april 26, 2019 maruti suzuki€¦ · q4fy19 – e april 26, 2019 maruti suzuki downside scenario...

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FY1

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April 26, 2019

Maruti Suzuki Downside

Scenario

Current

Price

Price

Target

7,2174.5%

Upside

Scenario

Hold

6,903

Q4FY19 Decoded!Maruti’s 4th quarter results were expected to be weak and meets streetestimates, but the margins came in lower than the expectations on account of 1)adverse movement of forex 2) YoY increase in the commodity prices 3) higherone-off fixed costs and 4) to improve volume sales, the company has spent ahigher amount on A&P and given discounts. This was partially offset by Maruti’scost rationalization efforts.

We expect Q1FY20 to remain subdued and will be similar like Q4FY19 onaccount of 1) increase in the vehicle prices due to the introduction of safetyregulations and 2) subdued consumer sentiments as buyers’ are postponing thepurchases due to uncertainty before the general elections. The Q4FY19 wassimilar like Q3FY19 where volumes were near flat. This has been observed in thepast that before the general elections, the economy as well as automobileindustry sales slows down and spurt post the elections.

We expect certain negative factors that could affect the demand/financials inthe short term:1. Uncertainty on petrol prices, especially post restriction on export of Iran’s

crude.2. The prices would go up further due to the phase wise introduction of new

safety regulations viz. ABS, Reverse Parking Sensors, Airbags, Seat BeltReminders, etc.

3. Adverse forex movement.4. The commodities could move up if there is a resolution in the US-China

trade war and on the expectation that the Chinese economy would dobetter.

5. Due to inauguration of 2nd plant in Gujarat, the fixed cost as well asdepreciation expense increased, that can affect the margins.

6. The continuous low consumer sentiments in the industry would push thediscounts higher.

7. We don’t expect any new model launch in FY20E and sees a new launch onlypost the implementation of BS6. This would create un-excitement amongbuyers and hence, prefers to further postponed its purchases. However, therefreshers are in the pipeline.

Hence, due to a combination of macro-economic factors, we believe FY20 isgoing to be a very difficult year to predict, on account of the introduction of newregulations, emission changes, an uncertain year due to an election, poorconsumer sentiments, unpredictability of monsoons, etc. Hence, we expectQ1FY20 to remain subdued quarter; for the rest of the year, on a lower base &led by pre-buying before the implementation of BS6, the volume growth could beabout 7% YoY in FY20E for Maruti.

Maruti Suzuki vs SENSEX

* Read last page for disclaimer & rating rationale

Market Data

Industry Automobile

Sensex 38,731

Nifty 11,642

Bloomberg Code MSIL:IN

Eq. Cap. (INR Crores) 151

Face Value (INR) 5

52-w H/L 9,923/6,324

Market Cap (INR Crores) 2,08,524

Valuation Data FY19 FY20E FY21E

OPM 12.8% 13.5% 14.0%

NPM 8.7% 9.4% 9.7%

P/E (x) 27.8 23.4 20.2

EV/EBITDA (x) 18.5 15.6 13.2

Shareholding Pattern (%)

Mar-18 Dec-18 Mar-19

Promoters 56.2% 56.2% 56.2%

FII 25.2% 22.7% 22.3%

DII 11.5% 13.4% 13.4%

Retail 7.1% 7.7% 8.1%

Total 100.0% 100.0% 100.0%

(INR Crores) FY17 FY18 FY19 FY20E FY21E

Revenue 68,035 79,763 86,020 95,093 1,06,747

Growth (%) 18.2% 17.2% 7.8% 10.5% 12.3%

EBITDA 10,145 11,863 10,999 12,860 14,986

Growth (%) 16.5% 16.9% -7.3% 16.9% 16.5%

EBITDA Margin (%) 14.9% 14.9% 12.8% 13.5% 14.0%

PAT 7,350 7,722 7,500 8,897 10,320

Growth (%) 37.0% 5.1% -2.9% 18.6% 16.0%

EPS (INR) 243 256 248 295 342

P/E (x) 20.1 30.7 27.8 23.4 20.2

EV/EBITDA (x) 14.4 19.9 18.5 15.6 13.2

Source: Company, NSPL Research

Institutional Research

*

Head of ResearchVaibhav Chowdhry vaibhav.chowdhry@ nalandasecurities.com

NALANDA SECURITIES PRIVATE LIMITED310-311 Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai 69+91-22-6281-9649 | [email protected] | www.nalandasecurities.com

AnalystAmit Hiranandani amit.hiranandani@ nalandasecurities.com

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SENSEX Maruti

Leader in short term pain

mailto:[email protected]


Maruti Suzuki | Q4FY19 - Result Update |

Signals Tough Road Ahead..!• FY19 was a challenging year for Maruti as well as for the automobile industry. The industry in FY19 has seen a lowest growth in

the last five years. The weak demand, which started in Q2FY19 has continued to impact the industry in Q4 as well. Maruti hastaken efforts to revive the demand, but failed to lift the volumes much higher. The management has lower down its volumegrowth guidance in the range of 4-8% for FY20E and we believe it would still continue to grow ahead of the industry growth.

• The exports volume growth continues to remain subdued on account of the challenges faced like currency devaluation andexport restriction in some countries. The export volume de-grew by 13.7% YoY to ~1.09L units in FY19, we expect the situationto remain little grim on the exports in FY20E as well, hence, volume growth is expected to decline by 4.1% YoY to 1.04L units inthe next financial year. The management has plans to tap the African market, but, still needs to work on the roadmap.

Margins Bottomed!• The margins fell sharply on a YoY basis (picked up QoQ) led by higher fixed costs, adverse movement of FX and operating

deleverage. However, we believe, the margins would gradually come back to normal 1) once we see a pickup in the volumes. 2)the commodity prices are softening. 3) forex movement has stabilized. 4) stringent cost rationalization efforts. 5) target ofimport reduction on procurements. 6) efforts to improve the productivity in the plants. 7) looking at every element of the costvery closely. 8) All this would aid in further improving the margins in the coming years and despite tough market conditions, theon going efforts would support in improving the overall performance.

• Changes in the Royalty terms to further aid margins. The royalty was ~5% for the quarter and we believe directionally it shouldcome down in the coming years, this is on account of the revised agreement with Suzuki that will move from Yen based toRupee based formula for all the new models starting from Ignis. We expect that by FY22, all the models will move to a newformula. Maruti to get dual advantage as a) the FX fluctuation will go away and b) If certain models attains certain level oftargets, then royalty will reduce further. At present, 40% of the models moved to a new formula.

Maruti to Grow Higher than IndustryOn competition, which was present earlier and will continue to remain in the future as well. The Maruti has been successful inbeating the industry growth since the past six years as its market share improved from 37% to 51.2% in FY19. We expect, movingforward as well the company is in a better position to surpass the industry growth. This is possible as the company has 16 models +variants and is a market leader in all the segments. Secondly, it is well prepared for the upcoming BS6, has been rolling out modelsone year ahead of the deadline and much ahead of the competition. Maruti has been the preferred choice for majority of thebuyers as over the years it has developed a trust and loyalty among the consumers. This along with unmatched distributionnetwork.

Multiple Headwinds Impacted FY19• Maruti started FY19 with a bang, reported high growth in the 1st quarter, but since then all the consecutive quarters have

reported a flattish kind of a growth. The FY19 was a very difficult year for the company as on one side, it was hit by poor volumesales and on the other side by a sharp increase in the commodity prices and forex rates.

• On the financial performance - FY19, was a tough one for Maruti as the company got impacted due to an industry wideslowdown in the volumes as the cost of ownership increased sharply and operating deleverage. Secondly, the commodity pricesreversed the trend and went up in FY19. It also incurred higher D&A on account of commissioning of new Suzuki plant inGujarat.

• Recommend dividend of Rs. 80 per share, which were similar to the last year. This decision was intentionally taken as the profitswere lower YoY in FY19.

On BS6, which is around the corner can affect the demand further due to expectation of sharp increase in the prices. Maruti has 16models and needs to convert all of them to BS6 and hence they decided to rollout BS6 models in a phased manner. Themanagement already started rolling out BS6 models with Alto and Baleno few days back. The management believes that there arecustomers who prefers to have more environment friendly models.

ValuationsWe believe all the uncertainties for the next few months are already priced in and trust that the moat of Maruti remains intact w.r.t.low cost manufacturer, an unmatched distribution reach & over the years has created a loyalty among the consumers. The companyhas been gaining market share from the last few years as they keep innovating & introducing newer products/refreshers which keptthe consumers excited. We have arrived the fair value of Maruti Suzuki at Rs. 7,217 per share, valued it by averaging P/E &EV/EBITDA valuation methodology. The company has been trading at a forward P/E multiple of close to 23.2x in the past few yearsand 12.4x on EV/EBITDA. We have assigned similar earning multiples to its FY21E EPS & EBITDA to arrive at a fair value andrecommending buying on dips. We have drilled down our estimates post change in the guidance by the management.







Q4FY19 Result Analysis

On the LCVs, Maruti in a very short span of time has grown the market share. The expectation is to continue to take the growthhigher by expanding the networks. Post BS6, Maruti would discontinue the diesel models of LCVs and will only offer Petrol/CNGvariants of it as the management feels its more economical for the users.

Maruti plans to phase out diesel engines in FY21E and its under discussion. The management believes that conversion of dieselengines from BS4 to BS6 would lead to a sharp increase in the costs & prices of the vehicles and can impact the demand heavily.Hence, the push is to move the buyers’ more towards Petrol/CNG vehicles. Maruti’s diesel car sales were 23% of the total for thequarter, which remains lower than the industry.

Other Key Highlights1. The EV program continues and will launch an electric vehicle next year.2. The tax rate was much lower on a YoY basis on account of a one-time reversal of tax provision from earlier years. This was

related to a tax benefit on R&D expenditure.3. The other income sharply increased on account of higher fair value gains.4. Average discounts for the quarter was Rs. 15,125 per vehicle.5. The royalty rate for the year was ~5%.6. The export revenue for the quarter was Rs. 1,474 crores, while for the year it was Rs. 5,335 crores.7. The company incurred capex of Rs. 4,500 crores in FY19 and expects similar amount in FY20E. This will be spent on new

models, R&D, capacity enhancement, land purchase, to grow the network, annual maintenance capex, etc.8. The wage revision happened in FY19 and will have it after three years in FY22E.9. The channel inventory in the system is 25-28 days.10. Maruti has inaugurated 2nd plant in Gujarat in the month of January and hence the fixed costs as well as D&A is higher.

However, we expect it to come down over the next 6-12 months once the volume ramps up.

(INR Crores) Q4FY19 Q4FY18 YoY (%) Q3FY19 QoQ (%) FY19 FY18 YoY (%)

Volumes (Nos) 4,58,479 4,61,773 -0.7% 4,28,643 7.0% 18,62,449 17,79,574 4.7%

Realization (Rs) 4,68,056 4,58,355 2.1% 4,58,850 2.0% 4,61,867 4,48,212 3.0%

Net sales 21,459 21,166 1.4% 19,668 9.1% 86,020 79,763 7.8%

COGS 15,424 14,949 3.2% 14,044 9.8% 60,254 54,975 9.6%

Employee Expenses 817 828 -1.4% 881 -7.3% 3,255 2,834 14.9%

Other Expenses 2,956 2,946 0.3% 2,812 5.1% 11,512 9,892 16.4%

EBITDA 2,263 3,015 -24.9% 1,931 17.2% 10,999 12,062 -8.8%

D&A 810 703 15.3% 768 5.5% 3,019 2,758 9.5%

Other income 868 595 45.8% 917 -5.4% 2,561 2,046 25.2%

EBIT 2,321 2,908 -20.2% 2,081 11.5% 10,541 11,349 -7.1%

Interest Expense 9 273 -96.8% 21 -57.3% 76 346 -78.1%

PBT 2,312 2,634 -12.2% 2,060 12.2% 10,466 11,003 -4.9%

Tax 517 752 -31.3% 571 -9.5% 2,965 3,282 -9.6%

PAT 1,796 1,882 -4.6% 1,489 20.6% 7,501 7,722 -2.9%

EPS in INR 59 62 -4.6% 49 20.6% 248 256 -2.9%

Margin Analysis Q4FY19 Q4FY18 YoY (%) Q3FY19 QoQ (%) FY19 FY18 YoY (%)

Material Expenses % Net Sales 71.9% 70.6% 1.2% 71.4% 0.5% 70.0% 68.9% 1.1%

Gross Margin 28.1% 29.4% -1.2% 28.6% -0.5% 30.0% 31.1% -1.1%

Employee Expenses % Net Sales 3.8% 3.9% -0.1% 4.5% -0.7% 3.8% 3.6% 0.2%

Other Expenses % Net Sales 13.8% 13.9% -0.1% 14.3% -0.5% 13.4% 12.4% 1.0%

EBITDA Margin (%) 10.5% 14.2% -3.7% 9.8% 0.7% 12.8% 15.1% -2.3%

Tax Rate (%) 22.3% 28.6% -6.2% 27.7% -5.4% 28.3% 29.8% -1.5%

PAT Margin (%) 8.4% 8.9% -0.5% 7.6% 0.8% 8.7% 9.7% -1.0%





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Maruti's Rising Market Share (%)

Domestic Exports Total




Demand Environment• Given the on ground uncertainty, the management has drilled down its volume growth guidance in the range of 4-8% in FY20E.

This is in spite of expectation of pre-buying ahead of the implementation of BS6 from FY21E. We expect the company wouldachieve 7% YoY growth in FY20E as Maruti has 16 models and is a leader in all the segments, the company has been growinghigher then industry with an improving market share every year. We expect this trend to continue in the coming years as well.

• Additionally, we expect spurt in the volumes post the general elections (as per historical trend). The early roll out of BS6 modelsshows the leaders capability to stay ahead of the competition. The company over the years has developed trust & loyalty amongthe customers and is a preferred choice for buyers. The company has been pioneer in cracking a deal with Toyota for EVtechnologies and has already been working on sourcing as part of it. All these initiatives would keep Maruti well ahead of thecompetition in the coming years.

Export MarketsThe export markets are also facing challenges as the macro-economic situation doesn’t look stable. Few of the market has imposedrestriction on its imports and currencies sharply devalued for those countries. We feel, globally there are many headwinds on theexports as most of the markets are facing the economic slowdown and hence, we expect a decline in Maruti’s exports in FY20E aswell. The focus remains on the domestic market.

Realization to continue to improve gradually led by new models/refreshers and change in the product mix towards premium &compact SUV models. We have estimated moderate realization growth in FY20E led by higher sales from the premium launches,along with mandatory safety standards from next year and expect higher realization growth in FY21E led by the implementation ofBS6.

Volume Projections FY17 FY18 FY19 FY20E FY21E

Domestic Sales (in units)

Utility Vehicles 1,95,741 2,53,759 2,64,197 2,87,975 3,11,013

Vans 1,52,009 1,55,137 1,78,606 1,89,322 1,98,788

Passenger Cars 10,95,891 12,34,571 12,87,023 13,77,115 14,59,741

Goods Carriers 900 10,033 23,874 35,811 48,345

Total Domestic Volume Sales 14,44,541 16,53,500 17,53,700 18,90,223 20,17,888

YoY Growth (%) - 14.5% 6.1% 7.8% 6.8%

Export Sales (in units)

Utility Vehicles 11,423 5,463 5,724 5,982 6,400

Vans 1,868 1,480 1,664 1,780 1,923

Passenger Cars 1,08,742 1,16,960 99,110 94,155 97,921

Goods Carriers 1,968 2,171 2,251 2,330 2,516

Total Export Volume Sales 1,24,001 1,26,074 1,08,749 1,04,246 1,08,760

YoY Growth (%) - 1.7% -13.7% -4.1% 4.3%

Domestic + Exports (in units)

Utility Vehicles 2,07,164 2,59,222 2,69,921 2,93,956 3,17,413

Vans 1,53,877 1,56,617 1,80,270 1,91,103 2,00,711

Passenger Cars 12,04,633 13,51,531 13,86,133 14,71,269 15,57,662

Goods Carriers 2,868 12,204 26,125 38,141 50,861

Total Volume Sales 15,68,542 17,79,574 18,62,449 19,94,469 21,26,648

YoY Growth (%) - 13.5% 4.7% 7.1% 6.6%

Blended Realization (Rs.) 4,33,729 4,48,212 4,61,864 4,76,784 5,01,950

YoY Growth (%) - 3.3% 3.0% 3.2% 5.3%

Key Risks:1. Higher than expected increase in the commodity prices can impact its margins2. Continued weakness in the domestic passenger vehicle industry3. Rising competition4. Sharp weakness in the export markets led by a correction in the oil and commodity prices, etc.









Story in Charts




4,44

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Healthy & Consistent Growth in Realization

Realization (Rs) YoY Realization Growth (%)

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Revenue Growth Performance

Net Revenues YoY Growth (%)

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Margins in Good Shape Despite of Turbulent Times

EBITDA EBITDA Margin (%)

0.0 0.0 0.0 0.0 0.1 0.1 0.3 1.2 1.7 1.9 2.2 3.9 3.9 4.0 4.2

53.4 52.8 52.7 52.1 52.2 51.9 52.155.5 56.6 56.4 56.8

59.7 59.0 58.1 58.1

13.8 15.3 16.1

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80.9 81.9 80.8 82.0 82.7 83.9 83.6 82.6 82.1 81.8 80.7 81.3 80.5 82.2 82.2

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Segmentwise - Improving Market Share (%)

Goods Carriers Passenger Cars Utility Vehicles Vans

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Volume Growth Higher than Industry

Maruti's YoY Volume Growth (%) Industry's YoY Volume Growth (%)




Profit & Loss (INR Crores) FY17 FY18 FY19 FY20E FY21E

Net Revenues 68,035 79,763 86,020 95,093 1,06,747

COGS 46,732 54,975 60,254 66,610 74,723

Employee Expenses 2,331 2,834 3,255 3,588 3,956

Other Expenses 8,724 9,992 11,634 12,035 13,083

EBITDA 10,145 11,863 10,999 12,860 14,986

D&A 2,602 2,758 3,019 3,150 3,626

Other income 2,300 2,046 2,561 2,785 3,127

EBIT 7,542 9,105 7,980 9,711 11,360

Interest Expense 89 346 76 81 87

PBT 9,960 11,003 10,465 12,415 14,400

Tax 2,610 3,282 2,965 3,517 4,080

PAT 7,350 7,722 7,500 8,897 10,320

EPS in INR 243 256 248 295 342

Balance Sheet (INR Crores) FY17 FY18 FY19 FY20E FY21E

ASSETS

Non-Current Assets

Property, plant and equipment 12,920 13,047 14,957 16,405 17,393

Capital work-in-progress 1,252 2,126 1,600 1,600 1,696

Intangible assets 373 312 451 588 723

Financial assets

Investments 26,302 34,073 31,470 34,789 39,052

Loans 0 0 0 0 0

Other financial assets 24 32 34 38 42

Other non-current assets 1,603 1,858 2,059 2,276 2,555

Total Non-Current Assets 42,474 51,449 50,570 55,696 61,462

Current Assets

Inventories 3,262 3,161 3,326 3,676 4,124

Financial assets

Investments 2,179 1,217 5,046 5,578 6,261

Trade receivables 1,199 1,462 2,310 2,554 2,867

Cash and cash equivalents 13 70 179 1,621 3,496

Loans 3 3 16 16 16

Other financial assets 95 285 496 549 616

Current tax assets (Net) 485 411 427 507 588

Other current assets 1,539 1,312 561 621 697

Total Current Assets 8,775 7,920 12,362 15,121 18,665

Total Assets 51,250 59,369 62,932 70,817 80,127

EQUITY AND LIABILITIES

Equity

Equity Share capital 151 151 151 151 151

Other equity 36,280 41,606 45,991 52,005 58,981

Total Equity 36,431 41,757 46,142 52,156 59,132

LIABILITIES

Non-current liabilities

Provisions 22 27 40 44 49

Deferred tax liabilities (net) 466 559 564 669 776

Other non-current liabilities 1,105 1,585 2,037 2,251 2,527

Total Non - Current Liabilities 1,593 2,171 2,640 2,964 3,352

Current liabilities

Financial liabilities

Borrowings 483 110 150 165 186

Trade Payables 8,367 10,497 9,633 10,649 11,946

Other financial liabilities 1,303 1,334 1,440 1,592 1,787

Provisions 449 560 624 690 775

Current tax liabilities (Net) 799 854 673 798 926

Other current liabilities 1,825 2,086 1,630 1,802 2,023

Total Current Liabilities 13,226 15,441 14,150 15,697 17,643

Total Liabilities 14,819 17,612 16,790 18,661 20,995

Total Equity and Liabilities 51,250 59,369 62,932 70,817 80,127








Cash Flow (INR Crores) FY17 FY18 FY19 FY20E FY21E

Profit Before Tax 9,960 11,003 10,465 12,415 14,400

Operating Profit before Working Capital Changes 10,407 12,034 10,313 12,860 14,986

Cash Generated from Operations 12,601 14,840 8,745 13,709 16,030

Less: income tax paid -2,321 -3,055 -2,965 -3,517 -4,080

Cash Flow from Operating 10,279 11,785 5,780 10,192 11,951

(Incr)/ Decr in Gross PP&E -3,250 -3,892 -4,403 -4,599 -4,710

Cash Flow from Investing -9,178 -8,282 -3,206 -5,802 -6,665

Dividends Paid (including tax on dividend) -1,057 -2,266 -2,019 -2,395 -2,778

Finance costs -110 -346 -76 -81 -87

Cash Flow from Financing -1,129 -3,446 -2,466 -2,948 -3,410

Incr/(Decr) in Balance Sheet Cash -28 57 109 1,442 1,875

Cash at the Start of the Year 41 13 70 179 1,621

Cash at the End of the Year 13 70 179 1,621 3,496

RATIOS FY17 FY18 FY19 FY20E FY21E

Growth (%)

Net Revenues 18.2% 17.2% 7.8% 10.5% 12.3%

EBITDA 16.5% 16.9% -7.3% 16.9% 16.5%

PAT 37.0% 5.1% -2.9% 18.6% 16.0%

Profitability

Return on Capital (%) 20.7% 21.8% 17.3% 18.6% 19.2%

Return on Equity (%) 20.2% 18.5% 16.3% 17.1% 17.5%

Margin Trend

EBITDA Margin (%) 14.9% 14.9% 12.8% 13.5% 14.0%

Net profit Margin (%) 10.8% 9.7% 8.7% 9.4% 9.7%

Solvency

Total Debt / Equity 0.0 0.0 0.0 0.0 0.0

Net Debt / Equity 0.0 0.0 -0.1 -0.1 -0.2

Valuation Ratios

P/E 20.1 30.7 27.8 23.4 20.2

EV/EBITDA 14.4 19.9 18.5 15.6 13.2

P/B 4.0 5.7 4.5 4.0 3.5







OUR RECENT REPORTS

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the subject company and nature of such financial interest

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relatives'/associates')

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Rating Legend

Strong Buy More than 15%

Buy 5% - 15%

Hold 0 – 5%

Reduce -5% - 0

Sell Less than -5%

Maruti Suzuki

Date CMP (INR) Target Price (INR) Recommendation

April 26, 2019 6,903 7,217 Hold

January 26, 2019 6,516 7,610 Strong Buy

October 26, 2018 6,725 8,417 Strong Buy







april 26, 2019 maruti suzuki€¦ · q4fy19 – e april 26, 2019 maruti suzuki downside scenario...

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