Maruti Suzuki. Source: Company Data; PL Research

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1 Q3 results subdued, Outlook remains good; BUY January 28, 2016 Rohan Korde Rating BUY Price Rs4,103 Target Price Rs4,844 Implied Upside 18.1% Sensex 24,470 Nifty 7,425 (Prices as on January 28, 2016) Trading data Market Cap. (Rs bn) 1,239.5 Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 56.21% Foreign 22.08% Domestic Inst % Public & Other 7.27% Stock Performance (%) 1M 6M 12M Absolute (11.6) (2.2) 10.1 Relative (5.6) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: MRTI.BO, BB: MSIL IN) (Rs) 5,000 4,000 3,000 2,000 1,000 0 Jan 15 Mar 15 Source: Bloomberg May 15 Jul 15 Sep 15 Nov 15 Jan 16 Maruti Suzuki s (MSIL s) performance in Q3FY16 was weak due to lower thanexpected EBITDA margins, coupled with lower non operating income and higherthan expected depreciation provision. While MSIL s sales growth at 19.9% YoY to Rs150.8bn was on expected lines, EBITDA margin at 14.4% was impacted by a combination of provision for bonus with retrospective effect from April 2014, higher sales promotion and marketing expenses, adverse fixed cost incidence due to decretion of inventory and higher maintenance cost for the Gurgaon plant. Resultantly, EBITDA was Rs21.7bn, which was lower than expectation of Rs23.8bn, while reported profit was Rs10.2bn, which though higher 27.1% YoY, was lower than expected. We remain positive on MSIL on expectations of market share gains and good demand growth driving revenues. A healthy recovery in economic growth, sales prospects from new models, both domestically and overseas and incremental demand from hike in public sector wages provide a positive outlook ahead. Productivity improvement and localisation are likely to be the long term drivers. We lower our EPS estimate by 8.5% for FY16e and 7.1% for FY17e to factor in the tepid Q3FY16 performance. We expect revenue CAGR of 18% over FY15 18e, with an adjusted profit CAGR of 28.8% and EBITDA margin expansion of 280bps to 15.8%. The stock is currently trading at 18.6x FY17e EPS. Our revised target price is Rs4,844 based upon 22xFY17e (previously Rs4,977). At our price target, MSIL would trade at a cash PE 15x FY17e (currently trades at 12.7x). We maintain BUY. In Q3FY16, MSIL s volumes grew 15.5% YoY to 374,182 units. These were MSIL s highest quarterly sales volumes ever. Contd...2 Key financials (Y/e March) E 2017E 2018E Revenues (Rs m) 498, , , ,261 Growth (%) EBITDA (Rs m) 64,986 91, , ,615 PAT (Rs m) 37,112 48,300 66,516 79,323 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2017E 2018E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Q3FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Sales realisation grew by 4.2% YoY, resulting in net sales growth of 20.4% YoY. Other operating income was higher 0.5% YoY (lower 12.5% QoQ) to Rs3.1bn. QoQ decline was due to a lower scrap sale rate and a one time sales tax benefit in Q2FY16. As a result, total income increased 19.9% YoY to Rs150.8bn. Adjusted EBITDA margin (for bonus provision) was 14.5%, which was 150bps lower than expectation (lower 180bps QoQ and up 180bps YoY). Adjusted EBITDA grew 37.7% YoY to Rs21.9bn. On a YoY basis, RM/Sales ratio was lower 170bps (benefits of foreign exchange on imports and cost reduction efforts), while it was higher 170bps QoQ. MSIL has mentioned that an adverse fixed cost incidence due to decretion of inventory led to RM/Sales being higher 100bps QoQ. This more than offset the 50bps benefit on lower commodity costs during Q3FY16. Staff costs after adjusting for provision for bonus pertaining to earlier years (~Rs230m) were 3.2% of sales (higher 20bps YoY and QoQ). OE/sales ratio was flat QoQ. In Q2, the adspend was higher due to launchrelated expenses of S Cross, while in Q3, it involved launch expenses pertaining to Baleno. There was also an impact of higher maintenance cost at the Gurgaon plant. With lower than expected non operating income, higher depreciation and a higher tax rate YoY (by 720bps), adjusted profit grew 29.1% YoY to Rs10.35bn, which was lower than expected. Conference call highlights Discounts per vehicle were ~Rs21,997 in Q3FY16 (Rs19,500 in Q2FY16 and Rs16,088 in Q1). Average discount in FY15 was Rs19,464/vehicle. Capex for FY16 has been pegged at Rs30bn to be spent on new model launches, R&D, marketing infrastructure (excluding NEXA) and normal maintenance capex. Most benefits of commodity price correction have been factored in the margins and further benefit is likely to be limited. Exports will see an adverse impact due to duty hike in Sri Lanka. Management is expecting Baleno exports to make up for this shortfall. AMT capacity has been increased to 10,000 units per month, which is adequate currently. Production capacity achievable has been pegged at 1.6m units in FY17. With short term measures, production capacity can be managed to meet seasonal demand requirements. January 28,

3 Exhibit 1: Q2FY16 Result Overview (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Revenues 150, , , , , Raw Materials 103,277 88, , , , % of Net Sales Personnel 4,815 3, ,180 13,626 10, % of Net Sales Manufacturing & Other Exp 20,796 17, ,339 57,415 49, % of Net Sales Total Expenditure 128, , , , , EBITDA 21,931 15, ,694 66,516 45, EBITDA Margin (%) Depreciation 7,221 6, ,694 20,631 18, EBIT 14,710 9, ,999 45,884 26, Interest Expenses (18.7) ,034 (40.8) Non operating income 315 1,290 (75.6) 1,371 3,407 5,603 (39.2) PBT 14,551 10, ,193 48,449 31, Tax Total 4,358 2, ,937 14,071 7, Tax Rate (%) Total Reported PAT 10,193 8, ,256 34,378 24, Adj. PAT 10,354 8, ,256 34,539 24, Source: Company Data, PL Research Exhibit 2: Operating Metrics (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Car Sales Volume (nos) 374, , ,335 1,068, , Net Realisation/Vehicle 403, , , , , Material cost / vehicle 276, , , , ,657 (1.6) Gross Profit / vehicle 127, , , , , Employee cost /vehicle 12,868 11, ,830 12,748 11, Other expenses / vehicle 55,577 55, ,733 53,716 52, EBITDA/vehicle 58,611 49, ,227 62,231 47, Net Profit/vehicle 27,671 24, ,685 32,314 25, Source: Company Data, PL Research January 28,

4 Income Statement (Rs m) Net Revenue 498, , , ,261 Raw Material Expenses 350, , , ,098 Gross Profit 147, , , ,163 Employee Cost 16,066 18,475 21,247 24,434 Other Expenses 66,431 78,425 92, ,114 EBITDA 64,986 91, , ,615 Depr. & Amortization 24,703 28,119 30,727 32,710 Net Interest 283 (395) (985) (1,553) Other Income 9,768 4,610 6,811 8,577 Profit before Tax 48,682 68,261 87, ,373 Total Tax 11,570 19,662 21,005 25,049 Profit after Tax 37,112 48,599 66,516 79,323 Ex Od items / Min. Int. Adj. PAT 37,112 48,300 66,516 79,323 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) C/F from Operations 77,846 83, , ,152 C/F from Investing (58,967) (60,000) (85,000) (85,000) C/F from Financing (24,993) (13,783) (14,522) (16,063) Inc. / Dec. in Cash (6,114) 10,019 7,199 17,089 Opening Cash 6, ,202 17,401 Closing Cash ,202 17,401 34,490 FCFF 39,243 44,279 65,843 77,243 FCFE 22,806 45,279 65,793 77,193 Key Financial Metrics Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity (0.1) Net Wrkng Cap. (days) (23) (27) (28) (28) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 237, , , ,750 Total Debt 1,802 2,802 2,752 2,702 Other Liabilities 4,810 4,810 4,810 4,810 Total Liabilities 243, , , ,262 Net Fixed Assets 141, , , ,865 Goodwill Investments 128, , , ,140 Net Current Assets (22,553) (19,221) (20,622) (8,743) Cash & Equivalents ,202 17,401 34,490 Other Current Assets 65,766 72,708 82,876 94,590 Current Liabilities 88, , , ,823 Other Assets Total Assets 247, , , ,262 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 136, , , ,819 EBITDA 21,643 21,891 22,694 21,931 % of revenue Depr. & Amortization 6,600 6,716 6,694 7,221 Net Interest 1, Other Income 3,199 1,720 1, Profit before Tax 17,215 16,705 17,193 14,551 Total Tax 4,373 4,776 4,937 4,358 Profit after Tax 12,842 11,929 12,256 10,193 Adj. PAT 12,842 11,929 12,256 10,193 Key Operating Metrics Total volumes (units) 1,292,403 1,455,365 1,674,819 1,886,896 Realisation per unit (Rs) 376, , , ,860 Gross margin per unit (Rs) 114, , , ,349 EBITDA per unit (Rs) 50,283 63,146 66,606 68,162 Profit per unit (Rs) 28,715 33,187 39,715 42,039 Source: Company Data, PL Research. January 28,

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