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Maruti Suzuki India - Hurdle rate of expectations remains elevated - ICICI Securities

Posted On: 2020-07-29 22:14:04

Maruti Suzuki India's (MSIL) Q1FY21 earnings were a miss on consensus estimates as EBITDA margin dropped 3,141bps to -21% largely due ~79% revenue drop while costs remained relatively sticky. The industry read-through from Q1 results is the sharp divergence between fixed cost structures of OEM's (2Ws displayed resilient EBITDA margins even in low utilizations while PV's breakeven hurdle rates remain high). However, current valuations (Refer chart 3) would make you believe otherwise. Two key focus points for MSIL in FY21/22 are: a) managing SUV market share without a diesel(high torque) offering as competition intensifies (e.g. Kia Sonet, Nissan Magnite, Toyota Brezza), and b) scaling back to ~6% EBIT margins amidst high conversion costs, weak utilization and sticky discounts. We expect MSIL to clock -8.1% earnings CAGR over FY19-FY22E. Maintain SELL.

- Key highlights of the quarter: Revenues for Q1FY21 declined 79.2% YoY to ~Rs41bn while EBITDA margin declined 3,141bps to -21%. ASP improved 9.4% YoY to ~Rs536k/vehicle due to better mix, higher other operating income (down only ~56%). Other income (up 57.6% YoY) at Rs13.2bn restricted the reported PAT loss to ~Rs2.5bn. Other income contribution to PBT on TTM basis stood at ~81%.

- Key takeaways from earnings call: a) Management indicated current production at ~4k units per day with SMG plant (single shift) at ~900 units per day; is expected to ramped upto ~4.9k units/day in Sep'20; current inventory levels is ~25 days (~80k units); b) enquiry levels currently have reached 85-90% of pre-Covid levels with higher share in mini and compact segments (~65% against ~55% earlier); c) diesel vehicle share in overall industry sales dipped to 20.6% in Q1FY21 from 29.5% in FY20;competetion diesel share stood at ~36% d) in terms of customer profile, first-time buyers share has gone up by 5.5% QoQ to ~51-53% as replacement buyers have delayed purchase decisions; e) new petrol variant of S-Cross is expected to be launched in first week of Aug'20; and f) festive demand outlook depends on progression on virus and consumer sentiment around the same time.

- At some point (as expectations get pruned down) valuations will matter: We believe MSIL faces headwinds in maintaining its market share as customer preference continue to rotate towards UVs (no visible downtrading in sales) amidst rising competition. Given high expectations, we worry about the sustenance of current stratospheric valuations (49x FY22E core EPS). We however, upgrade our earnings estimates (7.1%/12.8% for FY21E/FY22E respectively) factoring in higher financial income. Considering the down cycle earnings we upgrade valuation to 24x (earlier: 22x) FY22E core EPS of Rs98 (earlier: 92) and add cash per share of Rs1,405 (earlier: Rs1,395) to arrive at our target price of Rs3,756 (earlier: Rs3,413).

Shares of MARUTI SUZUKI INDIA LTD. was last trading in BSE at Rs.6185.6 as compared to the previous close of Rs. 6287.3. The total number of shares traded during the day was 71758 in over 14698 trades.

The stock hit an intraday high of Rs. 6293.95 and intraday low of 6120. The net turnover during the day was Rs. 444831592.

Source: Equity Bulls

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