Maruti Suzuki Rating – ‘Buy’: Higher costs cast a shadow on the quarter

MSIL’s Q3FY19 Ebitda at Rs19.3bn was significantly below our (-25%) and consensus (-27%) estimate. Ebitda margins at 9.8% (Nom 13%, Consensus 13.5%) was impacted by higher commodity (100bp), discounts (100 bp), adverse forex (50 bp), inventory adjustment (30 bp), one-time in staff (20 bp) and operating de-leverage. Management mentioned that weaker than expected sales resulted in high discounts to clear off inventory and led to higher fixed costs. Discounts have helped clear off inventory to only 15 days at the end of Dec-18 compared to normal levels of 4-5 weeks.

According to management, industry demand remains slow but improving macro (lower fuel price, rural support schemes by government and improving liquidity) should drive recovery.For MSIL, we expect volumes should recover to 5% y-o-y in Q419F (flat in Q3) led by low inventory levels, strong bookings for new Ertiga (55k) and Wagon R (14k). We maintain 10/11% volume growth in FY20-21F supported by industry recovery and new model cycle. We note that apart from the slow growth, there are no major structural factors to pull down Ebit margins. We expect Ebitda margins to rebound to 13.7% by FY21F (Ebit margins at 10.5%) helped by lower commodity costs (down 70bp q-o-q in Dec-18), price hike of 70bp, lower discounts (100-150bp) and operating leverage. Overall, we lower our FY19-20F volume estimates by 2-4%, Ebitda margins by 70-110 bp over FY19-21F. Thus, our EPS is lower by 6-14% during the period.

Valuation: TP based on 22x FY21F consolidated EPS

We lower our TP to Rs 7,956 (Rs8,783 earlier) on a cut to our FY21F EPS estimate, as we roll forward our valuation of 22x P/E (middle of estimated trading band of 20-25x) to Mar-20 from Oct-19 earlier. The stock trades at ~21x FY20F EPS, which remains attractive given expectation of ~17% EPS CAGR FY18-21F and FCF yield of 5% (FY20).

PV industry likely to grow at 5/10% y-o-y in FY19/20F

PV industry growth remained soft in Q3FY19 at -1% y-o-y, albeit better than -4% y-o-y in Q2FY19. Our industry interactions and also Federation of Automobile Dealers Association (FADA) commentary indicates companies have been able to bring down inventory to normal levels of 35 days by Dec-end compared to 45 days earlier. This was largely due to higher discounts to clear off inventory. Macro environment is improving (lower fuel prices, improving liquidity in the system) and we expect a better Q4FY19F.

In line with past trends, MSIL continued to outperform industry with flat y-o-y volumes compared to industry at -1% y-o-y in Q3 (industry ex-MSIL at -2%). Thus, it was able to maintain market share at 51% in Q3, which is down ~100 bp q-o-q. However, management indicated that MSIL inventory level of 2 weeks as on Dec-end, is much lower than industry average. Also, it has launched new Wagon R in Jan-19. Hence, we expect the company to grow 5% y-o-y in Q4FY19F. We maintain our view that MSIL will continue to outperform the industry due to limited competition and healthy new launch pipeline. Hence, we maintain our 9/11% volume growth for MSIL in FY20/21F.