Our analysis suggests that the Gujarat plant of Suzuki will be margin accretive to MSIL from FY2019 due to VAT incentives received by Suzuki for the plant for sales in Gujarat and richer product mix as the company prioritises Baleno production at this plant. We maintain our Add rating and target price of R6,400 on the stock as we believe upside is limited from current levels due to expensive valuations.
Once the Gujarat plant crosses 60% capacity utilization its profitability will exceed that of the existing plant. We expect the second phase of Gujarat capacity of 250,000 units to come online by Q3FY19 and thus expect MSIL to reach a volume of 2.2 million units by FY2020 (higher than the company’s stated target of 2 mn units).
Another factor which can lead to expansion in margin for the company is the improvement in profitability of Baleno and Vitara Brezza as tooling capex of vendors is fully amortised.
EBIT margin for both these models can improve by 500 bps in the next two years which can add ~100 bps to the company’s EBIT margin. We thus forecast 100 bps expansion in EBIT margin from Q3FY17 levels led by above factors over the next two years.
We have cut our EBITDA 3-6% factoring in higher than estimated raw material cost pressures and slightly higher cost at the Gujarat plant. We have rolled over to March 2019 from December 2018 earlier.