We believe MSIL volumes will continue to grow over the long term led by further increase in penetration of PVs aided by improvement in income levels of consumers.
We maintain ‘sell’ rating on MSIL as we believe valuations are expensive at this juncture. The stock is currently trading at 23X FY22E core EPS. Our reverse DCF valuation exercise suggests the stock factors in 7% CAGR in volumes over FY20-50E. We believe, MSIL can continue to grow over the next 30 years owing to low penetration of passenger vehicles in India. However, we assume long- term volume CAGR for the industry will be 6-7%, so risk-reward at CMP remains fair at this juncture. However, the near term will remain weak for the PV industry. Revise fair value to Rs 4,900 (from Rs 5,800 earlier).
We expect volume growth for the PV segment to remain muted on a y-o-y basis in FY21E led by weak economic growth due to the coronavirus pandemic leading to negative impact on businesses (~50% of MSIL’s buyers belong to the business community) and decline in diesel segment volumes due to 6-8% price increase owing to the BS-VI transition. As a result, we expect MSIL volumes to remain flattish yoy in FY21E led by low single-digit growth in the entry-level segment offset by double-digit decline in export and CV segments. Around 70% of the cars sold by MSIL are financed by banks/NBFCs, which will get impacted as banks tighten credit to those segments of the economy that are more vulnerable to an economic slowdown. We expect MSIL’s total volumes to grow by 15-16% y-o-y in FY22E led by pick-up in economic activity, pent-up demand converting into purchases and strong rural demand.
At current market price, our reverse DCF analysis implies 7% volume CAGR for MSIL over FY2020-50E. We note that domestic PV segment volumes have grown at a CAGR of 8% over FY09-19 and a CAGR of 6% over FY14-19. We believe MSIL can continue to grow at 6% CAGR going forward led by lower PV penetration in India (21 PVs per 1,000 people), MSIL’s strong foothold in rural areas (where penetration is even lower) and continued market dominance in the entry-level car segment. As the situation continues to evolve, it is difficult to estimate the impact of the pandemic on consumer demand in the near term.
As it stands, we believe valuations are a tad expensive at this juncture. We believe MSIL volumes will continue to grow over the long term led by further increase in penetration of PVs aided by improvement in income levels of consumers. We have cut our FY21-22 EPS estimates by 11-15% led by 6-10% cut in volume estimates and 110-120 bps cut in Ebitda margin assumptions. We expect MSIL’s Ebitda margin to remain around 10.6% in FY21E due to a weaker product mix (higher mix of entry-level cars and lower mix of SUV segment) due to low visibility of product launches in the SUV segment and increase in competitive intensity in the compact SUV segment led by aggressive product launches by Kia Motors (Seltos), Hyundai Motors (Venue) and MG Motors (Hector). We maintain our ‘sell’ rating and revise fair value to Rs 4,900. We value the company at 22X March 2022E core EPS (from 23X December 2021E core EPS earlier) + Rs 1,690 of cash and cash equivalents.