Maruti Suzuki's Q4FY19 results (Outperformer) - Another stressed quarter; volume growth key

Q4FY19 results

• Weak operating performance: Maruti Suzuki’s Q4FY19 PAT at Rs18bn (-5% yoy) was 2% above our estimates. A weak operating performance (EBITDA margins were ~190bps below expectations) was offset by higher other income/lower tax rate.
• Margins drop sharply: Revenues at Rs 215bn grew by 2% yoy with realizations improving by ~2% qoq on lower discounts. EBITDA margins came in at 10.5% (down 380bps yoy, up 70bps qoq; est: 12.4%) with gross margins declining by 50bps qoq. While discounts were lower by ~200bps on a qoq basis, this was offset by (a) ramp up costs at the Gujarat plant (~70bps) (b) FX impact (60bps) and (c) inventory adjustments (50 bps). Despite sequential operating leverage (other expenses/ staff costs declined by 120bps qoq) absolute EBITDA at Rs 22.6bn (down 25% yoy) was ~14% below expectations. However, higher other income (+46% yoy) and a lower tax rate restricted PAT decline to 5%.
• Concall highlights: (a)The company has guided for a volume growth of 4%-8% in FY20 – higher than the estimated industry growth of 3-5% (b) Rural demand (+10%) outpaced urban demand in FY19. (c) Dealer inventory currently stands at 25-28 days. (d) Average discount for the quarter stood at Rs 15,125 (-38% qoq) – discounts in Q3 had risen sharply to clear dealer inventory. (e) Following BSVI norms, the management will have a relook at its diesel portfolio (25% of volumes in FY19) as cost pressures could drive down demand for low priced vehicles.

Key positives: Higher other income; lower tax rate

Key negatives: Sharp increase in raw material costs

Change in estimates: We cut estimates for FY20/FY21 by ~9% on each lower volume growth and greater margin pressures. We build in a 5%/9% volume growth and 12.7%/13.2% EBITDA margin for FY20/21 respectively.

Valuations & view

The current quarter reflects a culmination of adverse circumstances – weak volume growth coincided with adverse forex movements/ramp up in plants. In the near term, while we expect the pressures to ease out a bit lower commodity prices, ramp-up of the Gujarat plant and normalised production schedules. However, a full recovery (to ~14-15% 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 23x FY21 with a target price of Rs7500.Maintain Outperformer.