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New tailwinds emerging

During the last fortnight, MSIL introduced the new Brezza and shared information on unveiling another SUV in the mid-size category on 20th July. While the new product introductions are moving ahead in-line with our key thesis (Our report: Tank-Up; UV segment set for a makeover), during the last one month there has also been favourable movement on the forex exposure (majorly JPY & EUR). The company has direct exposure (10% of sales) towards imports of components, steel, etc. and indirect exposure (16% of sales) towards import of components by vendors. USD is a natural hedge between the exports (c.15-20% of sales) and direct/indirect exposure from INR/USD leg on imports. Basis the recent currency movement, we estimate c.70bps/c.10bps favourable impact on margins on weakening of JPY/EUR against USD. We believe, this will help partly mitigate the negative impact of steep rise in commodity costs in 1QFY23. Further, recent softening of commodity costs owing to weak global demand is likely to start reflecting favourably on margins from 2QFY23 onwards. Basis the new/announced product launches and the tailwind from favourable movement in currency and commodity, we revise our margin estimate by c.100bps for FY23e/FY24e and EPS estimate by 21%/14% for FY23e/FY24e. We reiterate our BUY stance on MSIL. We ascribe 25x PE to arrive at Mar’23 fair value of INR 10,300.

* Favourable movement in exchange rate to support margins: In the last one quarter, JPY and EUR have weakened by c.12% / c.5% against USD (refer exhibit 1). MSIL has total c.26% direct and indirect foreign currency exposure (primarily in JPY and EUR) towards sourcing of components. The USD/INR leg for both these payables is a natural hedge against the USD exports (c.15-20% of sales). We estimate c.70bps/c.10bps favourable impact on margins on weakening of JPY/EUR against USD (Refer exhibit 2 & 3).

* Softening in commodity costs to aid the margins going ahead: Average domestic HRC prices are higher by c.4% QoQ in 1QFY23. Unfavourable impact owing to steep rise in commodity costs in the latter part of 4QFY22 (and early 1QFY23) will likely reflect in the RM cost of auto companies for 1QFY23. Our channel checks suggest that benefit of recent correction in commodity prices led by HRC (CMP HRC in domestic market is -9% QoQ) will start reflecting on margins from 2QFY23 as against our expectation of gradual recovery in margins during 2HFY23.

* New product cycle and strong order backlog: New Brezza has been received well with over 50k+ bookings garnered within a week of launch. MSIL has also announced launch of mid-size SUV (co-developed by Suzuki-Toyota) on 20th July. Strong order book (320k+ at the end of Apr’22) and the new product cycle are likely to drive c.3-4% market share gains for MSIL going ahead. We reiterate our BUY stance on MSIL. We ascribe 25x PE to arrive at Mar’23 fair value of INR 10,300

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