Maruti reported a good Q4 with a realisation increase of 5% q-o-q and an Ebitda (earnings before interest taxes depreciation and amortisation) margin of 15.7%. However, this was not enough for us to significantly raise our estimates for FY17 in light of the impending margin headwinds. The full impact of yen appreciation on earnings is yet to come in the coming quarters and an adverse impact from the commodity price increases will be a headwind as well. We remain positive on the volume growth outlook for Maruti in the coming quarters led by new launches and improving customer perception, but the market recovery remains mediocre and limits upside to our estimates, in our view. We expect FY17 volume growth of 11.7% y-o-y. Production capacity constraint remains an additional risk to our estimates.
Upside to growth and margins appears limited: As discussed in our report The “Micro” vs “Macro” tussle published on April 6, 2016, we see the macro demand recovery being slow, impacted by weak private sector hiring, low wage inflation, and deteriorated rural wealth effect. However, with recent new launches we believe MSIL has earned itself an “upgrade” brand status, which in our view should underscore the long-term strong positioning of Maruti in India.
Q4 details: MSIL reported net revenues of Rs 149.3 bn, up 12.5% y-o-y. Realisation increase of 5% q-o-q surprised us positively. Improved product mix, reduction in discounts and price increase taken in the quarter collectively contributed to the top-line growth and helped improve margins as well. Average discounts per car saw a steep reduction to Rs 18,000 from Rs 22,000. Margins also benefited from inventory accretion and benign commodity costs. Overall Ebitda margin of 15.7% was better than our expectation as well. Increases in staff costs, royalty and marketing expenses were the key margin headwinds and collectively impacted margins by 160bps in the quarter. Despite the strong operational performance, EPS of Rs 37.5, down 11.7% y-o-y, was lower on account of a higher tax rate and low other income.
Valuation: We maintain our volume estimates for FY17/18 and increase our top-line estimates by 3% and 2%, due to higher realisation. We revise our tax assumption to 25% (from 24%) for FY17/18e in line with the management guidance. Consequently, we increase our FY17/18e earnings by only 1%. We maintain a Hold rating on the stock with a DCF-based fair value TP of R4,150 (from R4,100).
MSIL reported net revenues of R149.3 bn, up 12.5% y-o-y. Realisation increase of 5% q-o-q surprised us positively. Improved product mix, reduction in discounts and price increase taken in the quarter collectively contributed to the top-line growth and helped improve margins as well. Average discounts per car saw a steep reduction to R18,000 from R22,000. Margins also benefited from inventory accretion and benign commodity costs. Overall Ebitda margin of 15.7% was better than our expectation. Increases in staff costs, royalty and marketing expenses were the key margin headwinds and collectively impacted margins by 160bps in the quarter.
We expect FY17 volume growth of 11.7% y-o-y on account of successful new launches, improving customer perception and further increase in reach. The company expects to expand reach further by the end of FY17 to 160k villages and 200 Nexa showrooms. Production capacity constraint remains a risk to our estimates.
Margins have little scope for upside: A large part of the margin impact from the yen and commodity price increases should come in Q2/Q3FY17 as per management. Each 1% appreciation in the yen implies a 15-20bps hit to Ebitda margin and a nearly 1% hit to earnings as the company imports 22% of revenues in yen. The company has guided for a tax rate of 25%-26% in FY17 under IFRS accounting. We revise our tax assumption from 24% to 25% for FY17/18e.
From ‘first-time buyer’s choice’ to ‘an upgrade brand’
Maruti has not only credibly maintained its market share over the past few years now, but has earned an “upgrade” brand status. One key concern with Maruti has always been the perception that it is primarily a “first time buyer’s choice”, but less of an aspirational brand. But with new launches such as Ciaz, Baleno, SX-CROSS and Vitara Brezza, it has started to attract the attention of upgrade buyers as well.
Macro improvement, however, remains slow
Compared with the heightened expectations and in comparison to the upcycle in FY10/11, any macro improvement and consequently industry growth has been mediocre in the past two years. While expectations have started to come off now, it may still be difficult to see much upside to the current industry growth expectations of 8-10%. There are multiple reasons for this:
w Private sector hiring pick-up may not be as sharp as in the past cycle. Key large white-collar sectors like IT and banking have seen a structural slow-down in hiring, affecting both hiring and wage inflation. A significant increase in graduate supply in India isn’t helping wages as well. Capital-intensive sectors are already struggling.
w Further, rural India health is nowhere close to that in FY10/11. We believe a normal monsoon in 2016 may provide some relief but is likely to largely benefit bottomed-out rural exposed companies. The rural surge was not just led by MSP prices in FY10/11/12, but also loose lending practices by banks and NBFCs and an extraordinary “wealth effect” owing to rising real-estate prices and the liquidation of real-estate assets, which may not improve rapidly. Consequently, totally discretionary items such as cars may see limited benefit.
w And finally, the 7th pay commission will have a much more moderate impact on demand than the 6th pay commission owing to staggered payments.