Maruti Suzuki India - Q2FY14 Update - CMP Rs.1634, Maintain HOLD, Increased Target of Rs.1693 - Sushil Finance

Maruti Suzuki India Ltd. (MSIL) has reported decent set of numbers exceeding our & street expectations for Q2FY14 with Revenue & PAT of Rs. 104.7 bn & Rs. 6.7 bn respectively. The result is not directly comparable YoY as the company's sales volume was affected in Q2FY13 due to shutdown at its Manesar plant. The operating margins improved QoQ by 123 bps to 12.6% on account of favorable currency movement & compensation to the vendors paid with a quarter lag. The key highlights of the call are summarized as below:

- Sales, EBIDTA & PAT grew YoY by 26%, 160% & 195% respectively whereas QoQ it registered a growth of 2%, 14% & 6% respectively. EPS for the quarter came in at Rs. 22.2 vs Rs. 20.9 in Q1FY14 & 7.9 in Q2FY13.

- Volumes saw a YoY growth of 20% & a QoQ growth of 3.4% respectively. Of the 3.4% QoQ growth the company has witnessed in Q2FY14, rural markets which contribute ~31% to the total volumes grew a strong 24%. Diesel Mix for the quarter came in at 30% vs 34% in Q1FY14. Average Discounts were at Rs. 17500/vehicle in Q2FY14 vs Rs. 13500 in Q1FY14, an increase of Rs. 4000/vehicle indicating weak demand sentiments.

- EBIDTA margins came in at 12.6% in Q2FY14 vs 11.4% in Q1FY14 & 6.1% in Q2FY13. This expansion in margins was on the back of (1) Material Cost decreasing (on the back of increased localization, yield improvement & re-negotiations with the suppliers) (2) compensation to the vendors paid with a quarter lag (100 bps impact) (3) Higher volumes with domestic-exports mix on the favorable side with increased export revenues. However the company expects Q3FY14 margins to get impacted due to vendor payments done with a quarter lag which would be on a higher side.

- MSIL expects the industry to de-grow by 4-5% in FY14E. With regards to the festive season, the company stated that the uncertainty still prevails in the market and predicting H2FY14 would be a difficult thing and thereby expects to de-grow by 2-3% in FY14E. However, the company had witnessed a 5-7% increase in footfalls during the Navratri & Onum festival period. Actual conversion of footfalls to sales need to be seen given the lack of new launches by the company. On the volume front, the company has guided to record flattish growth in the exports market in FY14E.

- MSIL has commenced operations at its third assembly line at Manesar (Cap - 250,000 units) and its diesel engine plant (150,000 units, second line deferred) during Q2FY14 which would lead to depreciation cost to increase going forward.

- The company said it is on course to reduce its import content by way of localization as guided (2-2.5% on a yearly basis) which is currently at ~19.6%.

OUTLOOK & VALUATION

MSIL has come out with strong set of numbers on the margin front in Q2FY14. However, given the compensation is paid to vendors with a quarter lag, we believe these margins are not entirely sustainable. With our expectation of a 2.2% volume de-growth in FY14E and 7.1% growth in FY15E led by encouraging festive demand, strong rural growth (good monsoons to help drive this) coupled with increasing localization (Import content to reduce 2-2.5% annually from 19.6% in FY13) led strong operational performance, we are upward revising our estimates for FY14E & FY15E factoring in EBIDTA margins of 11.6% & 12.3% and EPS of Rs. 86.4 & Rs. 105.8 respectively. We are assuming JPY/INR rate to be at 0.62 & 0.59 in FY14E & FY15E respectively. Considering the currency impact to stabilize post Q3FY14 leading to greater visibility in earnings, focus on increasing localization & expected demand recovery from H2FY14 led by upgrades & new launches (FY15E), we recommend a HOLD on the stock with a revised price target of Rs. 1693 (based on 16x FY15E EPS of Rs. 105.8).

Source : Equity Bulls

Keywords