Maruti Suzuki's Q1FY19 results (Outperformer) - Tad below estimates

Q1FY19 results

• PAT below est on lower other income: Maruti Suzuki’s Q1FY19 PAT at Rs19.8bn (+27% yoy) was 15% below our estimates on account lower other income on mark to market loss (~80 bps increase in interest rates; Rs 4.5bn notional loss). Besides higher tax rate (31.5% in 1QFY19 v/s 28.6% in 4QFY18) too impacted PAT.
• Operating performance tad below expectations: Revenues at Rs 225 bn grew by 28% yoy on the back of strong volume growth (+24% yoy). Realizations though were flat sequentially as discounts increased sequentially. Gross margins declined by  100 bps qoq on higher discounts and commodity cost pressures EBITDA margins at 14.9% (v.s est 15.4%) improved 70 bps sequentially (+160 bps yoy) as higher RM costs (+110 bps qoq) was more than offset by lower A&P costs (other expenses declined 130 bps qoq) and staff costs (-50 bps qoq).
• Concall highlights: (a) Management guided for a 8-9% volume growth for the domestic PV industry in FY19 with MSIL likley to grow in double digits.(b)Rural market which accounts for ~30% of domestic sales for MSIL grew by 15% in 1QFY19. The company expects strong rural growth going forward led by good monsoon and increase in MSPs.(c) Commodity costs especially steel have hardened in 1QFY19,it expects costs to stabilize going forward.(d)Discounts were up 8% sequentially to ~Rs 15,161 as the share of entry level vehicles in the product mix increased. (e)It expects adverse forex impact over the next 1-2 quarters on weak currency.(f) It does not see major traction in the export markets as it plans to prioritize on domestic demand.(g) Waiting periods in petrol variants of Baleno and Dzire stood at 2-4 weeks; Swift has a waiting period of 4 weeks while Brezza continues to have a 4 month waiting period. Diesel models are available off the shelf.(h) It has not taken any price hikes in 1QFY19 

Key positives: Lower other expenses

Key negatives: Lower than expected other income

Change in estimates: We cut estimates for FY19/FY20 by ~4% and 1% due to lower other income.

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 and logistic costs could be lower on vendor localization and fast ramp up of Gujarat plant). Maintain Outperformer with a target price of Rs10,500