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Valuation and View – CNG to help drive industry outperformance

MSIL’s 2QFY25 results were weak as it reported ~7%/6% EBITDA miss to our/street estimates led by weak gross margins at 28.1% (est 29.5%). Lower than expected EBITDA at Rs44.2b (est Rs47.8b) was led by; 1) ~70bp drag due to higher A&P, 2) ~50bp RM impact, 3) increased discounts (on wholesales) at ~Rs29.3k/unit (vs ~Rs21.7k/unit in 1QFY25) at ~4.3% of ASP. However, this was offset by 30-40bp positive operating leverage. This led EBITDA/vehicle came off-peak at ~Rs81.6k/unit (-6% YoY/QoQ). Going ahead, increase in share of CNG, peak average discounts led by optimal inventory, stable RM and favorable mix are the positive margins triggers as volumes are likely to be muted led by industry growth dynamics. MSIL would likely outperform the industry led by strong CNG portfolio with ~33% contribution vs 27% in 4QFY24.

We believe going forward, despite volume growth is expected to moderate, MSIL margins to likely remain to expand to ~12.6% (vs ~12% in 2QFY25). This will be led by, i) favorable mix, ii) moderate to stable RM inflation and iii) peak average discounts. Consequently, we build in revenue/EBITDA/PAT CAGR of 7%/9.9%/10.2% over FY24-27E. Led by sharp valuations contraction and risk reward turning favorable, we upgrade the stock to BUY (from ADD) with revised roll forwarded TP of Rs13,485 (vs Rs14,587) valuing the stock at 24x Mar-27 EPS (v/s Sep-26). We cut FY25/FY26E/27E EPS by ~2-6% to factor in for weak gross margins and higher discounts, partly offset by higher other income led by +fx.

Result Highlights – Higher A&P, RM dent margins

* Revenues grew ~0.4% YoY (+4.7% QoQ) at ~Rs372b (in-line) led by 2.3% YoY (+0.9% QoQ) growth in ASPs at Rs686.9k/unit (in-line) while volumes de-grew 1.9% YoY (+3.8% QoQ) at ~541.6k units. Average discounts (on wholesales) highest at ~Rs29.3k/unit (vs ~Rs21.7k/unit in 1QFY25) at ~4.3% of ASP.

* Gross margins contracted 130bp YoY (-170bp QoQ) at 28.1 (est 29.5%), impacted by higher A&P spend (~70bp QOQ) and RM inflation (~50bp QoQ).

* Consequently, EBITDA de-grew ~7.7% YoY (-1.9% QoQ) at ~Rs44.2b (est ~Rs47.8b) with margins contracted 100bp YoY (-80bp QoQ) at 11.9% (est 12.8%, cons 12.7%). This was led by higher A&P and RM inflation impact of ~120bp QoQ, increased average discounts offset by 30-40bp positive operating leverage. Royalty rate for 2QFY25 at 3.4% (vs 3.5% in 1QFY25 and 3.5% in 4QFY25).

* Higher other income at ~Rs14.7b (est ~Rs9.5b, +51.3% QoQ) offset by higher tax at Rs20.3b due to withdrawal of the indexation benefit, led Adj. PAT came in lower at ~Rs30.7b (est Rs38.4b, -17.4% YoY, -15.9% QoQ).

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