Narnolia Securities Ltd. NAVEEN KUMAR DUBEY AUTOMOBILE. 02-Apr-18

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1 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar Apr-18 Company Data CMP 8863 Target Price 9367 Previous Target Price 9048 Upside 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) 10000/5930 2,67, RoE to maintain over 1 RoE % % % 13.3% 15. INDUSTRY - AUTOMOBILE BLOOMBERG MSIL IN BSE Code NSE Code - MARUTI NIFTY Key Highlights of the Report: Maruti Suzuki India Ltd (MSIL) has once again reported strong monthly sales volume in March 2018 with a growth of 14.YoY. Overall on a full year basis also Maruti has posted healthy 13%YoY volume growth in FY18. Early Ramp up of the second line of Gujarat plant in 2019 will offset the higher logistics cost and will protect the margins till the localization increases near the plant. We expect RoE to be maintained over 19. in FY20. Based on the double digit volume growth guidance, improvement in product mix and ramp up of Gujarat plant in FY19 we increase our FY20e EPS estimates by and change our rating from HOLD to ACCUMULATE for a target price of Rs. 9367(26x FY20e EPS) Shareholding patterns % Financials/Valu FY16 FY17 FY18E FY19E FY20E Net ation Sales 57,589 68,085 80,141 87,807 97,480 EBITDA 8,889 10,358 12,223 13,685 15,812 EBIT 6,067 7,754 9,534 10,708 12,806 PAT 5,504 7,733 7,998 9,104 10,877 3QFY18 2QFY18 1QFY18 EPS (Rs) Promoters EPS growth (%) 4 37% 1 1 Public ROE (%) Total ROCE (%) 2 21% 23% 2 23% BV 1,014 1,227 1,402 1,600 1,838 Stock Performance % P/B (X) Mn 3Mn 1Yr P/E (x) Absolute (0.1) (8.0) 49.2 Rel.to Nifty 3.5 (4.5) 38.6 RECENT DEVELOPMENT: Strengthening distribution network MARUTI NIFTY The management expects that the company would require at least 3,500 sales outlets and over 5,000 workshops over the next few years to expand its distribution reach and better service quality to its customers. Maruti is also taking various initiatives to bring the after sales service close to the customers. During the year, the company added approx. over 200 new dealer workshops. Maruti Suzuki had earmarked Rs 1,000 crore in the current financial year to buy land parcels for new dealerships. Another 43 land deals were finalized in the first half of the year. The company plans to add 1500 new dealerships in the next three years. NAVEEN KUMAR DUBEY Naveen.dubey@narnolia.com A separate chain which sells premium models under the Nexa brand has a further 280 outlets. It also runs a network of around 3,293 service centres across the country. Please refer to the Disclaimers at www. Narnolia.com

2 , , , , , , , , , , ,290 Quarterly Performance Financials 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY % QoQ% FY16 FY17 YoY % Total Volumes ('000) % -1 1,429 1,568 1 Realization(Rs./ car) % 1% % Net Sales 16,865 18,333 17,546 21,768 19, % 57,589 68,085 Other Income % 1,481 2,290 5 COGS 11,674 12,767 12,288 14,978 13, % 38,706 46,742 21% Employee Cost % 3% 2,000 2,360 Other Expenses 2,085 2,402 2,296 2,490 2,244 8% -1 8,054 8,728 8% EBITDA 2,489 2,549 2,309 3,634 3,020 21% -17% 8,768 10,358 Depreciation % 2,822 2,604-8% Interest PBT 2,417 2,270 2,278 3,460 2, ,419 10,035 3 Tax , ,087 2,616 2 PAT 1,745 1,709 1,557 2,484 1,799 3% -28% 5,451 7,591 3 Operating performance in line; lower other income impacted PAT Net sales stood at Rs crore in 3QFY18 a growth of 1 over same quarter previous year. This was driven by 11%YoY volume growth and 3%YoY realization growth. Domestic volumes grew by 1YoY to units during 3QFY18. Compact segment saw a growth of 27%YoY and utility vehicle segment grew by 28% YoY during the quarter. Fast growing UV and Compact segment demand is driven by Vitara Brezza, Dzire and Baleno. These models have a waiting period of 4, 4 and 6 months respectively. Realization improved by 2.7%YoY to Rs per car on account of better product mix and price increases taken during the quarter. Depreciation expenses has jumped by YoY in 3QFY18 due to increase in utilization level of Gujarat plant. Which started production in March The company reported Rs.245 crore of other income. Increase in G-sec rates have resulted in MTM loss during the quarter. Royalty rate for the quarter stood at Rs.1022 crore. Volume and volume growth trend Realization and realization growth trend Volume Volume Growth(YoY) Realization (Rs./car) Realization Growth (QoQ) % 1 13% 11% 11% % 460, , , , , , , , , , ,000 1% 1% -1% 1% 7% 3% 1% -1%

3 2,189 2,245 2,145 2,339 2,216 3,037 2,489 2,549 2,309 3,634 3,020 1,193 1,497 1,183 1,538 1,486 2,398 1,745 1,709 1,557 2,484 1,799 Higher volumes led economies of scale in 3QFY18 Margin % 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY(+/-) QoQ(+/-) FY16 FY17 YoY(+/-) Gross Margin 31% % 31% % 31% EBITDA Margin % 17% PAT Margin 1 11% % 0.02 EBITDA and EBITDA Margin trend Gross Margin remained flat YoY and QoQ to 30.. Higher commodity prices and higher discounts during the quarter were offset by cost initiatives taken by the company. EBITDA Margin grew by 90bps YoY to 15.7% on account of better product mix and higher volumes which resulted in operating leverage benefit during the quarter. PAT Margin declined by 100bps YoY to 9.33%. Lower other income due to MTM loss during the quarter and increase in tax rates due to reduction in R&D benefit remained the main reasons for decline PAT margins despites improved operational performance. PAT and PAT Margin trend EBITDA (Rs. Crore) EBITDA Margin PAT (Rs. Crore) PAT Margin 4,000 3,500 3,000 2,500 2,000 1,500 1, % % 17% % 3,000 2,500 2,000 1,500 1, % 8% % 1 11% % Concall/Management Interview Highlights: The company expects double digit volume growth in FY19. The management has suggested that the first line of the plant will run at its full capacity in FY19 and the second line will be available by the beginning of The management expects that the company can easily touch units monthly mark in Decision on the new royalty rates is still pending with the board. Capex guidance for full year FY18 is Rs.4000 crore Maruti Suzuki will grow in double digits in the next three years and meet its stated target of selling 2 million vehicles a year by Waiting period for Baleno: 16 weeks, Dzire: 16 weeks and Brezza: 20 weeks Exports revenue for the quarter stood at Rs.1430 crores Tax rate would be around 29-3 in FY18 Discounts for the quarter stood at Rs Royalty for the quarter Rs.1022 crore. Commodity prices will be higher in 4QFY18 as well. First time buyers are 5 of total sales. Government employees forms 2 of total Maruti's sales and fleet sales is still in single digits of total sales.

4 Investment Arguments: Focus on cost control to drive margins- Maruti is constantly working on various cost cutting initiatives which includes; outbound logistics cost and increasing localization. Though Maruti primarily uses roads currently, It worked with the Indian Railways to bring down transportation time substantially. These initiatives may further improve margins by 200 bps by FY20. Electric Vehicles a new opportunity- Being a market leader in the passenger vehicle segment, Maruti is stepping towards developing electric vehicles. Considering the increasing pollution government has already asked all car makers to update their portfolio by With regard to that Suzuki is developing its own Lithium-ion battery plant in JV with Toshiba and Denso. Currently China is the only producer of Lithium-ion batteries in the world. Unleashing the potential in the international business- Maruti is onset to unleash the potential in the international business by targeting European and Latin American markets. Recently launched and upcoming new products are technologically sound and competent to the export markets. Europe contributes 3 of total export volumes. Reducing dependency on Yen to improve profitability- Maruti is also aggressively working towards bringing down the import content in its cars from an average 1 at the end of FY17 to 1 as part of its vision 2.0 plan. Currently about 14 percent of imports are yen denominated. Management expects to bring it down to 5 percent and typically, 1% movement in yen leads to around 1% change in the operating profit of Maruti. The company also have rupee denominated Royalty contracts with the parent Suzuki Motors for new models. Improvement in rural economy to push entry level car sales - Currently about 30-3 of Maruti's sales come from rural areas. FMCG major like Hind unilever also sees gradual recovery in rural demand going forward led by two consecutive better monsoon, increase in minimum support prices and government s intervention to get the rural economy back on track. Government's focus towards improving rural infrastructure will provide huge opportunities for entry segment cars like; Alto. The entry segment cars have been witnessing slowdown due to increasing popularity of compact segment. Mix changes towards premium segment cars Discount/vehicle increased qoq in 3QFY Mini Compact Super Compact Mid size Utility Vehicles Vans Export 8% 7% 7% 8% 8% 8% 7% 7% 7% 8% % 7% 8% 3% 11% 13% 13% 13% % 38% 38% 37% 38% 3 37% % Discounts (Rs.) As % of realization 3% 3% 3% 2 31% % 27% 27% % % 0

5 Improvement in Return Ratios Capacity and Utilization Trend % RoE % 13% RoCE 2 21% % Total Capacity(in units) Utilization Trend 97% View & Valuation Maruti Suzuki India Ltd (MSIL) has once again reported strong monthly sales volume in March 2018 with a growth of 14.YoY. The company witnessed sharp growth in Utility vehicle segment and mini segment which grew by 2 and 21%YoY respectively. Domestic volumes grew by 1YoY and exports volumes grew by YoY during the 4QFY18. Overall on a full year basis also Maruti has posted healthy 13%YoY volume growth in FY18. The company has been able to post growth on the back of growing product portfolio and expanding reach in the interiors of the country, which resulted in 51% market share in February We believe MSIL to continue this robust growth momentum going ahead. MSIL has been facing the capacity constraints in FY18 due to delay in ramp up of first line of Gujarat plant. The management has suggested that the plant will run at its full capacity in FY19 and the second line will be available by the beginning of Going forward, the management has guided for double digit growth in FY19 based on the increasing waiting period for its high end models and rising living standards in rural areas. Early ramp up of second line will offset the higher logistics cost and will protect the margins for the company till the localization increases near Gujarat plant. We expect that the growing demand for premium segment cars, improving rural infrastructure, lower passenger vehicle penetration will drive the volumes going ahead. We expect RoE to be maintained over 19. in FY20. MSIL is sitting on a huge cash pile which gives it free hand to focus on product development and marketing & distribution areas. Based on the double digit volume growth guidance, improvement in product mix and ramp up of Gujarat plant in FY19 we increase our FY20e EPS estimates by and change our rating from HOLD to ACCUMULATE for a target price of Rs. 9367(26x FY20e EPS).

6 Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Revenue from Operation 68,085 80,141 87,807 97,480 ROE 20.3% % 19. Change (%) 1 11% ROCE % 23. Other Operating Income Asset Turnover EBITDA 10,358 12,223 13,685 15,812 Debtor Days Change (%) 17% 1 Inventory Days Margin (%) 1 1 Payable Days Dep & Amortization 2,604 2,689 2,977 3,007 Interest Coverage EBIT 7,754 9,534 10,708 12,806 P/E Interest & other finance cost Price / Book Value Other Income 2,290 1,760 2,010 2,410 EV/EBITDA EBT 9,954 11,204 12,678 15,176 FCF per Share 1,109 3,120 3,151 3,748 Exceptional Item Dividend Yield % Tax 2,616 3,404 3,803 4,562 Minority Int & P/L share of Ass Assumptions Reported PAT 7,511 7,998 9,104 10,877 Y/E March FY17 FY18E FY19E FY20E Adjusted PAT 7,511 7,998 9,104 10,877 Volume ('000) 1,569 1,780 1,952 2,122 Change (%) 37% 1 1 Volume Growth 1 13% 1 Margin(%) 11% % Realization(Rs./vehicle) 4,34,062 4,50,339 4,49,719 4,59,292 Realization Growth 8% Capex(Rs crore) 3,344 4,000 3,000 3,000 Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March FY17 FY18E FY19E FY20E Y/E March FY17 FY18E FY19E FY20E Share Capital PBT 10,127 11,204 12,678 15,176 Reserves 36,924 42,196 48,196 55,365 (inc)/dec in Working Capital 10,413 14,166 15,923 18,485 Networth 37,075 42,347 48,347 55,516 Non Cash Op Exp 2,604 2,689 2,977 3,007 Debt Interest Paid (+) Other Non Current Liab 1,633 2,018 2,018 2,018 Tax Paid (2,323) (3,404) (3,803) (4,562) Total Capital Employed 37,559 42,556 48,556 55,724 others 1,868 1, Net Fixed Assets (incl CWIP) 14,563 16,346 16,489 16,603 CF from Op. Activities 10,282 11,794 11,985 14,498 Non Current Investments 26,972 31,222 36,407 43,185 (inc)/dec in FA & CWIP (3,236) (4,472) (3,121) (3,121) Other Non Current Assets 1,603 1,664 1,664 1,664 Free Cashflow 7,046 7,322 8,864 11,378 Non Current Assets 43,162 49,263 54,592 61,484 (Pur)/Sale of Investment (17,694) 48 (528) (851) Inventory 3,264 3,623 3,969 4,407 others 56 (4,250) (5,185) (6,778) Debtors 1,203 1,757 1,684 1,869 CF from Inv. Activities (9,173) (8,674) (8,833) (10,750) Cash & Bank inc/(dec) in NW Other Current Assets 1,541 2,004 2,195 2,437 inc/(dec) in Debt 253 (275) - - Current Assets 8,798 10,113 11,114 12,830 Interest Paid (110) (90) (40) (40) Creditors 8,369 9,851 10,344 11,484 Dividend Paid (inc tax) (1,273) (2,727) (3,103) (3,708) Provisions others Other Current Liabilities 1,828 2,404 2,195 2,437 CF from Fin. Activities (1,129) (3,092) (3,143) (3,748) Curr Liabilities 12,753 14,802 15,132 16,572 Inc(Dec) in Cash (21) Net Current Assets (3,955) (4,689) (4,018) (3,742) Add: Opening Balance Total Assets 51,961 59,376 65,706 74,314 Closing Balance

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