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MSIL’s Q2 results were strong and had a confluence of various positive factors— volume, mix, commodities, Fx, discounts. Company’s margins expanded by ~288bps QoQ (adjusted for the Q1 one-off) to ~12.9% (Emkay: 11.3%), aided by improved gross margins.

However, consistent decline in order-book, normalized inventory levels along with continued weakness in the small-car segment reinforce our view that growth for MSIL is set to sharply moderate over FY24E-26E vs. FY22-24E, with the best of the SUV product cycle now behind (refer to our recent report: Festive outlook strong but underlying trends weakening). We expect EPS CAGR to taper to ~8% over FY24E-26E vs. ~56% YoY in FY24. We raise FY24E EPS by 4.5% to reflect the Q2 beat; FY25-26 estimates are largely unchanged. We maintain our BUY rating on MSIL as well as our TP of Rs11,700/share (25x core FY26E EPS + ~Rs1,700 cash/share).

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Strong beat on margins led by gross-margin expansion

MSIL’s Q2 revenues were higher by ~24% YoY (14.6% QoQ) to Rs370.6bn (in-line), amid volume growth of 6.7% YoY (+10.8% QoQ) to 552K units and ASP growth of 3% QoQ to Rs672K/unit (in-line). Reported EBITDA grew ~73% YoY to Rs47.8bn (~18%/~14% above Consensus/our estimates), with margins expanding by ~288bps QoQ (adjusted for the ~80bps one-off impact in Q1) to 12.9% (Emkay: 11.3%); the beat on margins was on account of higher-than-expected gross margins (up by ~220bps QoQ); Company attributed majority of the sequential margin improvement to softer commodities (particularly precious metals) and cost efforts. Reported PAT grew ~80% YoY to Rs37.1bn – a ~23% beat owing to better-than-expected margins and higherthan-expected other income

Earnings call KTAs

1) MSIL expects Industry to log ~5% volume growth this year, with Company growth pegged at ~10%; Industry festive growth so far is ~20% YoY, which would moderate to ~18% by end-Festive; MSIL is likely to perform in line with Industry’s festive performance. 2) The small-car segment still struggles due to ongoing affordability issues (visible in the 10% fall in share of first-time buyers, at Industry level); MSIL is hopeful about improvement once income levels start normalizing. 3) Pending order-book stands at ~288K/~250K as of end-Q2/today respectively (vs. 355K/412K in Q1FY24/Q4FY23). 4) Inventory levels are slightly higher than 1- month (~4 weeks, as of Q1). 5) MSIL reiterated its recent guidance on longer-term growth plans (refer to presentation; aims to expand the product portfolio to 28 models by 2030 vs. 17 now; would comprise of launches across the Nexa and Arena channels; exports expected to grow to ~750-800Kpa (3x of current levels) by FY31. 6) Q2 margin performance featured the best of all factors (mix, operating leverage, commodities, Fx); while precious metals and Fx may stay favorable in coming quarters, MSIL is cautious about steel (half the commodity basket) inflation. 7) FY24 capex guidance at over Rs80bn (ex SMG capex). 8) Discounts/unit at Rs17.7K vs. Rs16.2K in Q1.

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