Product life cycle to be improved: margin recovery levers in place. MSIL stock has underperformed (27% v / s Nifty and 23% v / s NSE Auto Index) over the past six months, impacted by market share / loss and margin pressure, despite strong resumption of volumes. We see both of these concerns subside as the product lifecycle improves, and moderating price increases / discounts leads to a recovery in profitability. We expect volume growth of around 30% in FY22E and positive margin development. We are seeing a 27% increase in our TP of Rs 8,700 / share. MSIL is our top automotive choice.
Demand for passenger vehicles was stronger than expected once Covid-related lockdown restrictions were lifted due to the shift in preference towards personal mobility. This resulted in a strong demand, the share of first-time buyers (FTB) increasing to 50% in FY21 YTD (against 45% in FY20) of the interior volumes. Domestic industry volumes have been above FY19 levels (previous high) since September 20. The recovery in PV demand would have been better, without a sharp rise in fuel prices (~ 30% increase over the years. last eight months). This has resulted in increased sales of CNG vehicles.
Significant fuel price inflation has led customers to prefer CNG vehicles due to significantly lower running costs (Rs 1.5 / km v / s Rs 4.5 / km for WagonR CNG v / s gasoline). MSIL has a substantial advantage in CNG as it offers factory-fitted CNG in eight models. MSIL’s CNG vehicle sales are forecast to increase 47% / 59% in FY21E / FY22E. MSIL won the most due to increased demand from first-time buyers, driven by its stronghold in the mini-segment (where its market share increased from ~ 5pp in FY21 YTD to ~ 84) . As we expect FTB’s share to normalize over the next six to nine months, further launches would offset any impact of this situation.
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