Buy rating on Maruti Suzuki; Strong margin performance continues

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November 02, 2015 12:06 AM

Maruti retains focus on market share expansion through new product launches, distribution expansion and new retail formats

Maruti Suzuki’s Q2FY16 results were in line with our expectations. The company continues to focus on market share expansion through new product launches, distribution expansion and new retail formats (premium vehicles). We factor in volume CAGR of 12% over FY15-17e. Ebitda margin of 16.3% for Q2FY16 was 19bps higher than our estimates driven by material cost benefits and favourable currency movements. However, on a q-o-q basis, Ebitda margin remained flat driven by higher advertising and CSR spends. Given the strong performance in H1FY16, we upgrade our Ebitda margin assumption by 30bps for FY16/17 to 16.3/16.8%. This results in our Ebitda and net earnings estimates increasing by 3% for FY16 and FY17 each. Overall, the increase in Ebitda (3%) and roll forward of DCF (discounted cash flow) date (to November 2016) lead to a 5% upgrade to our valuation to R5,000, implying 18.5x October 2017 net earnings. We retain BUY.

Results overview: Maruti Suzuki’s Q2 operating performance was in line with our expectations. Revenues increased by 13% y-o-y and 4% q-o-q. Revenues for the quarter were in line with our expectations. However, the real surprise was on raw material costs which as a percentage of sales declined by 54bps q-o-q/448bps y-o-y and were 97bps lower than our estimates. This led to gross profit and gross margin coming in higher than our expectations by 3% and 97bps. The gross margin outperformance was partly offset by higher-than-expected ‘other expenses’ (which increased 18% y-o-y and were 108bps higher than our expectation as a percentage of sales). This resulted in Ebitda margin coming in at 16.3%, 19bps ahead of our expectation of 16.1%.


Key takeaways from the conference call

Demand/Volumes: The industry continues to witness a gradual recovery in demand. Maruti’s petrol volumes have seen strong growth at 14.5% y-o-y in Q2FY16, in line with the industry growth. On the other hand, diesel vehicles continue to face demand pressure, with industry volumes declining by 2.3% but Maruti has been able to grow its volumes by 8% y-o-y during the quarter. The company continues to record growth in rural areas, with its volumes growing close to 10% y-o-y in H1FY16. It continues to target market share expansion through new launches, distribution network expansion and new formats for premium vehicles (Nexa–currently 80 outlets). The volumes in urban areas witnessed a growth of 4% y-o-y during the same period. Baleno has received a strong response, with the company clocking firm bookings of 2,500 so far and another 10k customer interests.

Costs/Margin: Maruti’s Ebitda per vehicle decreased marginally from R64.4k/vehicle in Q1FY16 to R64.2/vehicle (Ebitda margin remained flat at 16.3%). Whilst material costs saw a 54bps q-o-q decline, ‘other expenses’ saw a 101bps q-o-q increase, leading to stable Ebitda margin. The increase in other expenses was driven by higher CSR spend (by R150m) and marketing spends (R1,460m). The marketing spends was mainly attributable to launches of S-Cross, Nexa outlets and Ciaz Hybrid. The blended discount/vehicle also increased q-o-q from R16k/vehicle to R19.5k/vehicle due to seasonality factors.

We factor in a volume CAGR of 12% for Maruti over FY15-17e

Demand for passenger vehicles (PV) industry in Q2FY16 at 6% y-o-y was similar to the growth in Q1FY16. Maruti continued to outperform the domestic industry growth, with 10% y-o-y growth in Q2FY16 and market share gain of 258bps y-o-y to 47.7%. We expect industry growth in FY16 (8%) and FY17 (12%) to be higher than FY15 (4% y-o-y) on the back of: (i) continuing positive sentiment surrounding lower fuel prices, new launches, (ii) benefits from the Seventh Pay Commission pay-outs and (iii) low base in recent years. We expect Maruti to not only sustain its market leadership but expand its market share in FY16 due to new launches, much wider product portfolio (straddling across various price points and well-balanced petrol:diesel mix), much superior distribution/service network and low maintenance costs.

Upgrade FY16/FY17 Ebitda margin by 30bps in line with H1FY16 margin performance

Maruti’s Ebitda margin for the quarter was better than our expectation (16.3%, 19bps higher than our estimates) driven by material cost benefits and favourable currency movements. Given the strong performance in H1FY16, we are upgrading FY16 Ebitda margin by 30bps to 16.3%. We upgrade our FY17 margin estimate by 30bps to 16.8%, as  we expect higher benefit from operating leverage than our last published estimates.

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