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MSIL to acquire Gujarat plant from Suzuki, likely at book value

* 1QFY24 EBIT miss was led by high employee costs due to one-time retention payments and marketing spends on new launches (~80bp impact). Aided by new products, MSIL is expected to outperform underlying industry growth of 6-8% in FY24, resulting in market share gains and margin recovery. This should be further supported by easing supply challenges.

* We increase our FY24E EPS by 3% to factor in better ASPs and higher other income. However, we cut our FY25E EPS by 1%, as benefits of higher ASP and higher other income are more than offset by the SMG acquisition (assuming consideration of INR130b paid in cash). The stock trades at 25.8x/23.5x FY24E/FY25E consolidated EPS. Maintain BUY with a TP of INR11,150/share (premised on 25x Sep’25E consolidated EPS).

One-offs for employee retention, marketing costs dent margin

* 1QFY24 revenue/EBITDA/PAT grew 22%/56%/1.45x YoY to ~INR323.3b/ INR29.8b/INR24.9b.

* Net realizations grew ~15% YoY/4% QoQ to INR649.1k/unit (est. INR623.9k/unit). Volumes were up ~6% YoY/down 3% QoQ. Hence, net sales came in above est. at INR323.3b (+22% YoY/ est. INR310.7k).

* Gross margin expanded 180bp YoY/50bp QoQ to 27.2% (est. 27%), driven by a better mix and stable commodity costs, diluted by higher discounts (+40bp QoQ, +20bp YoY to 2.5% of ASP or INR16.2k/unit).

* Higher staff costs due to one-time retention bonus and retiral benefits (~80bp impact), and expenses related to new model launches dented EBITDA margin at 9.2% (+200bp YoY/-130bp QoQ) vs. est. 10%.

* However, high other income at INR10b (est. INR6.2b) and lower tax at 22.1% (est. 23.3) boosted adj. PAT to INR24.9b (est. INR22.6b).

Gujarat plant to be acquired from the parent, likely at its book value

* MSIL’s board approved the termination of a contract manufacturing agreement with Suzuki Motor Gujarat (SMG) and exercising the option to acquire SMG from Suzuki Motor Corporation.

* The SMG plant would be acquired at net book value based on the agreement, which stood at INR127b as of Mar’23. The deal will result in better production efficiency and agility in decision-making. The deal consideration and its payment mode shall be decided in the subsequent board meeting.

* Based on our calculations, we see an EPS cut of 4-5% and RoCE reduction of 90bp (cash payout)/310bp (equity swap) in FY25.

* We factor in the SMG acquisition in our FY25 estimates assuming a cash consideration of INR130b.

Highlights from the management commentary

* Demand outlook- At present, demand is normal and the momentum should continue, driven by new product launches. The order book at the end of the quarter stood at 355k units (vs. 412k in 4QFY23).

* There was a production loss of 28k units during the quarter due to the semiconductor shortage. Visibility about the supply situation is still not clear, but it seems to be improving. Dealer inventory stands at 125k units, i.e. ~4 weeks.

* Commodity prices have largely stabilized. While there was an uptick in steel prices (~50% of the commodity) in the 1Q, they are now moderating. Precious metals have seen a sharp correction of 18-20%.

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 25.8x/23.5x FY24E/FY25E consolidated EPS. We maintain BUY with a TP of INR11,150/share (premised on 25x Sep’25E consolidated EPS)

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