Healthy operating performance; Accumulate October 28, 2016 Rohan Korde rohankorde@plindia.com +91 22 66322235 Rating Accumulate Price Rs5,860 Target Price Rs6,356 Implied Upside 8.5% Sensex 27,916 Nifty 8,615 (Prices as on October 27, 2016) Trading data Market Cap. (Rs bn) 1,770.1 Shares o/s (m) 302.1 3M Avg. Daily value (Rs m) 3876.9 Major shareholders Promoters 56.21% Foreign 23.59% Domestic Inst. 13.59% Public & Other 6.61% Stock Performance (%) 1M 6M 12M Absolute 6.1 56.3 30.3 Relative 7.2 49.2 27.9 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 237.4 209.3 13.4 2018 282.5 251.0 12.5 Price Performance (RIC: MRTI.BO, BB: MSIL IN) (Rs) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Oct 15 Dec 15 Source: Bloomberg Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Maruti Suzuki s (MSIL s) performance in Q2FY17 was robust, with healthier thanexpected EBITDA margins at 17%. Despite unfavourable forex movements, MSIL s EBITDA grew 35.3% YoY to Rs30.4bn, on the back of material cost reduction, lower discounts, lower selling and distribution expenses and greater operating leverage. However, due to significantly higher non operating income, coupled with lower depreciation provision, there was an impressive 60.2% YoY profit growth to Rs24bn, which was significantly better than expectations. We have an Accumulate rating on MSIL on a healthy product portfolio, expectations of market share gains and the opportunity to reap benefits from recent launches which have been well received. Capacity constraints in the nearterm would be resolved in FY18 with the ramp up of production at the new Gujarat plant. A recovery in economic growth, sales prospects from new models overseas and incremental demand from hike in public sector wages provide a positive outlook ahead for MSIL from a long term perspective. We expect revenue CAGR of 18.7% over FY16 18e, with an adjusted profit CAGR of 36.4%, but with an EBITDA CAGR of 20.4% over the same period. We increase our earnings by 20.2%/13.9% for FY17/18e to factor in better margins and higher nonoperating income. The stock is currently trading at 20.8x FY18e EPS. Our target price is Rs6,356 based upon 12.5x FY18e EV/EBITDA (previously Rs5,923). At our price target, MSIL would trade at a PE of 22.5x FY18e (currently trades at 20.8x). MSIL s sales volume growth was healthy at 18.4% YoY to 418,470 units, which were its highest quarterly sales ever. With a realization increase of 9.3% YoY (flat QoQ), MSIL reported revenue growth of 28.8% YoY to Rs178.4bn. Contd...2 Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 498,254 577,463 687,404 813,461 Growth (%) 13.6 15.9 19.0 18.3 EBITDA (Rs m) 64,986 90,015 110,358 130,550 PAT (Rs m) 37,112 45,875 71,709 85,329 EPS (Rs) 122.9 151.9 237.4 282.5 Growth (%) 28.3 23.6 56.3 19.0 Net DPS (Rs) 25.0 35.0 45.0 50.0 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 13.0 15.6 16.1 16.0 RoE (%) 16.6 18.1 24.0 23.5 RoCE (%) 16.3 18.2 24.1 23.6 EV / sales (x) 3.6 3.1 2.6 2.1 EV / EBITDA (x) 27.3 19.7 15.9 13.3 PE (x) 47.7 38.6 24.7 20.7 P / BV (x) 7.5 6.6 5.4 4.4 Net dividend yield (%) 0.4 0.6 0.8 0.9 Source: Company Data; PL Research Q2FY17 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
MSIL reported a robust EBITDA margin at 17% (up 70bps YoY and 220bps QoQ), while EBITDA increased 33.8% YoY to Rs30.4bn (higher than expectation of Rs27.1bn). EBITDA margin improvement was driven by lower OE/sales ratio on operating leverage and lower discounts. Despite adverse currency movement, MSIL was its gross margins QoQ (lower 80bps YoY) due to successful cost reduction. Depreciation was lower YoY due to a change in policy of amortisation of dies and intangible assets (from 4 years earlier to 5 years). This had the impact of lowering the depreciation provision. The net effect was lower as the saving was partially set off by depreciation on new models dies. Significantly higher non operating income at Rs8.1bn helped drive profit to Rs24bn, which was better than expected. Conference call highlights Gujarat plant expected to commence production at Q4 end. Current capacity stands at ~1.65m units; 0.25m units would be added once the new plant operates at full utilisation (ramp up possible over six months). Post Gujarat plant commissioning, Baleno capacity would be ramped up, thereby, reducing the waiting period. Gross margin improvement was possible due to successful cost reduction and lower discounts (blended discounts stood at Rs16,100/vehicle in Q2). Operating leverage benefits were also visible. Royalty stood at 6.1% of net sales, which was flat QoQ and higher 20bps YoY. Festive season sales have seen 15 18% increase. October 28, 2016 2
Exhibit 1: Q2FY17 Result Overview (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Net Revenues 178,428 138,512 28.8 149,273 327,701 272,281 20.4 Raw Materials 120,741 92,717 30.2 101,254 221,995 182,857 21.4 % of Net Sales 67.7 66.9 67.8 67.7 67.2 Personnel 5,191 4,112 26.2 5,790 10,981 8,789 24.9 % of Net Sales 2.9 3.0 3.9 3.4 3.2 Manufacturing & Other Exp 22,122 19,229 15.0 20,072 42,194 36,508 15.6 % of Net Sales 12.4 13.9 13.4 12.9 13.4 Total Expenditure 148,054 116,058 27.6 127,116 275,170 228,154 20.6 EBITDA 30,374 22,454 35.3 22,157 52,531 44,127 19.0 EBITDA Margin (%) 17.0 16.2 14.8 16.0 16.2 Depreciation 6,300 6,694 (5.9) 6,389 12,689 13,410 (5.4) EBIT 24,074 15,760 52.8 15,768 39,842 30,717 29.7 Interest Expenses 197 178 10.7 181 378 368 2.7 Non operating income 8,126 4,736 71.6 4,833 12,959 6,801 90.5 PBT 32,003 20,318 57.5 20,420 52,423 37,150 41.1 Tax Total 8,023 5,348 50.0 5,558 13,581 10,099 34.5 Tax Rate (%) Total 25.1 26.3 (4.8) 27.2 25.9 27.2 (4.7) Reported PAT 23,980 14,970 60.2 14,862 38,842 27,051 43.6 Adj. PAT 23,980 14,970 60.2 14,862 38,842 27,051 43.6 Source: Company Data, PL Research Exhibit 2: Operating Metrics (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Car Sales Volume (nos) 418,470 353,335 18.4 348,443 766,913 694,664 10.4 Net Realisation/Vehicle 426,382 392,013 8.8 428,400 427,299 391,961 9.0 Material cost / vehicle 288,530 262,405 10.0 290,590 289,466 263,231 10.0 Gross Profit / vehicle 137,852 129,608 6.4 137,810 137,833 128,730 7.1 Employee cost /vehicle 12,405 11,638 6.6 16,617 14,318 12,652 13.2 Other expenses / vehicle 52,864 54,421 (2.9) 57,605 55,018 52,555 4.7 EBITDA/vehicle 72,583 63,549 14.2 63,589 68,497 63,523 7.8 Net Profit/vehicle 57,304 42,368 35.3 42,653 50,647 38,941 30.1 Source: Company Data, PL Research October 28, 2016 3
Income Statement (Rs m) Net Revenue 498,254 577,463 687,404 813,461 Raw Material Expenses 350,771 387,800 466,747 553,967 Gross Profit 147,483 189,663 220,657 259,494 Employee Cost 16,066 19,657 22,999 26,448 Other Expenses 66,431 79,991 87,300 102,496 EBITDA 64,986 90,015 110,358 130,550 Depr. & Amortization 24,703 28,239 26,293 29,653 Net Interest 283 289 565 (106) Other Income 9,768 4,849 14,914 16,641 Profit before Tax 48,682 65,810 98,231 116,889 Total Tax 11,570 19,636 26,522 31,560 Profit after Tax 37,112 46,174 71,709 85,329 Ex Od items / Min. Int. Adj. PAT 37,112 45,875 71,709 85,329 Avg. Shares O/S (m) 302.1 302.1 302.1 302.1 EPS (Rs.) 122.9 151.9 237.4 282.5 Cash Flow Abstract (Rs m) C/F from Operations 77,846 92,372 103,007 120,878 C/F from Investing (58,967) (74,282) (75,000) (88,000) C/F from Financing (24,993) (17,882) (14,391) (15,803) Inc. / Dec. in Cash (6,114) 208 13,616 17,075 Opening Cash 6,298 183 391 14,007 Closing Cash 183 391 14,007 31,083 FCFF 39,243 63,394 62,259 80,229 FCFE 22,806 62,366 62,209 80,179 Key Financial Metrics Growth Revenue (%) 13.6 15.9 19.0 18.3 EBITDA (%) 24.9 38.5 22.6 18.3 PAT (%) 28.3 23.6 56.3 19.0 EPS (%) 28.3 23.6 56.3 19.0 Profitability EBITDA Margin (%) 13.0 15.6 16.1 16.0 PAT Margin (%) 7.4 7.9 10.4 10.5 RoCE (%) 16.3 18.2 24.1 23.6 RoE (%) 16.6 18.1 24.0 23.5 Balance Sheet Net Debt : Equity (0.1) Net Wrkng Cap. (days) (23) (28) (27) (27) Valuation PER (x) 47.7 38.6 24.7 20.7 P / B (x) 7.5 6.6 5.4 4.4 EV / EBITDA (x) 27.3 19.7 15.9 13.3 EV / Sales (x) 3.6 3.1 2.6 2.1 Earnings Quality Eff. Tax Rate 23.8 30.0 27.0 27.0 Other Inc / PBT 20.1 7.0 15.2 14.2 Eff. Depr. Rate (%) 9.3 9.6 7.9 7.9 FCFE / PAT 61.5 135.9 86.8 94.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 237,042 270,071 328,187 398,411 Total Debt 1,802 774 724 674 Other Liabilities 4,810 4,741 4,741 4,741 Total Liabilities 243,654 275,586 333,652 403,826 Net Fixed Assets 141,421 137,747 151,454 161,801 Goodwill Investments 128,140 177,857 212,857 260,857 Net Current Assets (22,553) (40,018) (30,660) (18,832) Cash & Equivalents 183 391 14,007 31,083 Other Current Assets 65,766 75,961 92,153 106,514 Current Liabilities 88,502 116,370 136,820 156,428 Other Assets Total Assets 247,008 275,586 333,652 403,826 Quarterly Financials (Rs m) Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Revenue 150,819 152,906 149,273 178,428 EBITDA 21,931 23,349 22,157 30,374 % of revenue 14.5 15.3 14.8 17.0 Depr. & Amortization 7,221 7,608 6,389 6,300 Net Interest 244 203 181 197 Other Income 315 1,212 4,833 8,126 Profit before Tax 14,551 16,750 20,420 32,003 Total Tax 4,358 5,565 5,558 8,023 Profit after Tax 10,193 11,185 14,862 23,980 Adj. PAT 10,193 11,185 14,862 23,980 Key Operating Metrics Total volumes (units) 1,292,403 1,429,201 1,605,150 1,819,592 Realisation per unit (Rs) 376,086 394,279 420,944 439,840 Gross margin per unit (Rs) 114,115 132,705 137,468 142,611 EBITDA per unit (Rs) 50,283 62,983 68,752 71,747 Profit per unit (Rs) 28,715 32,098 44,674 46,895 Source: Company Data, PL Research. October 28, 2016 4
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