Margin drop hurts 1Q Ebitda but financial income offsets
Maruti's 1Q Ebitda was up just 2% YoY (a 5% miss), dragged down by
production disruption and weaker margin but net profit was up 23% YoY
(10% beat) driven by higher financial income and lower depreciation. The
bulk of the yen/steel cost pressures came through in 1Q and FY17 margin
is likely to be around the 15% handle, which is not as bad as we feared a
few months back. With positives from new products now in the price, a
revival in industry demand is now key to Maruti's stock rising, which
cannot be ruled out in FY18. We upgrade FY17-18 EPS by 7%. Maintain
O-PF with a Rs5,000 target (Rs4,500 earlier).
Ebitda growth for 1Q slows substantially due to lower volume/margin
In 1Q, Maruti's volumes rose a modest 2% YoY and were impacted by a fire at
a key vendor plant but revenues rose at a much higher 12% YoY, driven by a
better product mix in both domestic sales and exports. Ebitda was, however,
up just 2% YoY and missed our estimate by 5%. Ebitda margin weakened
140bp YoY (50bp QoQ) to 14.8% owing to the impact of a stronger yen and
higher commodity prices. Net profit grew at a higher 23% YoY (10% beat)
boosted by a big rise in financial income (the effect of a shift to Ind AS) and a
fall in depreciation, due to increase in the useful life of dies.
Better visibility on FY17 margin now; not as bad as feared
While some part of the yen appreciation impact will flow through in 2Q, we
believe that the bulk of it came through in 1Q. Similarly, while Maruti is yet to
conclude negotiations for raw material contracts, adequate provisions have
been taken in 1Q. We believe that the bulk of the yen and steel impact came
through in 1Q and expect margins to be near the 15% handle in FY17. This is
a much better margin profile than we feared a few months back. Maruti's net
yen exposure has turned out to be lower than believed earlier, due to
disclosures on non-yen imports and rising yen-denominated Baleno exports.
In addition, the strong response to the Baleno and the Vitara Brezza raise our
margin expectations for these two models.
New product positives priced in; industry demand revival key now
We upgrade FY17-18 EPS by 7% factoring in higher financial income and
lower depreciation. Maruti's stock has recovered most of its 2016 losses but
valuations are once again looking rich at 20x/17x FY17/18CL PE. We believe
that an industry demand revival is now needed for Maruti's stock to rise,
which cannot be ruled out in FY18, given potential catalysts like
implementation of the 7th Pay Commission award, GST introduction and better
rural demand. Maintain O-PF.
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