MARUTI SUZUKI INDIA EBITDA miss a blip; outlook robust

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1 RESULT UPDATE MARUTI SUZUKI INDIA EBITDA miss a blip; outlook robust India Equity Research Automobiles Maruti Suzuki s (MSIL) Q1FY18 EBITDA (adjusted for GST-led dealer compensation & promotions) at ~INR24.7bn (up 11.6% YoY) came 4% below estimate due to higher commodity costs. Strong response to new models continues Brezza, Baleno, Dzire waiting periods at 20, 16, 16 weeks, respectively). Average discounts at ~INR16.6K/unit (3.7% ASP, up 30bps QoQ) imply that older model discounts remain high 5.2% ASP. MSIL expects commodity costs to remain stable going forward, which, in our view, will support margin. Over the next 2-3 years, management expects Gujarat plant s margin to benefit from higher localisation and economies of scale benefits. Maintain BUY with TP of INR8,705. Improved product mix drives topline beat MSIL s adjusted revenue, at INR177bn (up 18.5% YoY), was 2% above our INR174bn estimate and reflects benefits of an improving product mix, which drove 4% YoY increase in average vehicle realisations to ~INR438K. Adjusted EBITDA margin at 14.0% (flat QoQ) was below our 14.8% estimate as impact of higher input costs and discounts was only partially offset by better mix and cost reduction efforts. Adjusted PAT at INR17bn (up 14% YoY) was 5% below our estimate due to higher tax rate. Market share gains to sustain; better mix to lower discounts The company remains well placed to gain market share given structured new launch pipeline, expanding distribution and shift in consumer preference to petrol variants (~70% volumes for MSIL). An improved product mix (higher share of Baleno, Brezza, Ignis, new Dzire) is likely to support margin by lowering average discounts. In our view, weakening competitive intensity and macro recovery should help lower discounts for older models as well, which will drive margin improvement. Outlook and valuations: Dominance to sustain; maintain BUY Long waiting periods for key products, a structured launch programme, superior franchise and solid financials (10% FCF to sales, RoE of ~23% in FY19E) are likely to enable MSIL sustain premium valuations. We maintain BUY/SO and value the stock at 27x FY19E core EPS and assign cash/share of INR1,348 to arrive at target price of INR8,705. At CMP, the stock trades at FY19E PER of 22x. Financials Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q1FY18 Q1FY17 % Chg Q4FY17 % Chg FY17 FY18E FY19E Net revenues 172, , ,052 (4.1) 669, , ,238 EBITDA 24,727 22, ,607 (3.4) 103, , ,679 Adjusted Profit 16,979 14, ,090 (0.6) 73,377 87, ,939 Adjusted Diluted EPS (0.6) Diluted P/E (x) EV/EBITDA (x) ROACE (%) EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Edelweiss Securities Limited Outperform High Underweight MARKET DATA (R: MRTI.BO, B: MSIL IN) CMP : INR 7,600 Target Price : INR 8, week range (INR) : 7,683 / 4,510 Share in issue (mn) : M cap (INR bn/usd mn) : 2,296 / 35,800 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q4FY17 Q3FY17 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock : NIL Nifty EW Auto Index 1 month months months Chirag Shah chirag.shah@edelweissfin.com Karthik Subramaniam karthik.subramaniam@edelweissfin.com July 27, 2017

2 Automobiles Q1FY18 conference call: Key highlights Demand environment MSIL continued to gain market share with volume growth of 14.3% YoY versus industry s 4.4%. Consumer preference continued to shift in favour of petrol cars. Share of petrol models was 71% and 62% for MSIL and industry, respectively. GST impact: o o o o From July 1, MSIL passed on lower rates post GST regime. During Q1FY18, margins were impacted on account of dealer compensation (~50bps) and higher sales promotions to clear inventory prior to GST (~30bps). These are netted off from revenue. Retail volumes in June were high (pre-buying ahead of GST). Though volumes in initial part of July were slow, things are gradually picking up. GST impact varies from state to state and MSIL believes it is too early to assess the impact on exchange buyers and used car sales. Fleet sales: Moderation in fleet sales during Q1FY18 (5% volumes). Customer profile: Share of first-time buyers jumped to 50% during Q1FY18 (from 44% in Q4FY17). Strong response for new models continues. Brezza, Baleno and new Dzire have waiting periods of 20, 16 and 16 weeks, respectively. Exports Maintained volume outlook of 125K units for FY18. Focus markets include Indonesia, South East Asia, Chile and Bolivia. Margin Margin was impacted by higher commodity costs and higher sales promotions, offset by a better product mix and ongoing cost reduction efforts. Commodity costs inched up marginally QoQ; but MSIL expects commodity prices to remain largely steady going ahead. Royalty payout for the quarter was INR8,860mn (5% of revenue). Average discount for Q1FY18 was INR16,600 (3.7% ASP). In our view, discounts on older models continue to remain high at 5.2% ASP (up 30bps YoY, 70bps QoQ). Import content: Share of direct and indirect imports at around 16-17%. Higher staff costs during the quarter include seasonal impact of wage revision. Capacity FY18 capacity includes 1.5mn units (from Manesar and Gurgaon) and incremental 150K units from Gujarat plant. In Q1FY18, 24,000 units were produced in Gujarat plant. Capacity is ramping up and should be able to operate at full capacity towards FY18 end. Over the next 2-3 years, vendors will start moving in Gujarat and almost all models will be made there. MSIL will also get benefit of higher localisation and economies of scale. 2 Edelweiss Securities Limited

3 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 (% of vehicle sales) (Margin %) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 (INR '000) (% YoY) (INR '000) (% YoY) Maruti Suzuki India Others Targets FY18 capex of INR45bn (new products, R&D, maintenance capex ). Q1FY18 capex was ~INR9bn. Other operating income was higher led by write-back of excess provision of ~INR850mn. Tax rate for the quarter was higher due to creation of deferred tax liability given change in inflation index. Expects sustainable tax rate of 27-28% going forward with lapse of investment allowance and lower R&D benefits. High other income: Largely to do with interest rate reduction. Chart 1: Average realisations continued to trend up Chart 2: Discounts inched up QoQ (1.0) (5.0) Average realizations/unit % YoY Average discounts % ASP Chart 3: Royalty payment trend Chart 4: Higher input costs dented margin Royalty as % Sales EBITDA margins Source: Edelweiss research 3 Edelweiss Securities Limited

4 Automobiles Table 1: Valuation FY19E Core EPS (INR) 272 Earnings multiple (x) 27 Value per share (INR) 7,357 Cash per share (INR) 1,348 Target price (INR) 8,705 Source: Edelweiss research Table 2: Volume assumptions Volumes (units) FY16 FY17 FY18E FY19E Alto 263, , , ,869 Wagon R 169, , , ,609 Celerio 87,428 97, , ,768 Entry Segment 520, , , ,246 Ritz 18,844 17, Swift 195, , , ,624 Dzire 234, , , ,920 Baleno 44, , , ,823 Ignis 0 14,701 73,505 82,326 Ertiga 60,452 63,527 66,992 73,414 Mid Segment 553, , , ,107 Ciaz 54,233 64,448 71,743 81,787 Brezza 5, , , ,750 S-Cross 24,077 21,417 22,488 23,612 Executive segment 83, , , ,149 Eeco 63,522 67,263 72,644 79,908 Omni 79,949 84,746 91,526 98,848 Gypsy 4,323 2,157 1,618 1,618 Super Carry ,050 Total Domestic 1,305,351 1,444,541 1,652,721 1,872,926 Exports 123, , , ,667 Total Volumes 1,429,248 1,568,603 1,779,265 2,009,593 YoY (%) Entry Segment 5.4 (1.7) Mid Segment Executive segment Total Domestic Exports Total Volumes Source: Edelweiss research 4 Edelweiss Securities Limited

5 Maruti Suzuki India Financial snapshot (INR mn) Year to March Q1FY18 Q1FY17 % change Q4FY17 % change FY17 FY18E FY19E Total units sold (nos) 394, , ,439 (4.8) 1,568,603 1,779,265 2,009,593 Exports 26,140 26, ,771 (17.7) 124, , ,667 Domestic - Auto 368, , ,668 (3.7) 1,444,541 1,652,721 1,872,926 Realization 437, , , , , ,463 Net revenues 172, , ,052 (4.1) 669, , ,238 Other operating income 4,133 2, , ,254 11,729 13,549 Raw material costs 122, , ,669 (3.7) 467, , ,432 Staff costs 6,521 5, , ,310 27,390 29,751 Other expenses 22,740 20, ,898 (4.8) 86,192 95, ,925 Total expenditure 152, , ,727 (3.5) 576, , ,108 EBITDA 24,727 22, ,607 (3.4) 103, , ,679 Depreciation 6,839 6, ,010 (2.4) 26,021 27,025 28,884 EBIT 17,888 15, ,597 (3.8) 77,509 97, ,795 Other income 6,827 4, , ,798 24,003 28,312 Interest Add: Exceptional items Profit before tax 24,402 20, , , , ,213 Provision for taxes 7,423 5, , ,036 32,861 39,274 Reported net profit 16,979 14, ,090 (0.6) 73,377 87, ,939 Adjusted Profit 16,979 14, ,090 (0.6) 73,377 87, ,939 Diluted shares (mn) Adjusted Diluted EPS (0.6) Diluted P/E (x) EV/EBITDA (x) ROACE (%) As % of net revenues Raw material Employee cost Other expenses EBITDA Adjusted net profit Tax rate Edelweiss Securities Limited

6 Automobiles Company Description Maruti Suzuki (MSIL) is India s largest passenger vehicle (PV) manufacturer with ~47.4% market share. The company is a key player in the mini and compact cars segment with dominant market share and has enjoyed success in the executive segment as well post launch of Ciaz and Brezza. Suzuki Motor Corporation (Suzuki) of Japan holds 56% stake in the company. MSIL offers the widest product range in passenger cars with special focus on compact car segment. Investment Theme MSIL remains well placed to sustain market share gains given its robust new model launch pipeline, relatively weak competitive intensity, expanding distribution and consumer shift to petrol models (stronghold for MSIL). Improved product mix (higher share of Baleno/Brezza/Ignis/new Dzire) should help boost realisations and margins by lowering average discounts. We believe the long waiting period for key models, superior franchise and robust free cash flow generations will help sustain premium valuations. Key Risks Capacity constraints: MSIL s capacity addition program is fairly structured with ~250K blocks. Currently, MSIL is in a sweet spot due to waiting period for many of its existing models and structured product cycle. This makes us believe that MSIL will face capacity constraints in case of sharp demand recovery. Larger engine offerings: MSIL has yet to demonstrate its success with higher CC engines (upwards of 1.6 litres). With expansion of executive segment, we believe it become imperative for MSIL to address the product portfolio gap. 6 Edelweiss Securities Limited

7 Maruti Suzuki India Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Cars - domestic vol. (% YoY) UV - domestic vol. (% YoY) Company Revenue assumptions Volume growth (% YoY) Cars - domestic vol. (% YoY) Exports Avg realisation (INR) 393, , , ,424 Avg realisation (% YoY) Price hike (2.0) Cost assumptions RM cost/vehicle 270, , , ,702 Employee cost/vehicle 13,845 14,860 15,394 14,804 Royalty (% sales) Promotion cost (% revenue) EBITDA/vehicle 62,161 66,001 70,073 72,492 Financial assumptions Depreciation rate (%) Tax rate (%) Dividend payout (%) Currency (JPY/INR) B/S assumptions Net borrowings (INR mn) (1,028) 4,062 (4,062) - Capex (INR mn) 18,138 36,267 35,000 30,000 Debtor days Inventory days Payable days Cash conversion cycle (21) (24) (25) (25) Income statement (INR mn) Income from operations 575, , , ,786 Materials costs 386, , , ,432 Manufacturing expenses 79,775 86,192 95, ,925 Employee costs 19,788 23,310 27,390 29,751 Total operating expenses 486, , , ,108 EBITDA 88, , , ,679 Depreciation 28,202 26,021 27,025 28,884 EBIT 60,642 77,509 97, ,795 Add: Other income 14, , , , Less: Interest Expense Profit Before Tax 74,437 99, , ,213 Less: Provision for Tax 20,794 26,036 32,861 39,274 Reported Profit 53,643 73,377 87, ,939 Adjusted Profit 53,643 73,377 87, ,939 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest Expense EBITDA margins Net Profit margins Growth ratios (%) Revenues EBITDA PBT Adjusted Profit EPS Edelweiss Securities Limited

8 Automobiles Balance sheet (INR mn) As on 31st March FY16 FY17 FY18E FY19E Share capital 1,510 1,510 1,510 1,510 Reserves & Surplus 297, , , ,064 Shareholders' funds 298, , , ,574 Short term borrowings 774 4, Total Borrowings 774 4, Def. Tax Liability (net) 1,943 4,640 4,640 4,640 Sources of funds 301, , , ,988 Gross Block 291, , , ,327 Net Block 125, , , ,983 Capital work in progress 10,069 12,523 12,523 12,523 Total Fixed Assets 135, , , ,506 Cash and Equivalents 189, , , ,542 Inventories 31,321 32,622 38,252 43,917 Sundry Debtors 13,222 11,992 14,062 16,144 Loans & Advances Other Current Assets 42,202 46,310 46,310 46,310 Current Assets (ex cash) 86,776 90,949 98, ,405 Trade payable 74,073 83,673 97, ,698 Other Current Liab 35,693 44,023 51,453 58,768 Total Current Liab 109, , , ,466 Net Curr Assets-ex cash (22,990) (36,747) (50,593) (64,061) Uses of funds 301, , , ,988 BVPS (INR) , , ,637.7 Free cash flow (INR mn) Reported Profit 53,643 73,377 87, ,939 Add: Depreciation 28,202 26,021 27,025 28,884 Interest (Net of Tax) Others (1,204) 4,950 3,934 (1,134) Less: Changes in WC (3,100) 13,757 13,846 13,467 Operating cash flow 84,331 91, , ,872 Less: Capex 18,138 36,267 35,000 30,000 Free Cash Flow 66,193 54,984 70,664 89,872 Cash flow metrics Operating cash flow 84,331 91, , ,872 Investing cash flow (71,759) (86,868) (70,466) (87,188) Financing cash flow (12,364) (24,095) (34,036) (31,792) Net cash Flow 208 (19,712) 1, Capex (18,138) (36,267) (35,000) (30,000) Dividend paid 9,090 27,263 29,080 30,898 Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle (21) (24) (25) (25) Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity (0.6) (0.7) (0.8) (0.8) Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) \ Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) P/B (X) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E Maruti Suzuki India Ltd 35, Mahindra & Mahindra Ltd 13, Tata Motors Ltd 22, Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 Additional Data Maruti Suzuki India Directors Data Amal Ganguli Non-Executive Independent Directors Pallavi Shroff Non-Executive Independent Directors Manvinder Singh Banga Non-Executive Independent Directors Davinder Singh Brar Non-Executive Independent Directors R C Bhargava, Chairman Other Non-Executive Directors Osamu Suzuki Other Non-Executive Directors Kenichi Ayukawa Other Non-Executive Directors Shinzo Nakanishi, MD and CEO Executive Directors Tsuneo Ohashi Executive Directors Shuji Oishi Executive Directors Keiichi Asai Executive Directors Auditors - Price Waterhouse *as per last annual report Holding Top10 Perc. Holding Perc. Holding Suzuki motor corp Life insurance corp 5.3 Blackrock 1.45 Vanguard group 1.31 Abu dhabi investment 1.06 Hdfc asset managemen 1.05 Fmr llc 0.78 Birla sun life asset 0.77 Jpmorgan chase & co 0.74 Uti asset management 0.69 *in last one year Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 9 Edelweiss Securities Limited

10 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Amara Raja Batteries BUY None None Ashok Leyland BUY SO H Bajaj Auto HOLD SU L Ceat Ltd BUY SO L Eicher Motors BUY SO M Exide Industries BUY SP L Hero MotoCorp HOLD SU H Mahindra & Mahindra Ltd BUY SO M Maruti Suzuki India Ltd BUY SO H Minda Corporation BUY SO M Motherson Sumi Systems HOLD SU H Suprajit Engineering BUY SO H Tata Motors Ltd HOLD SP H ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 10 Edelweiss Securities Limited

11 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 (INR) Maruti Suzuki India Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research Coverage group(s) of stocks by primary analyst(s): Automobiles Ashok Leyland, Amara Raja Batteries, Bajaj Auto, Ceat Ltd, Eicher Motors, Exide Industries, Hero MotoCorp, Minda Corporation, Mahindra & Mahindra Ltd, Maruti Suzuki India Ltd, Motherson Sumi Systems, Suprajit Engineering, Tata Motors Ltd Recent Research Date Company Title Price (INR) Recos 25-Jul Jul-17 Hero MotorCorp Margins resilient; Result Update Ashok Leyland Subdued quarter; market share gains to sustain; Result Update 21-Jul-17 Bajaj Auto Subdued quarter; exports revival key; Result Update 3,709 Hold 104 Buy 2,816 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart 8,000 7,200 6,400 5,600 4,800 4,000 Maruti Suzuki India 11 Edelweiss Securities Limited

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