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Accelerated Cost Realization Squeeze Margins

MSIL’s Q1FY27 operating revenue was in-line with estimates, while margins faced pressure primarily due to commodity inflation and accelerated cost absorption from change in settlement cycles to support its suppliers. MSIL reiterated FY27 volume guidance as it remains supply constrained, although ramp-up in recently added capacities will be key to monitor as retail demand remains healthy. Geopolitical risks, higher RM prices and currency movements are expected to keep near-term margins under pressure, further aggravated by EV ramp-up, partially offset by cost efficiencies, price increases and operating leverage. We estimate volume/realization CAGR of 9.6%/5.7% over FY26-28E, translating into revenue/EBITDA/APAT CAGR of 15.9%/14.4%/14.3%. We reiterate ‘Accumulate’ rating with TP of INR15,000 (previous INR15,600), valuing it at P/E of 25x FY28E EPS.

Standalone op revenue grew by 35.9% YoY (flat QoQ) to INR524.6bn:

Realization was INR768.3k (+5.1% YoY/ -0.9% QoQ). Gross margin was 23.1% (-605bps YoY/-335bps QoQ), missing BBGe/PLe by -210bps/-220bps due to adverse commodity prices and unfavorable foreign exchange movement offsetting cost reduction and favorable operating leverage. EBITDA margin at 8.2% (-375bps YoY/-350bps QoQ) missed BBGe/PLe by -180bps/-130bps. EBITDA was INR43.1bn (-6.7% YoY/-30.0% QoQ). Reported PAT was INR33.5bn (-10.8% YoY/-6.6% QoQ) missed BBGe/PLe by -2.5%/- 2.0%. Other income was much higher than estimates (growing even on a high base).

EBIT margin declined -370bps QoQ to 5.1%:

RM cost spikes impacted margins by ~300bps, of which 110bps was attributable to a temporary shift in commodity settlement cycles. Additionally, higher gas costs (20bps), lower fixed cost incidence due to inventory depletion (30bps), adverse forex impact (30bps), higher employee cost from Q1 seasonality (40bps), and higher depreciation following new Kharkhoda plant commissioning (20bps) weighed on EBIT margin which were partially offset by lower other expenses (30bps) and higher operating income (30bps). It undertook calibrated price increase of 50bps in June’26 (benefits of which will flow in Q2FY27) and will be taking another one in Aug’26.

Temporary margin compression from new settlement cycle:

The settlement cycles with suppliers for some key commodities such as aluminum, plastic, and rubber were shifted from a quarterly lag to a monthly lag mechanism to support suppliers and ensure uninterrupted production amid sharp commodity price volatility. This resulted in a temporary impact on profitability due to faster pass-through of prices. The company has been proactively engaging with suppliers to identify vulnerabilities and maintain supply chain stability, with no material disruptions reported thus far. This resulted in a significant portion of the cost impact to be already front-loaded although margins are expected to gradually recover as commodity prices normalize and there is a phased return to the traditional quarterly settlement mechanism over the coming quarters.

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