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Q4 margins below expectations on the back of high RM costs

MSIL’s Q4 FY21 revenues grew by 32% yoy and 2.4% qoq to ₹240 bn on the back of strong volumes and a lower base which was impacted by the pandemic. Realizations grew by 4% both yoy and qoq. EBITDA margins reduced to 8.3%, a fall of 70 bps yoy on firming up of input costs, as steel and precious metal prices are spiraling upwards.

RM to sales ratio stood at 77.3% v/s 76.5% qoq and 74.4% yoy. Discounting in the quarter was sequentially down to ₹16.6K v/s20.2K. Despite price hikes, low discounting and product mix favoring SUVs, margins were more than offset by the input costs escalation. On the back of a steep fall in other income (90% yoy) led by lower fair value gains on invested surplus, and subdued operating performance, PAT moved down by 10% yoy and 40% qoq to ₹11.66 bn.

Demand outlook remains positive over long term

Demand in Q4 improved by 28% yoy to 4.92 lakh units as lockdown restrictions were relaxed and Q4 being seasonally a bright quarter. MSIL highlighted that Q4 demand remained strong driven by robust rural sentiment, higher first time and additional car buyers, CNG variants and personal mobility theme. As discounting remaining low qoq, and channel inventory standing at just 22k units, waiting period increased to more than 1.5 months. This is a clear indication of demand remaining robust even after festive season. While MSIL’s share of rural has reached 41% from 38.5% qoq, urban markets have also started witnessing pick-up in sales during Q4.

Currently, demand for hatchback is higher primarily driven by moderation in income levels, telescoping of demand and focus on functionality aspect by customers. There is a jump in enquiries for preowned cars, however, replacement segment has slowed down (from 26% Q3 FY21 to 19.5% in Q4 FY21) implying that first time buyers for MSIL have increased (47% from 43-44% yoy) leading to robust demand for the hatchback portfolio. Even the demand for MSIL’s SUVs such as Ertiga and Brezza have picked up in Q3 leading to MSIL taking #1 spot in the entry level SUV segment, while it needs to improve in the mid and premium SUVs. Excluding mid and premium SUVs, the market share of MSIL will be 64%, while including these it is just above 48%. In the mini truck segment as well, Super Carry LCV of MSIL has achieved #1 spot (~29.5 k sales in FY21).

Car buying is a discretionary purchase and affordability and sentiments will play key role in continuity of demand. Therefore the current second wave of the pandemic may impact the sales in Q1 FY22. Management mentioned that as of now bookings are not having a major impact, but retail sales will be soon impacted due to stringent lockdown in 9 major states in the country (35% of sales). Therefore the current demand will be subdued, however as and when the pandemic fades off, demand will resume like it did last year. We remain sanguine on the demand outlook considering a decent model pipeline from MSIL.

Outlook and Valuation

MSIL reported soft margin numbers in Q4, as the company witnessed an unprecedented hike in input costs. However, the demand is quite strong driven by robust bounce back in volumes post lockdown, increased demand for hatchbacks, rise in first time buyers and personal mobility theme. This demand may observe a temporary break given the second wave of pandemic surging across the country, but may strongly bounce back once it fades off. Going forward, we believe that newer launches, higher capacity utilization rates and price hikes should trigger a superior volume and margin profile in FY22 and ensuing year. With ability to combat competition and wide presence in the rural markets which is growing at a higher pace than urban markets, (which is also showing a strong pick up) MSIL is poised for a healthy growth here-on. However, we are worried about the impact of the current pandemic on the short term demand as well as supply. In line with weak Q4 margins and concerns over demand in early FY22, we prune down our estimates and target to ₹7,485, while maintaining our BUY rating on the stock.

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