Q3 numbers hurt by slurry of unexpected costs
Maruti Suzuki India Ltd (MSIL)'s Q3FY16 numbers came in well below street expectations. The top-line grew by 20% yoy at Rs148 bn. Volumes in the quarter grew by 15.6% yoy and 6% qoq to 3.74 lakh units. Net realizations improved by 5.9% yoy and 2.7% qoq as the quarter saw high priced new launches. EBITDA grew by 31% yoy while EBITDA margins decreased from 16.7% to 14.7% qoq. RM to sales went up to 69.9% up from 68.6% qoq due to decretion of inventory levels at 4,000 units from an average of 25,000 units. Employee costs increased to 3.42% from 3.08% qoq on higher bonus expenses which led to an impact of 15 bps on margins. Other expenses were at 14.1% due to Rs 700 mn additional costs linked with maintenance of the ageing Gurgaon plant which the company carries out biannually (June and December). Also the launch costs associated with Baleno and S-Cross led to higher advertising expenses. Furthermore, discounts associated with S-Cross (~Rs 2 lakh per vehicle) also led to margin dip. Other income remained low due to low scrap sale rate, while depreciation and amortization sequentially grew by 8% and 15% yoy to Rs 7.2 bn on the back of new launches. Tax rate in the quarter went up to 29.9%. In line with weak operational outperformance adjusted PAT dropped by 17% qoq at Rs10.19 bn, but grew by 17% yoy.
Outlook and valuation
MSIL's volume performance has been very strong in 9M FY16 and the company has witnessed a quick gain in its market share too. With expectations of economic revival coming in FY17 along with interest rates and fuel costs going down along with recent launches of Baleno, S-Cross and Ciaz and upcoming launches of Brezza and Ignis from MSIL's stable will continue with a strong volume growth. Implementation of Seventh Pay Commission, improvement in GDP in line with falling oil prices and possible implementation of GST in FY17 will help the cause. MSIL being a proxy to the recovery in economy, we believe policy reforms and a populous upcoming budget may spur demand for cars. However, margin headwinds may lead to eating up of some gains coming from volume surge. Competition coming from Renault Kwid may impact Alto volumes, while Baleno and the upcoming launches which are expected to have high import content will be vulnerable to currency movement in Yen beyond Q4FY16 (where the Yen exposure is hedged). However, Baleno exports to Japan may provide a natural hedge in FY17 which is positive and would take care of much of the Yen exposure, though movement in GBP and $ exposures in indirect imports may impact margins. New launches of Brezza and Ignis may lead to increase advertising expenses. Lower commodity benefits may not restrict RM costs from moving higher but according to us the decretion of inventory levels seen in Q3 is a temporary phenomenon and will get adjusted in the ensuing quarters thus helping margins to improve from the lows seen in Q3. Higher capex and maintenance costs at the ageing Gurgaon plant may lead to higher depreciation costs, but expectations of higher other income and lower tax rate (24%) due to changes in accounting standards from FY17 may lift the bottomline. Expectations of higher exports with Baleno and newer launches to country like Japan may too help the profitability. In line with strong volume performance we have increased the volume outlook slightly but have cut the margin outlook to a higher extent than the volume upgradation. As a net-net effect, we have cut the target price by 8%, but from current levels, we still have an upside of 10% for a lower target price of 4,486. Maintain BUY.
Please find attached file containing our view on – Maruti Suzuki (MSIL)
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