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Margins expansion levers shaping up well    

Valuation and View  

MSIL’s 2QFY23 operating results were healthy as EBITDA came in higher by ~11% to our estimates at Rs27.7b (est Rs24.9b) with ~200bp QoQ expansion in margins at 9.3% (est 8.4%). This was led by 1) RM inflation cooling off, 2) positive operating leverage, 3) favorable product mix (as proportion of higher priced variants were higher) and 4) + fx (Rs1.58b positive impact on P&L). However, higherroyalty spends at 3.8% (v/s 3.6% in 1Q) and A&P spends (Rs1.5b impact), partially restricted margins expansion. Going forward excluding impact of +fx, we expect margins to expand QoQ led by 1) ease in RM costs, 2) cost controls and 3) op. leverage. Strong response to recently launched products has led to overall bookings at ~4.1L units (v/s ~3.5L units in 1QFY23) of which ~130k bookings is for recently launched products with Grand Vitara bookings at ~75k (>35% of which is for strong hybrid). With this and more launches expected in SUV space, we believe MSIL’s market share to further increase.

We believe going forward i) strong demand, improving supplies, ii) moderating commodity inflation and iii) +fx would support ~300bp EBITDA margins recovery to 11.3% in FY24E (v/s 8.3% in 1HFY23 and 15.4% in FY18). We introduce FY25 estimates and build in healthy revenue/EBITDA/PAT CAGR of 19%/45%/52.5% over FY22?25E. We maintain ADD rating on the stock with revised TP of Rs10,788 (v/s Rs9,763) valuing the stock at 27x June?24 EPS (v/s 10yr LPA of 29x). We upgrade FY23E/24E EPS by ~6.5% each to factor in for higher margins and other income.

Result Highlights? 

Healthy operating performance

* Revenue grew 13% QoQ at Rs299.3b (in?line) as volume grew 10.6% QoQ at 517.4k units while ASP grew by 2% QoQ at record Rs578.5k/unit. This was led by favorable mix as proportion of higher priced variants were higher in 2Q, full impact of price hikes taken in 1Q. Discounts were at are at Rs13,840/unit v/s Rs12,748/unit in 1QFY23 and Rs18,500/unit in 2Q.

* Gross margins came in better at 26.9% (est 26%), +150bp QoQ. This coupled with positive operating leverage and cost control initiatives resulted in EBITDA growth of ~45% QoQ at Rs27.7b (est Rs24.9b) with EBITDA margins at 9.3% (est 8.4%, +210bp QoQ).

* Better op performance was further supported by higher other income at Rs6.1b (est Rs1.2b) and lower tax at 21.6% (v/s 23.4% in 1QFY22, est 24%). This resulted in Adj PAT beat at Rs20.6b (+1x QoQ, est at Rs14.6b).

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