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Betting on UV segment to recoup its lost market share

Robust revenue growth: MSIL reported its Q2 revenue at Rs 29,931 Cr registering a growth of 45.7% YoY, due to exceptional demand scenario during the festive season, better capacity utilization and premium priced product mix. The company’s sales volume inched up by 36.3% YoY to 517,395 units wherein domestic sales (which account for 88%) reported a growth of 41.9% whereas exports saw a steady growth of 6.4% YoY. Amongst segments in the domestic market, Mini + compact (continued to maintain its commanding share at 58.1% of total sales) saw a growth of 56.7% YoY followed by Vans and UVs at 32.1% and 10.3% YoY respectively.

Improving realizations and margins: MSIL’s average realization came in at Rs 5,78,490/unit up by 6.9% YoY due to premiumization and launch of higher priced models. The company posted its EBITDA at Rs 2,769 Cr up by 223.9% YOY and EBITDA margin came in at 9.3% an improvement of 509 bps YoY. The improvement in margin was due to the low base of last year, improving supply of semi-conductor chips, cost reduction efforts taken by management, benefits of soft commodity prices in Q1FY23, better capacity utilization resulting in higher volumes. We believe price hikes taken in Q1FY23, launch of premium models would further improve operating efficiency and result in better realization.

Promising outlook: Going forward, the company plans to add 1 lakh additional capacity per annum in its Manesar plant by FY24 to meet increasing demand. Furthermore, for the next 2-3 years, we expect promising performance driven by new product launches under pipeline especially under UV segment backed by its strong presence in CNG and Hybrid variants and its efforts towards premiumization.

Key concall highlights: 1) Discounts were at Rs 13,840/Unit vs. Rs 18,500/Unit last year. 2) With new launches in the pipeline we expect MSIL ad-expense to rise further. 3) Chip shortage continues to impact the production by ~35,000 units for the quarter. 4) Current order book of 4,12,000 units of which ~70,000 units for Grand Vitara. 5) Royalty payments stood at 3.8% vs 3.5% in Q1FY23.

Valuations: We expect demand for PV to remain robust for coming years given that MSIL is the leader in the segment, also low penetration level and rising aspiration of customers will drive the growth. Besides, MSIL will benefit from new launches in the UV segment, superior hybrid vehicles and premiumization efforts. Hence, we remain positive on the company's growth perspective and have estimated its Revenue/ EBITDA/PAT to grow at a CAGR of 18.8%/41.0%/45.4% over FY22-25E. We maintain Buy rating with a revised target price of Rs 11,501.

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