MSIL’s 3QFY20 results are a reflection of the efforts to revive demand through discounts during the festive season and ahead of year change/BS VI transition. We believe operating performance has bottomed out and recovery is expected from Q1FY21. Our FY20/FY21 EPS estimates remain unchanged and we would buy into any weakness post such weak results. Maintain ‘buy’.

MSIL’s 3QFY20 revenues/Ebitda/PAT grew 5%/9%/5% y-o-y to ~Rs 20,700 crore/Rs 2,100 crore/Rs 1,560 crore, respectively. 9MFY20 revenue/Ebitda/PAT declined 11%/32%/22%, respectively. Domestic PV market share recovered 130bp y-o-y (+240bp q-o-q) to 52%. Net realisation rose 3% y-o-y (-6% q-o-q) to ~Rs 4.73 lakh (v/s est. ~Rs 4.99 lakh). Sequential decline was due to higher discounts and adverse mix. Discounts inched up to ~Rs 33,000/unit (v/s ~Rs 24,000 y-o-y v/s Rs 25,800 q-o-q).

Gross margin declined ~150bp q-o-q due to higher sourcing from Gujarat (accounting impact), higher discounts (~190bp q-o-q), lower production (v/s wholesales; ~100bp q-o-q impact), and ~60bp benefit of lower cost. Ebit margins improved 10bp y-o-y (+200bp q-o-q) to 6% (v/s estimate ~6.2%). Ebit grew ~7% y-o-y (+83% q-o-q) to ~Rs 1,240 crore (v/s est. ~`1,360 crore).

Demand environment is improving, which can be gauged by the rise in inquiries. While rural demand is now better than urban, outlook is also promising based on encouraging estimates for Rabi crop. SIAM has forecasted PV industry growth at 3-5% for FY21. Our estimates factor in recovery from Q1FY21 and volume growth of 8.5% for FY21.

MSIL does not expect material pre-buying in Q4FY20 as it plans to stop diesel car production beginning February. Currently, it has <10 days inventory for diesel. Post BS VI, it expects a further decline in industry share of diesel to 15-20% (from ~29% in Q3FY20). Even in mid-sized SUVs like Hector, Creta and Venue, share of petrol is picking up. For MSIL, we expect the loss in diesel to be made up by petrol and CNG/hybrids. In January, key models have seen Rs 5,000-6,000 reduction in discounts and price increase of Rs 5000-6,000. This implies 200-250bp q-o-q recovery in gross margins.