Maruti Suzuki Rating: Buy – A muted first quarter for the company


Maruti Suzuki vehicles stand lined up at the Maruti Suzuki India Ltd. Brand Center prior to the second-quarter earnings news conference at their headquarters in New Delhi, India, on Thursday, Oct. 24, 2019. Maruti Suzuki posted its lowest quarterly profit since fiscal 2016, caught in the Indian auto market’s worst ever sales slowdown. Photographer: Prashanth Vishwanathan/Bloomberg

Maruti reported 4.9% Ebitda and 0.5% Ebit in Q1FY22 (slight miss to our estimate of 1.5%), impacted by the negative operating leverage and commodity hit. While operating leverage should reverse now from Q2 itself, some pending impact of commodity prices is yet to hit in Q2. Maruti has an inventory of around 135K, but an order book of 170K. We have seen demand coming back reasonably well, with July retail likely to be 20-30% higher than June, and we expect volumes to be back to pre-second wave levels by September (obviously withstanding the risks of a third wave of COVID-19).

Overall, we think Maruti stock may warrant some patience in the near term, but over 1-2 years we see the industry demand remaining solid (driven by the pent-up demand) and Maruti to accelerate its product refresh in earnest by end of FY22/early FY23. Any moderation in commodity prices can be a significant upside risk to FY23/24 EPS estimates as well. Maruti has lost some share in the recent months, led by the lack of CNG supply and growth in SUV share. We expect market share recovery of 100-200bps in the next six months.

Q1FY22 details: MSIL total revenues of Rs 177 bn (up 333% y-o-y) was marginally lower vs Street and HSBC estimate of ~Rs 179 bn. Average selling price was up 2% q-o-q due to better mix, recent price hikes and lower discounts (mainly due to lower retail vs wholesale). Gross margins were down 180bps q-o-q, as impact of commodity costs (nearly 350bps q-o-q) was partly offset by price hikes and lower discounts. Negative operating leverage had an impact of c400bps q-o-q, which should partly reverse in the coming quarters as volumes pick up. One-off COVID-19 related expenses and wage hikes further had an impact on margins.

On the positive side, MSIL appeared to be less impacted by the semiconductor shortage and expects production to ramp up in line with demand recovery in the near term. Further, the company also alluded to product development efforts across all fuel types – BEV, Hybrid, CNG and bio fuels.

Launches appear key: We have discussed in the past that launches remain the key trigger for MSIL for the medium term. While our outlook for the next six months on launch activity appears muted, we expect strong product action in CY22. Launches are the most critical driver of margins for any OEM. Successful launches not only lead to higher volumes but also more importantly improve pricing power and variant mix. The last upcycle in margins (FY15/16) for MSIL coincided with a strong launch pipeline as well.

Retain Buy with a lower TP of Rs 8,200 (from Rs 8,400): Factoring in Q1FY22 performance, lower-than-expected price hikes and pending commodity headwinds, we cut our FY22/23e EPS by 8%/4%. Additional impact due to COVID-19, fuel price increases or commodity prices remain the key risks.


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