Maruti Suzuki's Q3FY19 results (Outperformer) - Stressed quarter; volume growth key

Q3FY19 results

• Weak operating performance: Maruti Suzuki’s Q3FY19 PAT at Rs1.49bn (-17% yoy) was 6% below our estimates. The variance was on account of an extremely weak operational performance with EBITDA margins declining to 5 year lows. This was partially offset by a higher other income and a lower tax rate.
• Margins drop sharply: Revenues at Rs 196.7 bn grew by 2% yoy with realizations declining by ~1% qoq on higher discounts. Adjusted EBITDA margins came in at 10.1% (Q2FY18: 15.3%; est: 13.5%) with gross margins declining by 330bps qoq. The gross margin decline reflects (a) increase in commodity costs (100 bps) (b) higher discounts (120bps) (c) FX impact (50bps) and (d) inventory adjustments (30 bps). Additionally, negative operating leverage and higher advertisement expenses led to a further impact of ~220bps.
• Concall highlights: (a) Management indicated that while footfalls in were rising, the conversion rate remains low. (b) Rural demand grew at 13% yoy for the quarter while urban demand was flat. (c) Dealer inventory at December end was 15 days as against an average of 4 weeks. Restocking of inventory could benefit wholesale volumes in Q4 (d) Average discount for the quarter stood at Rs 24,300 (+30% qoq; +39% yoy)- the high increase reflected the intent to clear inventory. (e) MSIL continues to face headwinds in the export markets due to sharp depreciation in local currencies along with import restriction in some markets notably Indonesia.

Key positives: Higher other income

Key negatives: Sharp increase in raw material costs; stronger than expected negative operating leverage

Change in estimates: We cut estimates for FY19/FY20 by ~14% on each lower volume growth and greater commodity/currency pressures. We build in a 6/10% volume growth and 13.3/13.7% EBITDA margins for FY19/20 respectively.

Valuations & view

The current quarter reflects a culmination of adverse circumstances – weak volume growth (and consequently steep discounts/ negative operating leverage) coincided with commodity cost inflation and adverse forex movements. In the near term, while we expect the pressures to ease out a bit, however, a full recovery (to ~15% margins) is likely only with robust volume growth. While near term volume growth could be muted, the medium to long term outlook remains positive given the growing economy and an underpenetrated market. MSIL’s structural advantages (distribution, economies of scale, brand) will continue to work in its favour. We value the company inline with its last 4 years average at 22x Sept 2020 with a target price of Rs7400.Maintain Outperformer.