Higher realizations and lower RM costs led to a superior margin performance in Q4
Maruti Suzuki India Ltd (MSIL)'s Q4 FY16 numbers came above street expectations. The top-line grew by 12% yoy at ₹149bn. Despite the volumes in the quarter having grown by 4% yoy, net realizations improved by 9% yoy on the back of launch of high margin vehicles such as Baleno in Q3 and Vitarra Brezza in Q4. EBITDA margins grew to 15.7% (above street estimates), 100 bps above 14.7% qoq, though it was down on a yoy level. RM to sales ratio saw a reduction to 67.6% from 69.9% qoq on the back of steep inventory reduction effect of Q3, lower material costs, cost reduction benefits and lower discounts. Employee costs increased to 4.04% from 3.83% yoy. Other expenses were at 15.1% due to higher launch expenses linked with the recent launches of Baleno and Brezza. Furthermore, discounts associated with S-Cross and other models were low qoq post the festive Q3. Below the operational line, there was a miss of ~10% against street expectations on the bottomline due to lower other income and higher tax rate at 32%. Net profits came in at ₹11.3 bn, a drop of 12%
Outlook and valuation
MSIL's performance was strong in FY16, with market share gain at 46.8%. With expectations of economic revival continuing in FY17 along with new launches from the company in the form of Baleno, Brezza and sedan CIAZ, despite the rural weakness, we believe the strength in volumes which has come back will continue to remain so. However, the company is facing serious capacity constraints at its existing plants. Though debottlenecking may free capacity somewhat, it will not be sufficient to cater to the increasing demand for its new models from domestic and overseas markets. Gujarat plant preponement may add a few numbers to production in FY17 which may still lead to continuation of production deficit. We do not believe that demand will be a challenge in FY17, but production will be surely a challenge. On a higher base of FY16, we believe that volume growth will moderate. Additionally, margins may face pressure on the back of increasing metal prices and currency fluctuations on the indirect imports. FY17 onwards, when the new accounting standards will be implemented, we believe that other income will get a boost and tax rate will come down to 25-27%, which will boost the bottomline. We have trimmed down the FY17E estimates on the operational concerns mentioned above while rolling over to FY18E estimates. We therefore maintain a BUY on the stock with a revised target price of ₹ 4,298.
Please find attached file containing our view on – Maruti Suzuki
LKP Research
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