Volume outlook remains strong; earnings CAGR of 22% estimated over FY18-20; ‘Buy’ retained with TP revised to Rs 11,187.
Q1 EBITDA was a slight miss due to lag effect of commodity price impact coupled with seasonally higher discounts. On the call, the management indicated that demand outlook remains buoyant (across rural and urban) coupled with a strong model pipeline. Some of its key models still have 1-2 month waiting period (though down from 4-6 months earlier, as production has ramped up).
Volume outlook remains strong backed by new models and robust pipeline as well. Rising share of new models also lowers discounts (now 3.2% vs. 5% earlier) and royalty (INR terms + India R&D). Despite capacity constraints, we foresee FY18-20 earnings CAGR of 22%. Our estimates are largely unchanged & our revised TP of Rs 11,187 values the stock at 28x FY20e PE (1+ SD of 5-year average). Reiterate Buy.
Conference call highlights
Volume growth outlook: Management has maintained double-digit volume growth outlook for FY19, which would remain above industry growth (possibly 8-9%). Rural demand continues to remain buoyant, witnessing 15% growth driven by consecutive normal monsoons and MSP increase.
Discounts at 3%: Blended discount for the quarter was Rs 15,161/vehicle
(vs. Rs 16,600 y-o-y and Rs 13,880 q-o-q). The y-o-y drop is due to continued ramp-up in new models, while the q-o-q increase is more seasonal.
Raw material cost pressure continues: Management indicated raw material pressure remains (especially steel and aluminium), while some commodities are softening. Currency movement (both USD-INR and USD-JPY) impacted Q1 by 30 bps and remains a risk. Maruti will optimise costs in-house before passing on the impact to customers by way of price hike.
Gujarat plant and overall capacity: The new plant in Gujarat contributed 66k units during Q1. Management expects the new plant to contribute full capacity of 250k in FY19 and will commission new plant early CY19.
Gujarat facility is Ebit neutral: We highlight that as the new Gujarat facility (owned by Suzuki) ramps up production (currently 13% of volumes), depreciation charge on the plant will become cost for Maruti (as per agreement) and thus Maruti’s Ebitda will look dilutive. However, the agreement is Ebit neutral.
Royalty payment to go down: Royalty rate for the quarter stood at 5.5%. With royalty on all new models from Jan 2017 to be in INR (vs. Yen earlier), we expect royalty rates to taper off to <5% over next few years.
Waiting period: Baleno and Dzire petrol variants have waiting period of 2-4 weeks, while diesel variants are available off the shelf. Swift (petrol variant) and Brezza still have significant waiting period of 3-4 months.