MSIL reported a strong beat in Q4FY22, led by stable commodity prices and lower discounts. Favourable product lifecycle will drive volumes, market share, and margin, whereas the JPY depreciation will dilute the impact of commodity prices in H1FY23. We raise our FY23e/FY24e EPS by 7%/3%, factoring in a ramp-up in exports and forex changes. We maintain our Buy rating, with a target price of Rs 10,000/share (~27x Jun’24E consolidated EPS).

Lower discounts and stable commodity cost boost margin
Revenue/Ebitda/PAT grew 11%/22% /58% y-o-y to ~Rs 267.4/24.3/18.4 bn. Revenue/Ebitda grew 25.5%/ 7% y-o-y to Rs 883/57 bn, while adjusted PAT fell 11% to Rs 37.7 bn in FY22. Net realisations grew 12% y-o-y (+1.4% q-o-q) to Rs 547.2k (est. Rs 550.5k) due to price hikes and lower discounts at Rs 11.1k/unit (v/s Rs 15.2k q-o-q and Rs 16.6k/unit in Q4FY21). This, coupled with stable commodity cost, boosted gross margin by 180bp q-o-q (+40bp y-o-y) to 26.5% (est. 24%).

Ebitda margin improved by 240bp q-o-q and 80bp y-o-y to 9.1% (est. 7.1%), led by gross margin improvement and operating leverage. Ebit margin improved by 270bp q-o-q and 150bp y-o-y to 6.7% (est. 4.7%). Higher other income and lower tax boosted PAT to Rs 18.4 bn (est. Rs 12 bn). FCFF was a negative ~Rs 15.3 bn in FY22 (a first since FY09), impacted by higher (Rs 28.1 bn) working capital.

Highlights from management commentary
Good demand, coupled with recent product launches (Baleno, Celerio, and XL6), has further increased its order book to 320k at present (v/s 268k as of Mar’22 v/s 240k as of Dec’21), of which CNG constitutes 40%. Semiconductor shortage resulted in a production loss of 270k (mainly in the domestic market). The management said the situation is unpredictable and may impact slightly in FY23. Cost inflation had no impact or benefit in Q4FY22. It expects an increase in Q1/H1FY23, though it is difficult to quantify, as negotiations on steel prices are ongoing.

Valuation and view
Strong demand and favourable product lifecycle for MSIL augurs well for market share and margin. We expect a recovery in market share and margin in H2FY23, led by an improvement in supplies, favourable product lifecycle, mix, price action/cost-cutting, and operating leverage. The stock trades at 33.7x/21.8x FY23E/FY24E consolidated EPS. We maintain our Buy rating, with a TP of `10,000/share (27x Jun’24E consolidated EPS).