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Subdued quarter; demand outlook remains intact

* Q2FY22 EBITDA declined by 56% yoy to Rs8.5bn (est.: Rs11.4bn), 25% below estimates due to a lag in the pass-through of commodity inflation and higher marketing spends. Revenue grew by 10% yoy to Rs205bn, above our estimate of Rs192bn, due to the increased share of spare-part revenues.

* The order book is strong at over 200,000 units. Led by a sales upcycle and new products, we expect a 19% CAGR in volumes over FY22-24E. In the next 2-3 years, major launches could include new Brezza, Jimny UV, above 4m UV and new MPV, among others.

* We reduce FY22E/23E/24E EPS by 9%/3%/3% to Rs142.9/Rs293.7/Rs395 due to cost pressures and lower other income. We build in a strong revenue/earnings CAGR of 23%/66% over FY22-24E. Consequently, ROIC (post tax) should increase from 19% in FY22E to 67% in FY24E.

* We remain positive on MSIL due to expectations of a cyclical upturn, which generally lasts for at least three years. Reaffirm Buy with a revised TP of Rs8,750, based on 27x core P/E on Dec’23E EPS (earlier 28x Sep’23E EPS), backed by a DCF model and net cash of Rs1,445/share.

Subdued quarter: Revenue grew 10% yoy to Rs205.4bn, above our estimate of Rs191.6bn, due to higher spare-part sales. Volume fell by 3% yoy to 379,541 units. An estimated 116,000 vehicles could not be produced owing to chip shortages. However, chip supplies are improving gradually and production levels are expected to improve ahead on a sequential basis. EBITDA margin contracted by 620bps yoy to 4.2%, below our estimate of 6.0%, due to a lag in the pass-through of commodity inflation and higher marketing spends. Retail volumes were almost 30% higher than wholesales, resulting in increased discounts/marketing spends during the quarter. Consequently, adjusted PAT declined 65% yoy to Rs4.8bn, below our estimate of Rs6.9bn, owing to lower operating profit.

Retain Buy: MSIL should retain the pole position as it plans to launch new products to fill white-spaces and network expansion. In the next 2-3 years, new models could include new Brezza, Jimny UV, Above 4m UV and new MPV. The network has increased to over 3,000 touch points, and the expansion continues. Retain Buy with a TP of Rs8,750, based on 27x core P/E on Dec’23E EPS (earlier 28x Sep’23E EPS), backed by a DCF model and net cash of Rs1,445/share. Key downside risks include a delay in economic recovery, failure of new products, increase in competitive intensity and adverse movement in currency/commodity prices.

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