Maruti’s Q1 performance was weak (volume -18%, Ebitda -39% y-o-y) but largely in line with expectations. In fact, Ebitda margin of ~10% over last 3 quarters has so far held up better than bottom of 5-8% in past periods of weakness. Near-term is challenging with continued weak demand & higher than usual inventory of 30+days. However, Maruti faces lower BS-6 risks & PV down-cycle looks more advanced with 4 quarters of negative growth already. Maintain Buy.
Weak Q1 but largely in line
Maruti’s reported revenue, Ebitda and net profit were 3-4% ahead of our estimate; however adjusting for impact of lease accounting norms, Ebitda was 3% lower & Ebitda margin 9.7% vs. estimate of 10.3% even with support from higher engineering services fees (Rs 1.1 bn vs. Rs 500 m in Q4) in other operating income. Management indicated benefit to gross margin from lower commodity prices, favourable forex and cost reduction initiatives was offset to some extent by adverse mix and arithmetic impact of higher prices resulting from safety norms & BS-6 adoption. Blended discount per vehicle at Rs 16.9k (vs. Rs 15.2k in Q1FY19) remained largely in check.
Retails remain weak
Retails declined 17% y-o-y, similar to wholesales and have remained weak in July as well with weak footfalls & enquiries. Dealer inventory is over 30 days (vs. 25-28 days indicated at end of Q4), higher than usual for the time of the year.
BS-6, diesel, EV plans
Maruti has already transitioned variants of many of its bestselling models to BS-6 with majority of models expected to shift by end of CY19. It clarified that it is still evaluating BS-6 variant of its 1.5l diesel engine though this is unlikely to be ready by 1st April, 2020. However smaller engines will shift entirely to petrol, CNG & hybrid given sharp increase in cost of diesel post BS-6 & RDE. We note that its decision to completely vacate diesel for smaller vehicles is a risk particularly to its market share in Brezza (currently 100% 1.25l diesel engine) and fleet sales. It plans to launch an EV next year.
Call takeaways
(i) Rural sales (39% of total) also declined 17% y-o-y; (ii) Softer commodity prices, cost reduction initiatives should remain incremental tailwinds to margins in Q2; (iii) 45% of model value has shifted to the INR denominated royalty under the new formula so far while the rest are expected to transition over next 3 years.
Maintain Buy
Despite near-term challenges in the form of cyclical industry slowdown and a weak launch cycle in FY20e, we maintain Buy on Maruti given more advanced PV down-cycle (already 4 negative y-o-y quarters vs. maximum of 5 historically), lower BS-6 risks and a strong franchise.