Maruti Suzuki’s reported net profit of R4 bn (+60% y-o-y) was 21% ahead of our estimates boosted by higher other income in Q2FY17. Ebitda rose by 35% y-o-y which was 6% above our estimates led by 29% y-o-y improvement in revenues and 80 bps y-o-y increase in Ebitda margin. We believe the company can maintain current levels of Ebitda margin due to strong demand for its products. We expect the company to manage moderate cost increases with small price increases and cost-reduction efforts. We maintain Buy rating and raise target price to R6,600 (from R6,500 earlier).
Q2FY17: Exhibits various margin levers to improve Ebitda margin
The company reported an Ebitda of R30.4 bn (+35.3% y-o-y), led by 29% y-o-y increase in revenues and 80 bps y-o-y increase in Ebitda margin. While revenues were 2% below our estimates, the company surprised positively by maintaining gross margin sequentially despite forex and commodity cost headwind. Ebitda margin improved mainly led by operating leverage benefit (+100 bps) and lower staff costs (+100 bps). The company had written back some excessive provisions on staff expenses this quarter, which is not recurring so the Ebitda margin was higher by 50 bps than actual reported margin. Other income was significantly higher than our estimate as the company booked a capital gain of R3 bn this quarter pertaining to its investments. The company has also changed depreciation policy for jigs and dies. Useful life of dies and jigs has been increased from 4 to 5 years resulting in R708m lower depreciation in Q2FY17.
We believe MSIL can maintain 16% Ebitda margin level in H2FY17 despite increase in steel costs and higher logistics costs due to start of the Gujarat plant in Q4FY17. Festive season
retail volumes for the company has started on a strong note and increased by 16% y-o-y until now in October, which implies dealer inventory levels will be quite low post festive season.
Ebitda margins to cross its historical peak levels in next few years
We believe MSIL margin will cross its historic peaks over the next few years as (i) competitive launches are weak, (ii) MSIL captures market share in highly profitable segments (compact SUVs, premium hatchback) and (iii) MSIL expands distribution at a faster pace than competition. We expect MSIL Ebitda margin to inch closer to 17% in FY2018/19.
Marginally tweak estimates
We have increased our earnings estimates by 11% in FY2017 due to higher other income and increase in our Ebitda margin assumptions. We have maintained FY2018/19 earnings per share estimates but expect consensus estimates to increase significantly. We raise our target price to R6,600 (from R6,500 earlier).
We value the company at 20X September 2018e EPS + R995/share cash and cash equivalents.
Conference call highlights
Petrol model volumes for the company increased by 15.6% y-o-y and diesel model volumes increased by 24.2% y-o-y in Q2FY17. Discount per vehicle declined to R16,100 per vehicle in Q2FY17 from R16,800 per vehicle in Q1FY17. Royalty expenses for the quarter were R10.8 bn (6.1% of sales). For FY2017e, Maruti is guiding towards capex of R45 bn; maintenance capex will be around R10 bn, marketing infrastructure-related capex of R11 bn and a large part will be towards R&D and product development expenses.