Maruti Suzuki (RHS) BUY. Operationally In Line; Reiterate Buy. Automobiles October 31, 2014 RESULT REVIEW. Outlook & Valuation.

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1 Oct13 Dec13 Jan14 Feb14 Apr14 May14 Jun14 Aug14 Sep14 Oct14 India Research Automobiles RESULT REVIEW Bloomberg: MSIL IN Reuters: MRTI.BO BUY Operationally In Line; Reiterate Buy India s (MSIL) Revenue/EBIDTA/PAT grew 17.5%/15%/29% YoY, and 8%/14.5%/13% QoQ in Q2FY15. Company s performance was broadly in line with our estimates, while lower tax rate and higher non operating income escalated net profit to some extent. Currency benefit was partial, which compensated for cost escalation and higher discount. Company s average selling price rose 1% YoY, due to product mix and favorable export realization, despite higher discounts. MSIL s EBIDTA margin rose 68 bps QoQ (down 26 bps YoY) to 12.4% (our Est was 12.5%). Its RM/Sales fell 67 bps QoQ (up 192 bps YoY) to 71.3%. Higher depreciation (up % YoY) due to commencement of operations at its new plant at Manesar, was compensated by higher non operating income (up 91% YoY), resulting in net positive impact on MSIL s bottom line. Lower tax rate of.2% escalated net profit in Q2FY15. Strong Volumes Backed by Success of New Launches and Market Share gain: MSIL plans number of new launches over next two years. Company aims 5060K annual volume from its newly launched Ciaz. It plans to launch Sx4 Cross by H1FY16 and another compact SUV by FY17. Its Celerio ATM is well received with current rate of 4000 units/month and having waiting period of 4 months. Its WagonR and Alto continue gaining shares in small car segment. We believe that economic recovery amid positive sentiments from urban market will increase first time buyers, despite near term headwinds. We believe that MSIL s strong product pipe line coupled with vast dealer network would be the key driver over next 23 years. Better product mix, higher realisation and favourable currency would result in EBIDTA margin expansion of ~150bps over FY14 FY17E. We estimate MSIL s volumes to grow by 14% CAGR over FY14FY17E. Outlook & Valuation We lower our volume and revenue estimates by 34%, while we lower our EBIDTA estimates by 35% for FY15E/FY16E/FY17E. Accordingly we cut our EPS estimates by 6% and 3% for FY15E and FY16E, while maintain our FY17E EPS amid higher non operating income. In view of ~32% CAGR in EPS, ~% RoE and market share gain by MSIL, we expect stock to trade close to its historical average multiple of ~17x. We reiterate our BUY recommendation on MSIL and maintain our target price of Rs 3,550 per share, valuing the stock at 17x FY17E EPS. Key Financials Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E Net Sales 436, , , , ,985 EBITDA 44,618 54,825 63,055 84, ,031 EBITDA margin (%) Adj. Net Profit 22,132 26,686 35,318 50,270 63,088 EPS (Rs.) YoY growth (%) ROE (%) ROCE (%) PER (x) EV/ EBITDA Source: Company, Karvy Stock Broking Recommendation CMP: Target Price: Previous Target Price: Rs3,240 Rs3,550 Rs3,550 Upside (%) 10% Stock Information Market Cap. (Rs bn / US$ mn) 968/15,803 52week High/Low (Rs) 3,219/1,540 3m ADV (Rs mn /US$ mn) 990/16.2 Beta 1.0 Sensex/ Nifty 27,098/8,090 Share outstanding (mn) 302 Stock Performance (%) 1M 3M 12M YTD Absolute Rel. to Sensex Performance 29,500 27,500 25,500 23,500 21,500 19,500 17,500 15,500 Sensex (LHS) Source: Bloomberg Earning Revision (%) FY15E FY16E FY17E Revenue EBITDA EPS Source: Karvy Stock Broking Analysts Contact Mitul Shah mitul.shah@karvy.com 3,650 3,150 2,650 2,150 1,650 1,150 (RHS)

2 Results Review Revenue Analysis MSIL s revenues grew 17.5% YoY and 8.2% QoQ to Rs. 123 bn in Q2FY15 (vs. our estimate of Rs bn), as its volume rose by 16.8% YoY & 7.3% QoQ to 321,891 units. Company s lower revenues were on account of higher discounts prevailing in the market, higher contribution of entry level cars and small cars during the quarter. This has impacted the average realization per vehicle, which rose just 1% YoY, despite better export realisation. MSIL s export realization was at Rs 14bn in Q2FY15. EBIDTA Margin MSIL s EBITDA grew 15% YoY and 14.5% QoQ to Rs bn (vs. our estimate of Rs bn). Its EBIDTA margin rose 68 bps QoQ (down 26 bps QoQ) to 12.4% mainly due to RM/Sales falling 67 bps QoQ (up 192 bps YoY) to 71.3%. Its employee cost was flat YoY (up 5% QoQ) to Rs. 3.7 bn. Other manufacturing and sales expenses as a percentage of revenue fell by 111 bps YoY (up 10 bps QoQ) to 13.3% during the quarter. Net Profit Growth MSIL s net profit grew 29% YoY and 13.2% QoQ to Rs. 8.6 bn in Q2FY15. Higher nonoperating income (up 91% YoY, but down 35% QoQ) to Rs. 1.9 bn benefitted bottom line. Moreover, lower tax rate of.2%, down 366 bps YoY and 380 bps QoQ escalated net profit in the quarter. MSIL s NPM rose 60 bps YoY & 30 bps QoQ to 7%. Its EPS stood at Rs in Q2FY15, as against our estimate of Rs Volume & Market Share Volume: In Q2FY15, MSIL s total volume grew 16.8% YoY and 7.3% QoQ to 321,891 units, mainly due to 19% YoY growth in domestic volumes, despite flat export volumes. Its domestic car volume rose 15.3% YoY to 237,052 units compared to industry growth of 6% YoY. Its UV sales rose 45% YoY to 17,102 units. MSIL s domestic volume in compact car segment rose 42% YoY to 115,219 units, while its volume in super compact car segment was up by 27% YoY to 21,183 units. Its exports rose just 0.5% YoY to 34,4 units, while total MPV volume rose 39% YoY to 34,270 units. Market Share: MSIL gained market share of 449 bps YoY in domestic PV segment to 45.2% in Q2FY15. Its market share in passenger car segment rose 430 bps YoY to 53.1%, while the market share in UV segment stood at 11.8%, up 0 bps YoY. In MPV segment, MSIL s market share jumped by 2,703 bps YoY to 73%, while market share in compact car segment rose by 780 bps YoY to 46%. Its market share in super compact car segment surged by 1,492 bps YoY to 78.2% in Q2FY15. 2

3 Conference Call Key Takeaways Improving Consumer Sentiment across Markets: Industry has been witnessing healthy volumes from rural India since past 23 years, while MSIL s management indicated turning around of sentiments from urban markets this time. Company experienced better traction over past few months with increasing footfall, rising number of first time buyers and increasing contribution of entry level cars. Though average discounts remained all time high, upwards of Rs,000 per vehicle during the quarter, management expects it to decline going forward. Domestic Volume to Record ~10% Growth Export to Remain Healthy: Management expects company to record lower growth (single digit) in H2FY15 amid high base, which would translate into ~10% growth for full year FY15 in domestic market. Management also expects similar double digit growth in exports market. Successful Launch of CIAZ; Plans 2 new Launches: After success of Celerio, MSIL s newly launched Ciaz has been witnessing good response with initial bookings of ~15,000 units. Company aims the annual volume of 5060K for its Ciaz. Its Celerio AMT model has waiting period of 4 months at present and its monthly run rate increased from initial 2,000 units to current 4,000 units/month. Company plans to launch 2 more new models in UV segment over next 2 years. Management indicated launch of SX4 Cross at the beginning of FY16 and another compact UV by FY17. This would help gaining market shares going forward. We believe Company would make its LCV foray in FY17 to record incremental volumes from new segment. Capex and Cash: MSIL has incurred a total capex of Rs 35 bn in FY14 and Rs 13 bn in H1FY15. Management guided for capex of Rs 40 bn in FY15E. Key focus area for spending capex would be product development, R&D activities and marketing related investments. Approves Dividend Guidelines and Increases FII Limit: MSIL board has approved dividend payout ratio of 1830%, barring exception based on fund availability. The Board also considered the matter and decided to recommend an increase in the FII limit to 40%, broadly the level of public shareholding in the stock. 3

4 Exhibit 1: P&L Review YE March (Rs. mn) Q2 FY15 Q2 FY14 YoY (%) Q1 FY15 QoQ (%) H1FY15 H1FY14 YoY (%) Domestic 287, , , , , Exports 34,4 34, , ,454 55, Total Volume (unit) 321, , , , , Net Sales 123, , , ,734 7, Less: Net Raw Material consumed 87,749 72, , , , Advertisement & sales promotion Exp. 16,383 15, , ,419 29,4 7.6 Personnel 3,698 3,723 (0.7) 3, ,233 6, Total Expenditure 107,829 91, , , , EBIDTA 15,8 13, , ,490 24, Less: Depreciation 5,989 4, , ,825 9,793.7 Less: Interest (19.8) 386 (9.8) (16.3) Add: Other income 1,933 1, ,965 (34.8) 4,898 3, Profit Before Extraordinary items and Tax 10,805 8, , ,830 17,260.7 Less: Total Tax 2,179 2, ,403 (9.3) 4,582 4, Profit After Tax 8,625 6, , ,248 13, Adj. PAT 8,625 6, , ,248 13, Reported EPS (Rs.) Adj. EPS (Rs.) Margin Analysis (%) Change in bps Change in bps EBIDTA Margin (26) Adj. NPM Effective Tax Rate (366) 24.0 (380) (258) Cost Analysis RM/Net Sales (67) Adv.& Sales Promotion Expenses./Net Sales (111) (83) Personnel/Net Sales (55) 3.1 (10) (17) Source: Company, Karvy Stock Broking Exhibit 2: Estimate Revision Y/E March (Rs. mn) FY15E FY16E FY17E New Old % change New Old % change New Old % change Total Sales (units) 1,318,382 1,413,105 (6.7) 1,544,602 1,567,225 (1.4) 1,718,375 1,752,970 (2.0) Net revenues 508, ,806 (4.2) 623, ,431 (3.5) 716, ,054 (3.4) EBIDTA 63,055 66,658 (5.4) 84,165 86,903 (3.2) 101, ,788 (2.7) EBIDTA margin (%) (15) Adj. Net Profit 35,318 37,529 (5.9) 50,270 51,654 (2.7) 63,088 63,105 (0.0) EPS (Rs.) (5.9) (2.7) (0.0) Source: Company, Karvy Stock Broking Change in bps We have lowered our volumes for FY15/FY16/FY17, mainly due to lower domestic volumes and accordingly reduce our revenue and EBIDTA estimates, while we have cut our EPS estimates by for FY15/FY16 to factor in lower EBIDTA. Our downward revision to FY16 EPS is lower due to higher non operating income and lower tax rate, while we maintain our FY17 EPS estimates. 4

5 Volume Analysis Exhibit 3: Quarterly Domestic Volume Analysis Exhibit 4: SemiAnnual Domestic Volume Analysis Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 H1 FY14 H1 FY15 Passenger Cars MPV UV Passenger Cars MPV UV Exhibit 5: Quarterly Domestic PCs Volume Analysis Exhibit 6: SemiAnnual Domestic PCs Volume Analysis Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY H1 FY H1 FY15 Mini Compact Super Compact MidSize Executive Mini Compact Super Compact MidSize Executive Exhibit 7: Domestic & Export Volume Analysis Exhibit 8: SemiAnnual Domestic & Export Vol. Analysis Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY H1 FY14 H1 FY15 Total Domestic Total Export Total Domestic Total Export 5

6 Exhibit 9: Segmental Quarterly Volume Analysis Domestic Exports Total Q2FY15 Q2FY14 Change Q2FY15 Q2FY14 Change Q2FY15 Q2FY14 Change Maruti Mini: 98, , % 17,967 23, % 116, , % Compact: 115,219 81, % 10,912 9,066.4% 126,131 90, % Super Compact: 21,183 16, % 1,687 1, % 22,870 18, % MidSize: 1,658 1, % % 1,661 1, % Executive: 0 0 NM 0 0 NM 0 0 NM PCs 237,052 5, % 30,569 33, % 267, , % UVs 17,102 11, % 2, %,000 11, % MPVs 33,533 24, % % 34,270 24, % Total 287, , % 34,4 34, % 321, , % Industry Mini: 125, , % 23,866 28, % 149, , % Compact: 250, , % 81, , % 332, , % Super Compact: 27, 26, % 7,675 12, % 34,775 39, % MidSize: 34,160 34, % 32,422 16, % 66,582 51, % Executive: 5,287 4, % % 5,289 4, % PCs 446, , % 145, , % 592, , % UVs 144, ,740.6% 19,162 12, % 163, , % MPVs 45,956 52, % 1, % 47,009 53, % Total 636, , % 166, , % 803, , %. 6

7 Jan13 Feb13 Mar13 Apr13 May13 Jun13 Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Jan13 Mar13 May13 Jul13 Sep13 Nov13 Jan14 Mar14 May14 Jul14 Sep14 Jan13 Mar13 May13 Jul13 Sep13 Nov13 Jan14 Mar14 May14 Jul14 Sep14 Market Share Analysis Exhibit 10: Domestic PCs Market share Trend 60 (%) Exhibit 11: Domestic UV & MPVs Market share Trend Hyundai Maruti Tata Motors Other M&M Maruti Tata Motors Toyota Other Exhibit 12: MSIL s Segmental Market Share Trend (PC) (%) Exhibit 13: MSIL s Market Share Trend (PV) (%) Mini Compact Super Compact MidSize Executive Passenger Cars MPV UV Exhibit 14: Product Mix MSIL (%) Compact Mid Size MUV Executive 7

8 Financials Exhibit 15: Profit & Loss Statement (Standalone) Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E Net revenues 436, , , , ,985 Operating expenses 391, , , , ,955 EBIDTA 44,618 54,825 63,055 84, ,031 EBIDTA margin (%) Other income 3,565 2,859 8,655 9,487 10,316 Interest 1,898 1,759 1,407 1,478 1,522 Depreciation 18,612,844 24,381 26,029 27,033 Profit Before Tax 29,910 36,585 45,921 66,145 82,792 Tax 5,989 8,755 10,604 15,875 19,705 Reported Net Profit 23,921 27,830 35,318 50,270 63,088 Net Margin (%) Adjusted Net Profit 22,132 26,686 35,318 50,270 63,088 Adj. Net Margin (%) Source: Company, Karvy Stock Broking. Exhibit 16: Balance Sheet (Standalone) Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E Equity capital 1,510 1,510 1,510 1,510 1,510 Reserves & surplus 184,279 8, , , ,543 Shareholders funds 185,789 9, , , ,053 Total Loans 13,892 16,851 16,851 16,851 16,851 Deferred tax liability 4,087 5,866 5,866 5,866 5,866 Total Liabilities and Equity 3, , , , ,770 Gross block 198, , , , ,487 Depreciation, , , , ,557 Net block 97, , , , ,930 Capital WIP 19,422 26,214 18,000 18,900 19,845 Investments 70, , , , ,679 Inventory 18,407 17,059 19,519 23,655 30,376 Debtors 14,237 14,137 16,016,508 23,572 Cash & Bank Bal 7,750 6,297,975 34,455 15,469 Loans & Advances 38,289 32,567 24,117 28,735 53,973 Current Assets 78,683 70,060 80, , ,390 Sundry Creditors 43,745 50,312 60,446 72,291 56,377 Other Current Liability 19,367 22,548 22,698 22,698 22,698 Current Liability& Provisions 63,112 72,860 83,144 94,989 79,075 Net current assets 15,571 2,800 2,518 12,365 44,315 Total Assets 3, , , , ,770 Source: Company, Karvy Stock Broking. 8

9 Exhibit 17: Cash Flow Statement (Standalone) Y/E March (Rs.mn) FY13 FY14 FY15E FY16E FY17E EBIT 26,006 33,981 38,674 58,136 73,998 Other Income 3,565 2,859 8,655 9,487 10,316 Depreciation & Amortisation 18,612,844 24,381 26,029 27,033 Interest paid() (1,898) (1,759) (1,407) (1,478) (1,522) Dividends paid() (2,828) (4,241) (4,416) (4,416) (4,416) Tax paid() (5,989) (8,755) (10,604) (15,875) (19,705) Extra Ord Income 2,237 1, Operating Cash Flow 39,705 44,433 55,282 71,882 85,704 Change in Working Capital (12,602) 16,918 14,396 (1,402) (50,937) Cash flow from Operations 27,103 61,351 69,678 70,480 34,767 Capex (29,975) (37,548) (40,000) (42,000) (44,) Strategic Investment 2,764 (277) Non Strategic Investment (13,256) (30,119) (15,000) (15,000) (500) Cash flow from Investing (40,467) (67,944) (55,000) (57,000) (44,600) Change in borrowing (3,335) 2, Others 87 2, (9,153) Cashflow from Financial Activities (3,248) 5, (9,153) Change in Cash (16,612) (1,453) 14,678 13,480 (18,986) Opening cash 24,361 7,750 6,297,975 34,455 Closing cash 7,750 6,297,975 34,455 15,469 Source: Company, Karvy Stock Broking. Exhibit 18: Key Ratios Y/E Mar FY13 FY14 FY15E FY16E FY17E Revenue Growth EBITDA Margin Net Profit Margin ROCE (%) ROE (%) Source: Company, Karvy Stock Broking Exhibit 19: Valuation Parameters Y/E Mar FY13 FY14 FY15E FY16E FY17E EPS( Rs) P/E (x) P/ BV (x) EV/ EBITDA (x) Fixed Assets Turnover Ratio (x) Debt / Equity (x) EV/ Sales (x) Source: Company, Karvy Stock Broking 9

10 Stock Ratings Absolute Returns Buy : > 15% Hold : 5 15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Office No. 701, 7 th Floor, Hallmark Business Plaza, Opp.Gurunanak Hospital, Mumbai Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad Karvy Stock Broking Research is also available on: Bloomberg KRVY <GO>, Thomson Publisher & Reuters. 10