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Rise in input & promotional cost impact margins

Quick Pointers:

* CNG penetration remained stable at ~33% in Q2FY25 in the domestic market

* Optimistic retail growth outlook at 4-5% for FY25

MSIL’s Q2FY25 standalone revenue increased by a mere 0.4% YoY, mainly driven by ASP expansion of 2.6% YoY as volume declined by 1.9% for the quarter. Prices of key commodities increased by and promotional expenses increased, leading to a contraction in its gross margin by 130bps YoY. As a consequence, the EBITDA margin contracted by 100bps YoY to 11.9%. Withdrawal of indexation benefits on long term gains saw a rise in taxes impacting profitability with PAT declining by 17.4% YoY. The sluggishness in the small car segment and slowdown in the industry shall impact wholesale growth for FY25, however, could be partially offset by healthy growth in UVs and export market. Given the grim outlook for FY25, we cut our volume/revenue/EPS estimates by ~-2-8% over FY24-FY27E. We continue to maintain our positive view on a long-term basis due to its 1) Diverse range of product offerings, 2) Revival in rural demand, 3) Beneficiary of state policies towards hybrids and other flex fuel powertrains. 4) Healthy traction in export markets and 5) Introduction of EVs and new launches. Factoring this, we retain our “BUY” rating with a TP of Rs 14,586 (previous Rs 15,045) valuing it at 25x on its Sept’27 earnings. Miss on estimates led by higher input and promotional cost: MSIL’s Q2FY25 revenue came in at Rs 372bn, against PLe: Rs 377.6bn; BBGe; Rs 372.3bn.

Gross profit came in at Rs 104.6bn, against PLe: Rs 112.9bn, while margin came in at 28.1%. Gross margin was impacted by 50bps YoY/80bps rise in commodity prices and promotional expenses respectively. Consequently, EBITDA declined by 7.7% YoY to Rs 44.2bn (PLe: Rs 48.7bn; BBGe: Rs 47.1bn) while margin contracted by 100bps YoY to 11.9%. PAT declined by 17.4% YoY to Rs 30.7bn (PLe: Rs 38.7bn; BBGe Rs 37.1bn).

Realization growth led by mix improvement: The increase in the mix of UVs in the domestic portfolio by 176bps YoY to 39.6% reflecting continued higher preference towards UVs. Meanwhile, CNG penetration remained steady at 33% sequentially. The strong 12.1% YoY growth in exports has further contributed to the overall improvement in the product mix. As a result, blended realization increased by 2.3% YoY/1% QoQ to Rs 686,969/unit. Domestic realization increased by 1.6% YoY to Rs 688,647/unit while export realization increased by 8.3% YoY to Rs 676,952/unit. Optimistic retail growth outlook: The management has noted a 14% YoY growth in festive sales for FY25, projecting sales of ~300,000 units during the festive period. This growth is largely attributed to a revival in rural sales, which have increased in the mid-single digits, while urban sales have experienced a slight decline. Looking ahead, the management anticipates overall retail sales in the domestic market to grow by 4-5% over FY24. Factoring this outlook, we expect its wholesale volume to grow by 2% for FY25.

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