Maruti Suzuki (MSIL IN) Steady performance, royalty to decrease

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1 INSTITUTIONAL EQUITY RESEARCH Maruti Suzuki (MSIL IN) Steady performance, royalty to decrease INDIA AUTOMOBILES Quarterly Update Top takeaways from Q3FY18 Revenue at Rs 193bn, up 14% yoy; largely in line with estimates EBITDA at Rs 30.4bn, 1% ahead of estimates; EBITDA margin at 15.8% (in line) PAT at Rs 18bn, 6% below expected; due to lower other income Board approved the revision in the royalty calculation method, resulting in lower royalty outgo (starting with its newly launched model Ignis). Key highlights: Steady performance was in line with our and street expectations. Royalty revision is seen as a positive. We believe Maruti is the best play on a pickup in automotive sales in India. However, we see little upside because of lower scope of a positive surprise and lofty valuations. Conference call takeaways Maruti s board approved lowering of royalty on new models launched from January 2017 (including Ignis and the new Swift); Suzuki s board approval is pending Rural growth was robust at 19% vs. overall growth of 15% FYTD18 Localization of vendors near Gujarat plant to reach c.70% (currently 15%) over the next 3 4 years Realisation improved by 3% qoq due to premium models, sustainable Maintains capex guidance of Rs 40bn; will spend Rs 8bn on acquiring land (for dealers) Average discounts were Rs 17,900 vs. Rs 15,200 qoq, mainly due to seasonality Gujarat production for Q3 was 36,000 units (95,000 units FYTD18); will operate at 20,000 units/month from January Targets 150,000/250,000 units production from Gujarat in FY18/19 First lithium Ion battery expected to roll out in 2020; it will manufacture both cell and battery, hence trying to secure supplies of lithium Hardening commodities impacted margins by 30bps in Q3FY18, expects more pressure in Q4FY18. Tax rate will be marginally higher at c.31% for FY18 Outlook and valuation: Maruti is better placed to play the recovery in automotive sales (we continue to be optimistic about volume growth) but we see little upside due to expensive valuations. We see 11% volume CAGR until FY20 led by new launches, but only nominal realisation growth from here. We tweak our estimates marginally and introduce FY20 estimates. Maintain Neutral, but revise our target to Rs 10,000 (Rs 8,150 earlier) valuing the company at a P/E of 25x FY20 EPS. 25 January 2018 NEUTRAL (Maintain) CMP RS 9397 / TARGET RS 10,000 (8%) COMPANY DATA O/S SHARES (MN) : 302 MARKET CAP (RSBN) : 2839 MARKET CAP (USDBN) : WK HI/LO (RS) : 9996 / 5644 LIQUIDITY 3M (USDMN) : 78.6 PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 17 Sep 17 Jun 17 PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS : KEY FINANCIALS Rs mn FY18E FY19E FY20E Net Sales 7,66,040 8,72,874 9,89,508 EBIDTA 1,22,243 1,41,982 1,65,532 Net Profit 79,475 98,151 1,17,862 EPS, Rs PER, x EV/EBIDTA, x PBV,x ROE, % Debt/Equity (%) CHANGE IN ESTIMATES Revised Est. % Revision Rs mn FY18E FY19E FY18E FY19E Revenue 7,66,040 8,72, % 0.7% EBITDA 1,22,243 1,41, % 2.1% Core PAT 79,475 98, % 0.2% EPS (Rs) % 0.2% Dhawal Doshi ( ) ddoshi@phillipcapital.in Nitesh Sharma, CFA ( ) nsharma@phillipcapital.in (Rs mn) Q3FY18 Q3FY17 yoy Q2FY17 qoq vs. expectations Comments growth % growth % % Total revenues 1,92,832 1,68, ,17, Raw material 1,33,323 1,16, ,49, Staff costs 6,869 6, , Other expenses 22,262 20, , Total expenditure 1,62,454 1,43, ,80, EBIDTA 30,378 24, , Margins largely in line Other income 2,449 5, , Interest Depreciation 6,890 6, , PBT 25,674 24, , Tax 7,684 6, , Adjusted net profit 17,990 17, , Units sold (nos) 4,31,112 3,87, ,92,118 (12.4) Realisation (INR) 4,47,290 4,29, ,35, Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Financials Income Statement Y/E Mar, Rs mn FY17 FY18e FY19e FY20e Net sales 6,69,094 7,66,040 8,72,874 9,89,508 Growth, % Other income 11,254 14,068 16,178 18,604 Total income 6,80,348 7,80,108 8,89,052 10,08,113 Raw material expenses 4,67,316 5,40,615 6,13,446 6,93,077 Employee expenses 23,310 26,758 30,494 34,578 Other Operating expenses 86,192 90,492 1,03,130 1,14,925 EBITDA (Core) 1,03,530 1,22,243 1,41,982 1,65,532 Growth, % Margin, % Depreciation 26,021 27,582 29,513 31,579 EBIT 77,509 94,661 1,12,469 1,33,953 Growth, % Margin, % Interest paid Other Non Operating Income 18,834 13,488 23,093 28,426 Pre tax profit 99,413 1,13,536 1,42,247 1,70,815 Tax provided 26,036 34,061 44,097 52,953 Profit after tax 73,377 79,475 98,151 1,17,862 Others (Minorities, Associates) Net Profit 73,377 79,475 98,151 1,17,862 Growth, % Net Profit (adjusted) 73,377 79,475 98,151 1,17,862 Unadj. shares (m) Wtdavg shares (m) Balance Sheet Y/E Mar, Rsmn FY17 FY18e FY19e FY20e Cash & bank ,525 22,222 53,170 Debtors 11,992 13,750 15,671 17,769 Inventory 32,622 37,739 42,823 48,382 Loans & advances 16,363 16,363 16,363 16,363 Total current assets 61,108 81,377 97,079 1,35,684 Investments 2,82,284 3,27,284 3,97,284 4,67,284 Gross fixed assets 3,32,714 3,72,714 4,11,714 4,49,714 Less: Depreciation 1,99,822 2,27,405 2,56,918 2,88,497 Add: Capital WIP 12,523 12,523 12,523 12,523 Net fixed assets 1,45,415 1,57,833 1,67,320 1,73,741 Non current assets 21,126 21,126 21,126 21,126 Total assets 5,09,933 5,87,620 6,82,808 7,97,834 Current liabilities 1,19,787 1,32,911 1,45,952 1,60,210 Non current liabilities 28,435 28,435 28,435 28,435 Total liabilities 1,48,222 1,61,346 1,74,387 1,88,645 Paid up capital 1,510 1,510 1,510 1,510 Reserves & surplus 3,60,201 4,24,764 5,06,912 6,07,680 Shareholders equity 3,61,711 4,26,274 5,08,422 6,09,190 Total equity & liabilities 5,09,933 5,87,621 6,82,809 7,97,835 Source: Company, PhillipCapital India Research Estimates Cash Flow FY17 FY18e FY19e FY20e Pre tax profit 99,413 1,13,536 1,42,247 1,70,815 Depreciation 26,021 27,582 29,513 31,579 Chg in working capital 20,863 6,249 6,036 6,601 Total tax paid 26,036 34,061 44,097 52,953 Other operating activities Cash flow from operating activities 1,21,155 1,14,200 1,34,594 1,56,936 Capital expenditure 32,000 40,000 39,000 38,000 Other investing activities 35,000 45,000 70,000 70,000 Cash flow from investing activities 67,000 85,000 1,09,000 1,08,000 Free cash flow 54,155 29,200 25,594 48,936 Equity raised/(repaid) Debt raised/(repaid) Other financing activities 14,715 15,806 16,897 17,988 Cash flow from financing activities 14,715 15,806 16,897 17,988 Net chg in cash 39,440 13,394 8,697 30,948 Valuation Ratios FY17 FY18e FY19e FY20e Per Share data EPS (INR) Growth, % Book NAV/share (INR) 1, , , ,016.7 FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (0.1) (0.1) (0.1) (0.1) Fixed capital/sales (x) Receivable days Inventory days Payable days Working capital days (32.1) (31.0) (29.7) (28.7) Liquidity ratios Current ratio (x) Quick ratio (x) Total debt/equity (%) Net debt/equity (%) 1.3 (2.0) (3.4) (7.9) Valuation PER (x) PEG (x) y o y growth Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Stock Price, Price Target and Rating History N (TP 8150) N (TP 7200) B (TP 4200) B (TP 4950) B (TP 4700) B (TP 4950) B (TP 6400) N (TP 5600) B (TP 5600) N (TP 4600) B (TP 4500) J 15 M 15 A 15 J 15 J 15 S 15 O 15 D 15 J 16 M 16 A 16 J 16 N (TP 4600) S 16 O 16 D 16 J 17 M 17 A 17 J 17 J 17 S 17 O 17 D 17 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Engineering, Capital Goods Pharma & Specialty Chem Dhawal Doshi (9122) Jonas Bhutta (9122) Surya Patra (9122) Nitesh Sharma, CFA (9122) Vikram Rawat (9122) Mehul Sheth (9122) Banking, NBFCs IT Services & Infrastructure Strategy Manish Agarwalla (9122) Vibhor Singhal (9122) Naveen Kulkarni, CFA, FRM (9122) Pradeep Agrawal (9122) Shyamal Dhruve (9122) Neeraj Chadawar (9122) Paresh Jain (9122) Logistics, Transportation & Midcap Telecom Consumer & Retail Vikram Suryavanshi (9122) Naveen Kulkarni, CFA, FRM (9122) Naveen Kulkarni, CFA, FRM (9122) Media Preeyam Tolia (9122) Naveen Kulkarni, CFA, FRM (9122) Technicals Vishal Gutka (9122) Vishal Gutka (9122) Subodh Gupta, CMT (9122) Akshay Mokashe (9122) Metals Production Manager Cement Dhawal Doshi (9122) Ganesh Deorukhkar (9122) Vaibhav Agarwal (9122) Vipul Agrawal (9122) Editor Economics Mid-Caps Roshan Sony Anjali Verma (9122) Deepak Agarwal (9122) Sr. Manager Equities Support Rosie Ferns (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Asia Sales Zarine Damania (9122) Kishor Binwal (9122) Dhawal Shah Bhavin Shah (9122) Sales Trader Ashka Mehta Gulati (9122) Dilesh Doshi (9122) Execution Archan Vyas (9122) Suniil Pandit (9122) Mayur Shah (9122) SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 RafflesCityTower, Singapore Tel : (65) Fax: (65) JAPAN: Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, VorawatBuilding, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of TradeBuilding Chicago, IL USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA: Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA: PT Phillip Securities Indonesia ANZTower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA: PhillipCapital Australia Level 10, 330 Collins Street Melbourne, VIC 3000, Australia Tel: (61) Fax: (61) HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, OceanTower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) INDIA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai Tel: (9122) Fax: (9122) Page 4 PHILLIPCAPITAL INDIA RESEARCH

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