1. ‘Buy’ rating on Maruti Suzuki: Back in top gear

‘Buy’ rating on Maruti Suzuki: Back in top gear

Surprise discount reductions aid margins.

By: | Updated: May 4, 2015 11:53 AM
Maruti Suzuki India

Maruti Suzuki reported a stellar Q4FY15 with net profit of Rs 12.8 bn (+61% year-on-year), which was 18% above our estimates. (Reuters)

Maruti Suzuki
Rating: Buy

Maruti Suzuki reported a stellar Q4FY15 with net profit of Rs 12.8 bn (+61% year-on-year), which was 18% above our estimates. The positive surprise was due to 320 bps quarter-on-quarter improvement in Ebitda margin led by a sharp reduction in discounts (+145 bps), favourable currency benefit (+100 bps) and lower royalty and advertisement expenses. We maintain our Buy rating on the stock owing to a strong model launch pipeline followed by improvement in the Ebitda (earnings before interest taxes depreciation and amortisation) margin trajectory. We increase our target price to R4,500 (from R4,300).

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Sequential decline in discounts, forex gains boost margin: Maruti Suzuki reported a 61% rise in net profit. Net sales grew by 13% y-o-y while Ebitda grew by 74%. . Ebitda margin improved by 560 bps y-o-y and 320 bps q-o-q. The key reasons for sequential improvement in Ebitda margin are – (i) sequential decline in discounts to R15,000/vehicle in Q4 vs R20,500 in Q3, which led to 145 bps q-o-q improvement in margin, (ii) favo-urable currency benefit on imported content (+100 bps), (iii) decline in royalty cost to sales (+30 bps), (iv) lower advertising expenses (+50 bps) and (v) one-off excise duty payment in Q3, which did not impact Q4 (+70 bps). We believe the key trigger for the stock would be sustaining Ebitda margin at 16% in FY16, which is dependent on keeping discounts at current levels.

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Concall takeaways

Maruti Suzuki guided a 10% y-o-y volume growth in FY16, which it believes would be higher than industry growth rate.

First-time buyer proportions in overall volumes have gone up to 44% in FY15 versus 37% in FY14.

Rural volumes grew by 23% y-o-y in FY15 and formed 34% of total volumes.

The company is focused on increasing its production capacity to 2m units in the next three years, higher than its rated capacity.

Direct plus indirect imports form 16% of net sales in FY15. Further reduction in import content is difficult until electronics are localised in India.

The company’s diesel car volumes grew by 2.8% y-o-y in FY15 against a 6.8% decline for the industry.

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