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Above our estimate; strong recovery in market share and margin

Easing semiconductor supplies, stable RM, and new launches to drive a recovery

* MSIL reported a strong recovery in 3QFY22, despite losing 90k units due to the semiconductor shortage. With an improvement in supplies, stability in RM cost, and launch of new products, MSIL is expected to recover both market share and margin.

* We raise our FY22E/FY23E EPS by 21%/6%, factoring in higher realizations and lower depreciation. We maintain our Buy rating, with a TP of INR10,300/share (~27x Mar’24E consolidated EPS).

Lower discounts and cost inflation boost margin

* Revenue was flat YoY but rose 13% QoQ to ~INR232.5b, EBITDA declined by 30% YoY (+82% QoQ) to INR15.6b, and PAT stood at INR10.1b (-48% YoY/+113% QoQ). Revenue grew 33% YoY, while EBITDA/adjusted PAT fell 2%/37% in 9MFY22.

* Net realizations grew 14% YoY (flat QoQ) to INR539.8k (est. INR519.5k) due to price hikes and lower discounts at INR15.2k/unit (v/s INR18.6k/ INR20.2k in 2QFY22/3QFY21).

* Gross margin improved by 50bp QoQ (-280bp YoY) to 24.7% (est. 23.7%) due to lower RM cost inflation, which was more than offset by price hikes (1.9% in Sep’21) and lower discounts (~60bp QoQ).

* EBITDA margin improved by 250bp QoQ (-280bp YoY) to 6.7% (est. 4.4%), led by gross margin improvement and operating leverage. EBIT margin improved by 350bp QoQ (-230bp YoY) to 4% (est. 1%), supported by lower depreciation (-15% QoQ). Lower other income restricted PAT to INR10.1b (est. INR6.2b).

Highlights from the management commentary

* Supply-side improving, but issues still persist: MSIL saw a production loss of 90k units in 3QFY22 due to the semiconductor shortage. While 4Q will be better than 3QFY22, the management doesn’t expect production to fully normalize in the foreseeable future.

* Order book currently stands ~264k units (v/s ~240k units at the end of Dec’21), of which ~117k is for CNG vehicles. The company has not seen any drop in bookings and is currently clocking 6k bookings/day.

* MSIL is targeting a market share of 50% in coming years by plugging gaps in its product portfolio. Its retail market share stood at 44% in 9MFY22, but was ~49% in Dec’21 led by supply side improvements.

* RM cost pressures are starting to ease as the rise in steel prices was diluted by a decline in precious metals. If commodity prices stabilize, the management expects a further reduction in RM cost in 4QFY22.

* It will be addressing weakness in the mid-SUV segment by launching products. It expects to strengthen its portfolio in the coming years.

Valuation and view

* Strong demand, softening commodity inflation, and improving semiconductor shortage will support a recovery in margin. We expect a recovery in 2HCY22 in both market share and margin, led by an improvement in supplies, favorable product lifecycle, and mix, as well as price action/cost-cutting and operating leverage.

* The stock trades at 34.6x/22.6x FY23E/FY24E consolidated EPS. We maintain our Buy rating, with a TP of INR10,300/share (27x Mar’24E consolidated EPS).

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