FREE

Maruti Suzuki's Q4FY18 results (Outperformer) - Weak quarter, growth story intact

Q4FY18 results

• Adj PAT in-line; operating performance weak: Maruti Suzuki’s Q4FY18 Adj PAT at Rs 20.6bn (+21% yoy) was in-line with estimates. Reported PAT at Rs 18.8 bn (+10% yoy) had a one off finance costs of Rs 2.5bn on account of settlement of enhanced compensation to land owners.
• Operating performance weak on higher operating exp: Revenues at Rs211bn (up 15% yoy) were driven by volume growth of 11% yoy  and supported by 2.5% qoq rise in realisations mainly due to improvement in product mix and reduction in discounts(-22% qoq). Gross margins improved by 120 bps qoq led by a better product mix and a reduction in discounts. However, EBITDA margins at 14.2% (-150 bps qoq/+20 bps yoy) were 150bps below expectations. This was mainly due to higher other expenses (+240 bps qoq) on account of a bunching up of expenses (expenses linked to the Auto expo, Swift launch), higher royalty expenses (on adverse product mix) and a change in accounting policies related to freight expenditure. Employee costs rose sequentially due to higher gratuity expenses related to the full year. This was however offset by higher other income(+140%qoq) offset weak operating performance.
• Concall highlights: (a) The resolution with respect to lower royalty costs on new models has been approved by Suzuki – this should lead royalty costs declining in the coming quarters (b) Discount levels for the quarter decreased by 22% qoq to Rs 13,900 in 4QFY18 (c)It expects RM costs to increase going forward as commodity costs are on an uptrend – this could be offset by cost cutting measures, operating leverage and a better product mix.(d)Growth was secular with urban and rural markets growing by 15% and 16% respectively. (e)It incurred a capex of Rs 34 bn and has guided for Rs 50bn for FY19 of which Rs 10bn to be incurred on purchasing land (f) It expects 250k units from Gujarat plant in FY19 (4QFY18 run rate of 58k; 157k units for FY17).

Key positives: Improvement in gross margins on a yoy basis

Key negatives: Higher than expected other expenses

Change in estimates: We cut FY19/FY20 earnings estimates by 3/2% respectively on lower margins.

Valuations & view

Maruti Suzuki continues to gain market share – this once again underlines its strong competitive position. Successful product launches coupled with declining competitive intensity reinforces the company’s dominance in the market.  While profitability has been weak in the current quarter, going forward we expect margins to improve on the back of better operating leverage and an improving product mix. We value the company at 26x FY20 led by stronger earnings visibility (royalty payments are likely to decline). Maintain Outperformer with a target price of Rs10,500.