Run continues, Royalty reduction positive ; Buy January 29, 2018 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating BUY Price Rs9,277 Target Price Rs11,237 Implied Upside 21.1% Sensex 36,050 Nifty 11,070 (Prices as on January 25, 2018) Trading data Market Cap. (Rs bn) 2,801.7 Shares o/s (m) 302.0 3M Avg. Daily value (Rs m) 5066 Major shareholders Promoters 56.21% Foreign 25.81% Domestic Inst. 11.00% Public & Other 6.99% Stock Performance (%) 1M 6M 12M Absolute (4.4) 23.5 60.0 Relative (10.6) 11.6 29.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 345.1 336.6 2.5 2020 416.2 394.9 5.4 Price Performance (RIC: MRTI.BO, BB: MSIL IN) (Rs) 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan 17 Mar 17 Source: Bloomberg May 17 Jul 17 Sep 17 Nov 17 Jan 18 Maruti Suzuki s 3QFY18 EBITDA grew by 22% YoY to Rs30.4bn (in line with our estimates), EBITDA margin at 15.8% grew 100bp YoY (in line, PLe 15.8%%) on back of a favourable product mix with new premium products contributing ~60 65% of sales, however margins were negatively impacted by ~30bps due to higher commodity prices. Revenues at Rs192.8bn up 14% YoY was broadly in line with our estimates. Profit for the quarter grew 3% YoY at Rs 18bn (~16% below our estimate) owing to lower than expected other income (impact of ~Rs3bn due to M2M valuations of investments) and higher tax expense. Reduction in Royalty a key positive: All model launches from January 2017 (Ignis/Dzire/S cross) will now attract a lower royalty rate than the current rate (5.3% of net sales for the quarter). While the quantum is yet to be decided (requires approval from the Suzuki board), it would be applicable retrospectively from Jan 17 when Ignis was launched. Valuation: reiterate Buy with a revised TP of INR 11,237: The announcement of royalty reduction for future models is a key positive, while the quantum is yet to be finalized. We have assumed a royalty reduction of ~100bp for future models and consequently upgraded our margin assumptions on weighted average basis. Competitive intensity fading, Maruti Suzuki continuing to gain market share (530bp to 50.3% over FY15 YTDY18) and further intensifying its hold on the domestic PV market with successful product launches, underlines MSILs strong competitive position. The company is now a rare play on the premiumization trend as well as a pull back in the entry level car segment in India in the next 2 3 years. We marginally increase our FY19 20E EPS by 2 4% to factor in higher margins. We maintain Buy with a revised target price of TP of INR 11,237 from INR 10,525 earlier based on 27x FY20E P/E. Key financials (Y/e March) 2017 2018E 2019E Contd...2 2020E Revenues (Rs m) 680,348 796,780 906,044 1,063,085 Growth (%) 18.2 17.1 13.7 17.3 EBITDA (Rs m) 102,494 125,942 149,890 178,475 PAT (Rs m) 73,377 86,816 104,229 125,691 EPS (Rs) 243.0 287.5 345.1 416.2 Growth (%) 36.4 18.3 20.1 20.6 Net DPS (Rs) 75.0 90.0 100.0 101.0 Profitability & Valuation 2017 2018E 2019E 2020E EBITDA margin (%) 15.1 15.8 16.5 16.8 RoE (%) 22.2 22.2 22.7 23.1 RoCE (%) 22.0 21.8 22.4 22.9 EV / sales (x) 4.1 3.5 3.1 2.6 EV / EBITDA (x) 27.4 22.2 18.6 15.5 PE (x) 38.2 32.3 26.9 22.3 P / BV (x) 7.7 6.6 5.7 4.7 Net dividend yield (%) 0.8 1.0 1.1 1.1 Source: Company Data; PL Research Q3FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY18 Result Overview (Rs m) Conference call highlights: Discounts for the quarter stood at ~INR17,900 down 6% yoy/ up 18% qoq. Gujarat plant production for the quarter was at 36k units and the plant is currently at a run rate of 20k per month, YTDFY18 production at 95k units. For FY19 contribution from the plant is expected be at 250k. Second line is on track and expected to be ready by January 2019. Localization level for the Gujarat plant currently at ~15%, which is expected to reach ~60 70% over the next 3 4 years. Expect Lithium ion plant to start production of batteries from 2020. Company plans to incur INR ~8bn on acquiring land in FY18. Company converted 30 of its existing showrooms to Arena in YTDFY18 and plans to convert 32 more next fiscals. Over the next 2 3 years all showrooms to be converted into Arena Rural growth continues to be robust up 19% yoy YTD as against overall growth of 15% YTD, management expects momentum in rural growth to continue. Capex for the year is to be at INR 40bn. Management expects commodity cost pressures to continue and likely to go up in Q4FY18 Y/e March Q3FY18 Q3FY17 YoY gr. (%) Q2FY17 9MFY18 9MFY17 YoY gr. (%) Net Revenues 192,832 168,648 14.3 217,682 585,971 496,523 18.0 Raw Materials 133,323 116,738 14.2 149,780 405,987 339,015 19.8 % of Net Sales 69.1 69.2 68.8 69.3 68.3 Personnel 6,869 6,169 11.3 6,666 20,056 17,150 16.9 % of Net Sales 3.6 3.7 3.1 3.4 3.5 Manufacturing & Other Exp 22,262 20,851 6.8 24,461 69,463 62,946 10.4 % of Net Sales 11.5 12.4 11.2 11.9 12.7 Total Expenditure 162,454 143,758 13.0 180,907 495,506 419,111 18.2 EBITDA 30,378 24,890 22.0 36,775 90,465 77,412 16.9 EBITDA Margin (%) 15.8 14.8 16.9 15.4 15.6 Depreciation 6,890 6,349 8.5 6,825 20,554 19,029 8.0 EBIT 23,488 18,541 26.7 29,950 69,911 58,383 19.7 Interest Expenses 263 290 (9.3) 150 726 668 8.7 Non operating income 2,449 5,919 (58.6) 5,229 14,505 18,926 (23.4) PBT 25,674 24,170 6.2 35,029 83,690 76,641 9.2 Tax Total 7,684 6,725 14.3 10,186 25,293 20,307 24.6 Tax Rate (%) Total 29.9 27.8 7.6 29.1 30.2 26.5 14.1 Reported PAT 17,990 17,445 3.1 24,843 58,397 56,334 3.7 Adj. PAT 17,990 17,445 3.1 24,843 58,397 56,334 3.7 Source: Company Data, PL Research January 29, 2018 2
Exhibit 2: Operating Metrics (Rs m) Y/e March Q3FY18 Q3FY17 YoY gr. (%) Q2FY17 9MFY18 9MFY17 YoY gr. (%) Car Sales Volume (nos) 431,112 387,251 11.3 492,118 1,317,801 1,154,164 14.2 Net Realisation/Vehicle 447,290 435,500 2.7 442,337 444,658 430,201 3.4 Material cost / vehicle 309,254 301,453 2.6 304,358 308,079 293,732 4.9 Gross Profit / vehicle 138,036 134,047 3.0 137,979 136,579 136,469 0.1 Employee cost /vehicle 15,933 15,930 0.0 13,546 15,219 14,859 2.4 Other expenses / vehicle 51,639 53,844 (4.1) 49,706 52,711 54,538 (3.3) EBITDA/vehicle 70,464 64,274 9.6 74,728 68,648 67,072 2.4 Net Profit/vehicle 41,729 45,048 (7.4) 50,482 44,314 48,809 (9.2) Source: Company Data, PL Research January 29, 2018 3
Income Statement (Rs m) Net Revenue 680,348 796,780 906,044 1,063,085 Raw Material Expenses 467,316 547,388 626,076 736,718 Gross Profit 213,032 249,392 279,967 326,367 Employee Cost 23,310 27,040 31,772 37,332 Other Expenses 87,228 96,410 98,306 110,561 EBITDA 102,494 125,942 149,890 178,475 Depr. & Amortization 26,021 27,017 28,932 29,955 Net Interest (514) (476) (876) (1,279) Other Income 22,798 24,770 27,415 30,360 Profit before Tax 99,413 124,023 148,899 179,558 Total Tax 26,036 37,207 44,670 53,868 Profit after Tax 73,377 86,816 104,229 125,691 Ex Od items / Min. Int. Adj. PAT 73,377 86,816 104,229 125,691 Avg. Shares O/S (m) 302.0 302.0 302.0 302.0 EPS (Rs.) 243.0 287.5 345.1 416.2 Cash Flow Abstract (Rs m) C/F from Operations 127,844 102,640 136,318 160,670 C/F from Investing (119,229) (75,000) (100,000) (110,000) C/F from Financing (8,875) (27,990) (30,867) (31,073) Inc. / Dec. in Cash (260) (350) 5,451 19,597 Opening Cash 391 131 14,781 20,232 Closing Cash 131 (219) 20,232 39,829 FCFF 226,632 77,997 90,701 115,149 FCFE 230,694 77,947 90,651 115,099 Key Financial Metrics Growth Revenue (%) 18.2 17.1 13.7 17.3 EBITDA (%) 15.8 22.9 19.0 19.1 PAT (%) 36.4 18.3 20.1 20.6 EPS (%) 36.4 18.3 20.1 20.6 Profitability EBITDA Margin (%) 15.1 15.8 16.5 16.8 PAT Margin (%) 10.8 10.9 11.5 11.8 RoCE (%) 22.0 21.8 22.4 22.9 RoE (%) 22.2 22.2 22.7 23.1 Balance Sheet Net Debt : Equity (0.1) Net Wrkng Cap. (days) (33) (26) (26) (26) Valuation PER (x) 38.2 32.3 26.9 22.3 P / B (x) 7.7 6.6 5.7 4.7 EV / EBITDA (x) 27.4 22.2 18.6 15.5 EV / Sales (x) 4.1 3.5 3.1 2.6 Earnings Quality Eff. Tax Rate 26.2 30.0 30.0 30.0 Other Inc / PBT 22.9 20.0 18.4 16.9 Eff. Depr. Rate (%) 13.9 12.6 11.2 9.9 FCFE / PAT 314.4 89.8 87.0 91.6 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 361,711 421,347 495,376 590,565 Total Debt 4,836 4,786 4,736 4,686 Other Liabilities 4,640 1,000 1,000 1,000 Total Liabilities 371,187 427,133 501,112 596,251 Net Fixed Assets 145,415 148,398 164,467 179,512 Goodwill Investments 282,284 312,284 367,284 432,284 Net Current Assets (56,512) (33,549) (30,639) (15,545) Cash & Equivalents 131 14,781 20,232 39,829 Other Current Assets 77,251 101,874 114,604 131,262 Current Liabilities 133,894 150,204 165,475 186,636 Other Assets Total Assets 371,187 427,133 501,112 596,251 Quarterly Financials (Rs m) Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18 Net Revenue 183,334 175,457 217,682 192,832 EBITDA 25,595 23,312 36,775 30,378 % of revenue 14.0 13.3 16.9 15.8 Depr. & Amortization 7,010 6,839 6,825 6,890 Net Interest 226 313 150 263 Other Income 4,491 6,827 5,229 2,449 Profit before Tax 22,850 22,987 35,029 25,674 Total Tax 5,745 7,423 10,186 7,684 Profit after Tax 17,105 15,564 24,843 17,990 Adj. PAT 17,105 15,564 24,843 17,990 Key Operating Metrics Total volumes (units) 1,568,603 1,774,127 1,962,937 2,226,714 Realisation per unit (Rs) 426,554 441,816 454,191 470,132 Gross margin per unit (Rs) 135,810 140,572 142,627 146,569 EBITDA per unit (Rs) 65,341 70,988 76,360 80,152 Profit per unit (Rs) 46,779 48,935 53,098 56,447 Source: Company Data, PL Research. January 29, 2018 4
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 43.4% 44.2% 12.4% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Saksham Kaushal (BSc Accounting & Finance (Hons.)), Ms. Poorvi Banka (MSc. Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Saksham Kaushal (BSc Accounting & Finance (Hons.)), Ms. Poorvi Banka (MSc. Finance), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. January 29, 2018 5