Maruti Suzuki India - Margins likely to remain subdued - ICICI Securities

Maruti Suzuki India's (MSIL) Q3FY21 numbers were a miss on consensus estimates as EBITDA margins declined ~66bps YoY to 9.5% despite strong operating leverage (volumes rose ~13% YoY). Margin impact reflected rising input costs (~300bps QoQ impact), weaker product mix (losing foothold in SUVs). As per the management, margin pressure is likely to continue in 4Q as price hikes are likely to be calibrated due to sentiment fragility. The commissioning of new Gujarat production line is also likely to further inflate fixed costs in coming quarters, thus add to margin headwinds. We believe, MSIL's key customer challenge remains arresting the declining replacement sales share (~19% down 600 bps YoY) even as customers uptrade into SUV offerings of competitors. Stock remains expensive (40x FY23E core EPS of Rs152). Maintain SELL.

- Key highlights of the quarter: Revenues for Q3FY21 grew 13.3% YoY to ~Rs235bn while EBITDA margin contracted by a marginal 66bps to 9.5%. ASP was down 10bps at ~Rs473k/vehicle (even as discounts came down ~Rs12.8k/vehicle YoY) due to: a) drop in diesel share (average pricing Rs100k/vehicle higher than petrol counterparts), b) increased downtrading within portfolio, and c) loss of market share in SUV segment (Q3: 22.1%/ down 310 bps YoY). PAT was boosted with lower depreciation (down ~14%), higher financial income (up ~27% to Rs10bn).

- Key takeaways from earnings call: Management indicated: a) demand remains resilient in rural markets ( ~40% share in Q3 sales); network inventory levels are mdoest at ~21k units with an order backlog of ~215k units as of Q3-end; b) share of replacement demand has reduced to ~19% (down 600 bps YoY) with one of the factors being rising average replacement cycle (9.2 years from 8 years; as per MSIL's true value business); c) increase in commodity prices impacted the margins by 300bps QoQ and the hit was w.r.t 2Q while 3Q input costs rise impact would come in 4Q; d) in terms of financing, the penetration remained at ~80% and digital inquiries proportion has risen to ~55% vis-à-vis 15-16% in FY20; e) MSIL's management continues to focus on hybrids vis-à-vis EVs as a preferred future technology solution, find EV's financially unviable; and f) royalty rates stood at 4.9%.

- Maintain SELL: Globally electrification acceptance for customers as well as investors is rising in a non-linear fashion, valuations too are realigning towards technological capabilities/investments vis-à-vis current ICE market position. Indian automotive market would also eventually get aligned towards the same phenomenon, disdain towards electrification is a bit unwise. We find MSIL's current valuation expensive (40x FY23 core EPS of Rs152), maintain our target multiple at 24x FY23E (rollover) core EPS and add cash per share of Rs1,582 (earlier: Rs1,539) to arrive at our target price of Rs5,226 (earlier: Rs4,755). Maintain SELL.

Shares of MARUTI SUZUKI INDIA LTD. was last trading in BSE at Rs.7586.25 as compared to the previous close of Rs. 7866.05. The total number of shares traded during the day was 223975 in over 21088 trades.

The stock hit an intraday high of Rs. 7977 and intraday low of 7557.85. The net turnover during the day was Rs. 1748823955.

Source : Equity Bulls

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