Maruti Suzuki's Q1FY20 results (Outperformer) - Stressed quarter; volume growth key

Q1FY20 results

• Operating performance inline: Maruti Suzuki’s Q1FY20 PAT at Rs14.4bn (-27% yoy) was 17% above our estimates. The variance was on account of high other income, lower than expected tax rate and improved realisation. However, operating EBIT met expectations.
• Margins drop sharply: Revenues declined Rs 196.7 bn (-12% yoy) on account of a volume decline of 17%. Revenues benefitted from an accounting policy related to freight (increased revenue and other expenses by ~Rs2.3bn) as well as higher realisations (+3% qoq). Price inflation on account of the BSVI/ safety features aided realisation growth even as discounts rose. Gross margins improved sequentially by 40bps on benign commodity costs/ favourable currency movements. Other costs declined on cost cutting measures and lower advertisement expenses which was partially offset by lower utilisation levels. EBITDA margins at 10.4% (Q4FY19: 10.5%; est: 10.1%) may have been by 30-40bps on account of Indas 116. The accounting policy change led to an increase in depreciation (up 13% yoy). The beat on PAT was on account of higher other income (2X yoy).
• Concall highlights: (a) Amongst other factors, the volumes continue to remain weak on lower liquidity, stringent loan disbursal criteria, weakness in rural area. Notably, the management did not provide a FY20 volume growth guidance (previous target 4-5%). (b) Dealer inventory stands over a month days. During the quarter, wholesale and retail volume decline was broadly on similar lines (~-17% yoy) (c) Average discount for the quarter stood at Rs 16,941/vehicle (+12% qoq). Going forward discounts would depend on the market situation (d) The company expects further benefit from commodity costs to flow through. This may however be offset by higher 

Key positives: Steady sequential EBITDA margins

Key negatives: Sharp increase in employee costs

Change in estimates: We cut estimates for FY19/FY20 by ~16%/11% on lower volume growth and negative leverage linked margin pressures.

Valuations & view

The demand environment continues to remain weak with no overt signs of a recovery. In such a scenario, we expect pressures on margins to continue in the near term. However, despite the sharp slowdown, the medium to long term outlook remains positive given the highly underpenetrated Indian car market. MSIL’s structural advantages (distribution, economies of scale, brand) will continue to work in its favour. While the current valuations at ~20xFY21 seem stretched given the current environment, we do note that in case of a volume recovery margins/profitability could move up sharply. Maintain Outperformer.