MARUTI SUZUKI INDIA Stellar show; strong outlook sans jump in commodity costs

Transcription

1 RESULT UPDATE MARUTI SUZUKI INDIA Stellar show; strong outlook sans jump in commodity costs India Equity Research Automobiles Maruti Suzuki s (MSIL) Q2FY18 EBITDA of ~INR36.7bn (up 21% YoY) came 17% above our estimate due to lower discounts and benefits of product mix. Demand for new models (Baleno, Brezza, Dzire) remained robust, interesting to note is ~50% buyers of new Dzire were first time buyers. Festive season (Sep Oct) growth was in double digits in terms of both wholesale and retail. Despite the 4% rise in share of new models, average discounts were at ~INR15.2K/unit (3.4% ASP, down 30bps QoQ), which indicates that discounts on older models are still at higher levels. While the good Q2FY18 performance would warrant a strong upward revision in earnings, we raise our FY19E EPS by only 4% factoring in the sharp jump in commodity prices. Price hikes or lowering of discounts pose upside risks to our earnings. Maintain BUY with a revised TP of INR9,289 (INR8,705 earlier). Robust volumes, improved mix aid margin outperformance Revenue, at ~INR218bn (up 22% YoY), was 2% below our estimate of INR222bn. Higher volumes (19.4% YoY), better product mix, cost savings and lower rubber prices drove the positive surprise in gross margins at 31.2% (our estimate of 29%). EBITDA margin at 16.9%, up 290bps QoQ, also beat our estimate of 14.2% led by lower other expenses. Adjusted PAT, at INR24.8bn (up 3.4% YoY), came 17% above our estimate. Market share gains to sustain; better mix to lower discounts We expect MSIL to sustain market share gains given robust new launch pipeline, expanding reach and shift in consumer preference to petrol variants (~70% volumes for MSIL). An improved product mix (higher share of Baleno/Brezza/Ignis/new Dzire) will support margins by lowering overall discounts. In our view, weakening competitive intensity and revival in macro demand will lower discounts for older models as well. Outlook and valuations: Dominance to sustain; maintain BUY We believe long waiting periods for key products, a structured launch programme, superior franchise and strong financials (11% FCF to sales, RoE of 23.6% in FY19E) will enable MSIL sustain market share gains. We maintain BUY/SO and value the stock at 27x FY19E core EPS and assign cash/share of INR1,466 to arrive at a revised target price of INR9,289. At CMP, the stock trades at FY19E PER of 22.5x. Financials (INR mn) Year to March Q2FY18 Q2FY17 % Chg Q1FY18 % Chg FY17 FY18E FY19E Net revenues 214, , , , , ,301 EBITDA 36,775 30, , , , ,073 Adjusted Profit 24,843 24, , ,377 90, ,130 Adjusted Diluted EPS Diluted P/E (x) EV/EBITDA (x) ROACE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. 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 8,114 Target Price : INR 9, week range (INR) : 8,242 / 4,765 Share in issue (mn) : M cap (INR bn/usd mn) : 2,451 / 37,678 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q1FY18 Q4FY17 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Auto Index 1 month months months Chirag Shah chirag.shah@edelweissfin.com Karthik Subramaniam karthik.subramaniam@edelweissfin.com October 27, 2017

2 Automobiles Q2FY18 conference call: Key highlights Domestic demand environment MSIL continued to gain market share with volume growth of 18.8% YoY versus industry growth of 13.4% YoY Rural segment witnessed strong growth of 22% YoY for MSIL led by good monsoons, outlook is positive Petrol models continued to gain traction; MSIL s petrol volumes grew by 25% YoY. Passenger vehicle industry s diesel share is currently 40% Festive season (Sep Oct) growth was in double digits for both wholesale and retail Inventory was around 80 85K units (as of end Oct) Share of first time buyers continues to rise and is currently at 50% (versus 42% 2 3 years back); 50% of buyers for new Dzire were first time buyers, may not be the first car in the family though Share of fleet sales and sales to government employees were in low single digits and 20%, respectively. Share of government sales has been constant in YoY terms, but MSIL believes that with increasing disbursement of Seventh Pay Commission arrears, demand will pick up going forward Higher GST on hybrid models: Hybrid Petrol mix for Ciaz has changed from 70:30 to 30:70. For Ertiga, hybrid petrol mix has changed from 70:30 to 50:50 Realisations were up in both domestic and exports, some accounting related adjustment is involved post GST, and will mail across a reconciliation separately to lift the confusion Exports Export revenues stood at INR15, 650mn versus INR11,660mn in Q1FY18 Margins Margin improvement was led by higher volumes, better mix and cost savings, though partly offset by higher ad spends and higher commodity costs Gross margins improved due to ongoing cost reduction measures. Lower rubber prices too helped, other commodities were largely stable Expects commodity costs to go up going forward (steel, which is bulk of commodity is likely to see some increase and copper is also expected to increase). In past 12 months, commodity cost impact on P&L is ~200bps. Average discounts stood at INR15,200. Discounts on older models were high due to festival related incentives Currently, some costs like logistics, etc., are higher for the Gujarat plant since all the vendors are not present. But, over next 2 3 years this should normalise H1FY18 reflects partial cost of Gujarat plant. There could be some incremental impact from Gujarat plant in H2FY18, commodity cost headwinds would also persist in H2FY18 Based on current price trends, commodity led cost pressure could be quite steep No price increases taken so far in H1, MSIL will gauge internal cost efficiencies before evaluating a price hike 2 Edelweiss Securities Limited

3 Maruti Suzuki India New launches The new Dzire was the fastest to reach the 100K sales mark in just 5.5 months since launch Response to the S Cross refreshed variants has been encouraging Demand for Baleno and Brezza remains robust as waiting periods remain high Capacity Production capacity of 1.5mn units at Manesar + Gurgaon and targets 150Kunits from Gujarat in FY18. Gujarat capacity will be gradually ramped up to 250K by next year Second line at Gujarat will be ready towards early 2019 Can stretch production to 1.7mn in FY18 via de bottlenecking. H1FY18 production, at 870K, was due to advance planning based on working days, etc Others Expects effective tax rate at 29%. Tax rate to inch up YoY due to lack of benefits on investment allowance on plant and machinery and decline in R&D benefits from 200% from 150% Royalty stood at INR11.4bn (5.3% revenues) Capex in Q2FY18 stood at INR14.5bn and FY18 capex guidance was maintained at INR40bn Chart 1: Average realisations trend (INR '000) (% YoY) Chart 2: Average discounts declined QoQ led by new launches (INR '000) (% YoY) 330 (1.0) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 (5.0) 10 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY Average realizations/unit % YoY Average discounts % ASP Source: Edelweiss research 3 Edelweiss Securities Limited

4 Automobiles Chart 3: Royalty payments continue to decline 7.5 Chart 4: Robust volume growth and better mix drive margins 17.5 (% of vehicle sales) (Margin %) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Royalty as % Sales EBITDA margins Source: Edelweiss research Table 1: Valuation FY19E Core EPS (INR) 290 Earnings multiple (x) 27 Value per share (INR) 7,824 Cash per share (INR) 1,466 Target price (INR) 9,289 Source: Edelweiss research 4 Edelweiss Securities Limited

5 Maruti Suzuki India 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: Company, Edelweiss research 5 Edelweiss Securities Limited

6 Automobiles Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD17 FY18E FY19E Total units sold (nos) 492, , , ,154,164 1,779,265 2,009,593 Exports 34,717 35,440 (2.0) 26, , , ,667 Domestic Auto 457, , , ,061,873 1,652,721 1,872,926 Realization 435, , ,789 (0.5) 579, , ,480 Net revenues 214, , , , , ,301 Other operating income 3,301 2, ,133 (20.1) 11,254 14,080 16,367 Raw material costs 149, , , , , ,485 Staff costs 6,666 5, , ,310 26,652 28,988 Other expenses 24,461 22, , ,228 94, ,122 Total expenditure 180, , , , , ,596 EBITDA 36,775 30, , , , ,073 Depreciation 6,825 6, ,839 (0.2) 26,021 27,030 28,929 EBIT 29,950 24, , , , ,144 Other income 5,229 8,189 (36.1) 6,827 (23.4) 22,798 24,818 27,029 Interest (23.9) 313 (52.1) Add: Exceptional items Profit before tax 35,029 32, , , , ,279 Provision for taxes 10,186 8, , ,036 33,838 41,148 Reported net profit 24,843 24, , ,341 90, ,130 Adjusted Profit 24,843 24, , ,377 90, ,130 Diluted shares (mn) Adjusted Diluted EPS 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

7 Company Description Maruti Suzuki India 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. 7 Edelweiss Securities Limited

8 Automobiles 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, , , ,570 Avg realisation (% YoY) Price hike (2.0) Cost assumptions RM cost/vehicle 270, , , ,221 Employee cost/vehicle 13,845 14,860 14,979 14,425 Royalty (% sales) Promotion cost (% revenue) EBITDA/vehicle 62,028 66,001 71,654 76,171 Financial assumptions Depreciation rate (%) Tax rate (%) Dividend payout (%) Currency (JPY/INR) B/S assumptions Net borrowings (INR mn) (1,028) 4,062 Capex (INR mn) (120,158) 35,794 35,000 30,000 Debtor days Inventory days Payable days Cash conversion cycle (21) (24) (25) (26) Income statement (INR mn) Income from operations 575, , , ,669 Materials costs 386, , , ,485 Manufacturing expenses 79,965 86,192 94, ,122 Employee costs 19,788 23,310 26,652 28,988 Total operating expenses 486, , , ,596 EBITDA 88, , , ,073 Depreciation 28,202 26,021 27,030 28,929 EBIT 60,452 77, , ,144 Add: Other income 14, , , , Less: Interest Expense Profit Before Tax 74,247 99, , ,279 Less: Provision for Tax 20,794 26,036 33,838 41,148 Reported Profit 53,453 73,377 90, ,130 Adjusted Profit 53,453 73,377 90, ,130 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

9 Maruti Suzuki India 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, , , ,907 Shareholders' funds 298, , , ,417 Short term borrowings 774 4,836 4,836 4,836 Total Borrowings 774 4,836 4,836 4,836 Def. Tax Liability (net) 1,943 4,640 4,640 4,640 Sources of funds 301, , , ,893 Gross Block 153, , , ,558 Net Block 125, , , ,933 Capital work in progress 10,069 12,523 12,523 12,523 Total Fixed Assets 135, , , ,456 Cash and Equivalents 199, , , ,807 Inventories 31,321 32,622 37,640 40,190 Sundry Debtors 13,222 11,992 13,837 13,859 Loans & Advances Other Current Assets 39,940 37,461 37,461 37,461 Current Assets (ex cash) 84,518 82,103 88,971 91,546 Trade payable 74,073 83,673 96, ,914 Other Current Liab 43,768 55,073 63,720 73,003 Total Current Liab 117, , , ,916 Net Curr Assets ex cash (33,323) (56,643) (71,559) (92,370) Uses of funds 301, , , ,893 BVPS (INR) , , ,660.3 Free cash flow (INR mn) Reported Profit 53,453 73,377 90, ,130 Add: Depreciation 28,202 26,021 27,030 28,929 Interest (Net of Tax) Others 28,937 49,282 5,258 14,837 Less: Changes in WC 7,233 23,320 14,916 20,811 Operating cash flow 103, , , ,735 Less: Capex (120,158) 35,794 35,000 30,000 Free Cash Flow 224,102 90,226 73, ,735 Cash flow metrics Operating cash flow 103, , , ,735 Investing cash flow (72,274) (91,815) (75,682) (90,471) Financing cash flow (12,364) (11,293) (29,971) (31,789) Net cash Flow 19,306 22,912 2,917 10,475 Capex 120,158 (35,794) (35,000) (30,000) Dividend paid 9,090 12,725 29,077 30,895 Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle (21) (24) (25) (26) Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity (0.7) (0.8) (0.8) (0.9) 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 37, Mahindra & Mahindra Ltd 13, Tata Motors Ltd 20, Median AVERAGE Source: Edelweiss research 9 Edelweiss Securities Limited

10 Automobiles Additional Data 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 4.98 Vanguard group 1.92 Blackrock 1.48 Abu dhabi investment 1.06 Birla sun life asset 0.79 Fmr llc 0.79 Jpmorgan chase & co 0.73 Uti asset management 0.68 Sbi funds management 0.6 *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 10 Edelweiss Securities Limited

11 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 11 Edelweiss Securities Limited

12 Automobiles 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 26 Oct Oct Oct 17 Exide Industries Bajaj Auto Revenue beat; margins buckle as lead spikes; Result Update In line quarter; H2FY18 outlook strong; Result Update Automobiles Do not ignore replacement demand; Sector Update 207 Buy 3,227 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 9,000 8,000 (INR) 7,000 6,000 5,000 4,000 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Maruti Suzuki India 12 Edelweiss Securities Limited

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