are expected to begin from 1QFY24. Flex fuel car and its first EV model will be launched in CY25. Share of bookings for GV (strong hybrid) variant stand at c.25%. With back-to-back new SUV launches, the company expects to regain leadership position in SUV segment.

* Margin outlook:

EBITDA margin improved by 50bps QoQ led by lower RM costs, favourable currency movement and better product mix partially offset by higher marketing and personnel costs. Management indicated that benefit of lower RM costs will continue in 4Q. Marketing costs will continue to remain high owing to new product launches. Overall, the company expects higher volume led positive operating leverage to drive margins going ahead.

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