1. Buy rating on Maruti Suzuki; In top gear

Buy rating on Maruti Suzuki; In top gear

Current high margins are sustainable on improving product mix and declining commodity prices

By: | Updated: August 3, 2015 10:56 AM
Maruti Suzuki India

For Maruti in its vendor agreements, raw material cost and Fx (forex) are pass through. (Reuters)

Q1FY16 Ebitda margin hits a record 16.7%, up 40 bps q-o-q: This is despite 60 basis points of one-off impairment charge in other expenses. Sales grew 18% year-on-year driven by 14% y-o-y growth in volumes. PAT at Rs 11.93 bn was below our estimate of Rs 12.7 bn due to lower other income. We raise our Ebitda margin for FY16/17e from 15.5%/16.2% to 16.5%. We believe the current high margins are sustainable driven by improving product mix and declining commodity prices. We raise our FY16/17e EPS by 8%/5% respectively. We are 12% ahead of consensus for FY16e EPS.

Softening commodity prices supportive for margins: We believe softening commodity prices remains a significant support for Maruti and an upside risk to our estimates. For Maruti in its vendor agreements, raw material cost and Fx (forex) are pass through. Hence, recent softening in commodity price will gradually accrue to Maruti. The sharp decline in steel, crude (plastics) and precious metals should result in significant improvement in gross margins for Maruti. Steel is the largest commodity exposure (10% of sales). Steel price has dropped 14% as at the end of June’15 vs average of Q4FY15. Assuming a three-months lag, we believe recent steel price decline is yet to be reflected.

Gr9

Remains top pick; product launch plans to drive growth: Recently, Suzuki has announced plans to launch five new models in the A-segment and three models each in B/C/SUV segments over the next five years. Most of the new launches (Ciaz, S-Cross, YRA and iV4) are positioned above Maruti’s existing product range, which should imply strong ASP (average selling price) growth and better gross margins over the next two years. Maruti is also pushing more into the premium segment with launch of the S-Cross and Nexa range of premium dealerships. More premium models are expected to be launched in 18-24 months. Success of these premium launches is likely to lead to further re-rating of the stock.

Valuation: Raise PT to Rs 4,950 (from Rs 4,500):We value Maruti at 10x 1-year fwd EV/Ebitda (enterprise value/earnings before interest taxes depreciation and amortisation) (Mean+1 S.D-standard deviation.) given we remain in early stages of a demand recovery. We raise our PT driven by our earnings upgrade and as we roll forward our price target by four months. We expect 30% EPS CAGR (compound annual growth rate in earnings per share) over the FY15-18. We remain 12%/10% ahead of FY16e/ 17e consensus EPS and expect 30% EPS CAGR over FY15-18 period.

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