Maruti is well placed to deliver double-digit volume growth over the next few years, led by strong demand for its new launches
Maruti Suzuki reported Ebitda of R2,220 crore (+2.2% y-o-y) in Q1FY17, which was in line with our estimates. The company delivered 15% Ebitda margin despite only 2% y-o-y volume growth, adverse currency movements and increase in commodity prices. We believe Maruti is well-placed to report double-digit volume growth over the next few years led by strong demand for its new launches. Increase in ASPs, steady Ebitda margin and higher other income will drive 16%/26% Ebitda/PAT CAGR over FY2016-19e. We maintain our ADD rating with revised target price of R5,000 (from R4,300); change in TP is led by revision in earnings estimates, roll-over to June 2018 and increase in target multiple to 19X from 18X earlier.
Q1FY17 Ebitda in line with estimates; higher other income leads to net profit outperformance
Maruti has reported Q1FY17 Ebitda of R2,220 crore (+2.2% y-o-y), which was largely in line with our estimates. Revenues were 2% below our estimate largely due to lower ASPs and partly due to lower revenues from services under Ind-AS. The company reported Ebitda margin of 14.8% as against our estimate of 14.5%. Gross margin deteriorated by 180 bps q-o-q (KIE—70 bps q-o-q) due to -50 bps due to provision for higher steel prices (ongoing negotiations with vendors), -60 bps due to adverse currency movements, -130 bps due to one-off vendor discounts /lower commodity costs in Q4FY16 pertaining to prior quarters, +80 bps positive impact due to cost reduction benefits and +20 bps positive impact on lower discounts. Other expenses declined by 11% q-o-q due to lower advertisement and repair & maintenance expenses; on a y-o-y basis, other expenses are still up 16% as compared to 2% y-o-y volume growth. The company reported net profit of R1,490 crore (+23% y-o-y), which was 17% above our estimate due to lower depreciation expenses and higher other income.
Market share gains will continue due to strong response for new models
The company has received bookings of >100,000 units for both Vitara Brezza and Baleno; these models have 6-9-month waiting period. Maruti will likely gain 300 bps market share over the next two years led by new launches and shift in industry demand towards petrol vehicles.
We increase our Ebitda estimates by 6%; maintain ADD with revised TP of R5,000
We have increased our FY2017-19e Ebitda estimates by 6% due to marginal increase in volumes and ASPs and 50-80 bps increase in Ebitda margin estimates due to lower-than-expected increase in commodity prices. We don’t build in further moderation in discount levels in our estimates. Our FY2017-19e net profit estimates have gone up by 10-17% due to higher other income. We maintain our ADD rating on the stock with revised TP of R5,000 (from R4,300), which is based on 19X June 2018 core EPS (without other income) and R860/share for cash & cash equivalents.
Revision in TP is driven by 6% increase in Ebitda estimates, roll-over to June 2018 (from March 2018) and increase in target multiple to 19X from 18X.
Conference call takeaways
Rural volumes for the company were flat y-o-y in Q1FY17 (up 9% yoy in FY2016) while volumes in urban markets grew in single-digit. Maruti’s recent new launches have received strong response from customers. Currently, there is a 6-7-month waiting period on Baleno and 8-9-month waiting period for Vitara Brezza. Diesel variant accounts for 20% of total Baleno sales. The company reiterated its export guidance of 50,000 units for Baleno in FY2017e; Baleno exports stood at 11,400 units in Q1FY17. Billing for entire Baleno exports (even outside Japan) will be in JPY. This would help the company lower its JPY exposure in FY2017e. Despite 27% y-o-y decline in export volumes, export revenues were largely flattish y-o-y at R1,350 crore in Q1FY17 (R1,380 crore in Q1FY16) due to steep increase in realisations led by commencement of exports of premium models such as Baleno.
Gross margin deteriorated by 170 bps q-o-q which was led by 50 bps negative due to provision for higher steel prices (ongoing negotiations with vendors), 60 bps negative due to adverse currency movements, 120 bps negative due to one-off vendor discounts/lower commodity costs in Q4FY16 pertaining to prior quarters, 80 bps positive impact due to cost reduction benefits and 20 bps positive impact on lower discounts.
Going ahead, currency impact will negatively impact Ebitda margin by only 20-40 bps due to lagged impact on indirect RM imports. Indirect RM imports are around 11% of sales; of this, 40% is denominated in JPY, 30% in euro and 30% in dollar. Discount per vehicle declined to R16,800/vehicle in Q1FY17 from R17,577/vehicle in Q4FY16.
This was driven by success of new models where there is no discount currently. Royalty expenses for the quarter accounted for 6.6% of sales (6.3% of sales in Q4FY16). Royalty has been marked to market at JPY: Rupee rate of 0.65; therefore, there will not be any further negative impact at current currency levels. Lower volumes due to fire at Subros plant led to higher overheads in this quarter (40 bps margin impact as per our calculations); with higher volumes, there would be operating leverage benefit in subsequent quarters, in our view.
Effective FY2017, tools & dies will now be depreciated over a period of five years as compared to four years earlier. This led to R83 crore reduction in depreciation expense on a sequential basis. For FY2017e, Maruti is guiding towards capex of R4,500 crore; maintenance capex will be around R1,000 crore, marketing infrastructure related capex of R1,100 crore (construction of warehouses, land procurement, etc.) and a large part will be towards R&D and product development expenses. Tax rate will be around 27% in FY2017e due to tax-shield on interest income from Maruti’s investment in Fixed Maturity Plans (FMP).