Maruti Suzuki Rating: sell: Q2FY22 results were below expectations

By: |
November 02, 2021 12:15 AM

Regaining lost mkt share may be difficult; EPS for FY22e down 26%; TP revised to `6,150 from `5,850; ‘Sell’ maintained

Attendees try out the Maruti Suzuki India Ltd. Vitara Brezza compact sports-utility vehicle (SUV) on display at the Auto Expo 2016 in Noida, Uttar Pradesh, India, on Thursday, Feb. 4, 2016. The motor show opened to the public today and runs through Feb. 9. Photographer: Prashanth Vishwanathan/Bloomberg

MSIL reported Q2FY22 Ebitda of Rs 8.55 bn (+4% q-o-q), 20% below our expectations due to higher-than-expected other expenses. Chip shortage is currently holding back recovery in the domestic PV industry; however, we expect a strong recovery in volumes from FY2023e. MSIL has been losing market share due to rising competition in the SUV segment. With further increase in competitive intensity, regaining lost market share will be challenging for MSIL. Retain Sell rating. Q2FY22 Ebitda 20% below estimates due to higher-than-expected other expenses

MSIL’s reported Ebitda of Rs 8.55 bn (-56% y-o-y, +4% q-o-q) was 20% below our estimates. Revenue increased by 10% y-o-y led by (i) 13% y-o-y increase in ASPs and (ii) 4% y-o-y decline in volumes. Increase in ASPs was led by (i) price hikes taken over the past few quarters and (ii) higher mix of export segment as well as higher mix of Ertiga and Brezza.

Gross profit per vehicle improved by 3% q-o-q despite rise in input costs (steel and precious metals) led by (i) price hikes taken during the quarter and (ii) material cost reduction. Staff costs declined by 10% q-o-q as the last quarter had cost related to vaccination and hospitalisation on account of Covid-19.

Other expenses were 17% above our estimates (+21% q-o-q) due to higher marketing and advertisement spends as well as higher freight cost. As a result, Ebitda margin came in at 4.2%, 130 bps below our estimate of 5.5%. The company reported PAT of `4.8 bn (-65% y-o-y, +8% q-o-q), 39% below our estimates due to miss at Ebitda level and lower other income.

Market share loss due to lack of product launches in SUV segment remains an area of concern. MSIL has been losing market share in the compact SUV segment due to (i) an increase in competitive intensity and (ii) lack of product launches over the past two years. MSIL will be aggressively launching products from the next quarter onwards; however, with aggressive product launches from competitors as well, we believe it will be challenging for MSIL to completely regain its lost market share.

Cut FY2023-24e EPS estimates by 4-6%; maintain SELL rating We have cut our FY2023-24e EPS estimates by 4-6% on 40-50 bps lower Ebitda margin assumptions. We have cut our FY2022e EPS estimates by 26% on lower volume and margin assumptions. We expect the company to clock in sales of 420k units in Q3FY22 and 495k units in Q4FY22.

We expect FY2023e volumes to increase by 19% on a y-o-y basis; however, margin recovery will fall below expectations as product mix will remain weak. We maintain Sell rating and revise our FV to `6,150 (from `5,850 earlier). We value the core earnings at 25X December 2023e EPS (from 25X September 2023e EPS earlier).

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