Maruti reported a 4.2% Ebit margin in Q4, missing the consensus estimate of 5.5%. Ex one-offs (BSIV write-off of 70bps) the Ebit margin was only a tad lower. The quarter was inconsequential for the stock or business outlook, in our view. Quite understandably, management refrained from offering a concrete outlook – either near term or long term.
Positively, they did mention a further fall in diesel ratio for the industry (to 15-20% in Q4) which will benefit Maruti. The company also alluded to likely down-trading by buyers. Treasury income (which was 48% of PBT in FY20) is likely to come down in FY21 due to lower yields, though management was confident of the quality of investment portfolio. Capex is expected to be cut to Rs 27 bn (from Rs 32 bn in FY20).
In our view, four drivers will determine the pushpull for industry growth in FY21e: Benefit from shift to personal mobility: As discussed in an earlier report, in our view, the potential upside from a shift to personal cars is not more than 3-4% of car industry sales.
Demand hit from WFH (working from home): For large white-collar sectors such as IT and banks, we believe 20-25% of the workforce may continue to WFH even post COVID-19. This amounts to a c2% headwind to car demand in our view.
Pent-up demand: Indian PV industry volumes in FY21 are likely to be similar to FY11, in a country with low penetration. While savings have increased for potential buyers with stable income, spending patterns may change. And people may tend to save more than spend in post-COVID era.
Job creation and wage deflation remain the most important drivers: Based on our interaction with 75 companies, we estimate wage deflation at 5-30% across companies. This is certainly negative for discretionary spending.
We revise our estimates for FY21/22 to factor in the lockdown – impacting both revenues and margins. Lower interest rates and MTM gains should impact other income as well. This leads to FY21/22e EPS estimate cuts of 30%/11%, respectively. We now forecast a 13% decline in volumes in FY21e.