Maruti Suzuki's Q3FY18 results (Outperformer) - Robust operating performance

Q3FY18 results

• PAT below est on lower other income; robust operating performance: Maruti Suzuki’s Q3FY18 PAT at Rs17.9bn (+3% yoy) was 6% below our estimates. While the operating performance beat expectations, this was offset by lower other income and higher tax rate.
• Strong operating performance in-line: Revenues at Rs193bn (up 14% yoy) were driven by volume growth of 11% yoy and product mix driven improvement in realisations (up 4% yoy;+1% qoq). Despite commodity inflation, qoq gross margin decline was limited to 30 bps on cost control measures. Despite lower volumes in the quarter (down 12% qoq) and seasonally higher discounts, the negative operating leverage was also fairly muted. Consequently, EBITDA margins at 15.8% (-110 bps qoq/+100 bps yoy) were 80bps ahead of expectations. However, lower other income / higher tax rate dragged down net profit growth to 3%.
• Concall highlights: (a) MSIL approved a revision in the method of calculating royalty, resulting in lower royalty payments for new model agreements starting with Ignis (includes the new Dzire and New Swift). This would be implemented after approval by the board of Suzuki Motor Corporation (b) Discount levels for the quarter increased from Rs 15,200 in 2QFY18 to Rs 17,900 in 3QFY18(v.s Rs19000 in 3QFY17) as third quarter is typically muted.(d) Inquiries showed a robust 20% yoy growth indicating strong demand. Rural demand for MSIL grew faster than urban sales. (e) It plans to commence production from its battery plant from FY20. The plant will produce the battery as well as lithium cells with collaboration with its parent Suzuki, Toyota and Denso. (a) Management expects RM costs to increase in 4QFY18 as commodity costs (steel and copper) are showing an uptrend

Key positives: Improvement in gross margins on a yoy basis

Key negatives: Lower than expected other income

Change in estimates: We cut estimates for FY18 by ~2% due to lower other income but maintain FY19/FY20 earnings.

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