Maruti Suzuki India (MARUTI) 4495

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1 Result Update Rating matrix Rating : Buy Target : 5090 Target Period : 12 months Potential Upside : 13% What s Changed? Target Changed from 4857 to 5090 EPS FY16E Changed from to EPS FY17E Changed from to Rating Unchanged Quarterly Performance ( Crore) Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue 13, , , EBITDA 2, , , EBITDA (%) bps bps Reported PAT 1, , Key Financials Crore FY14 FY15 FY16E FY17E Net Sales 42,645 48,606 55,912 66,678 EBITDA 5, , , ,198.3 Net Profit 2, , , ,992.9 EPS ( ) Valuation summary FY14 FY15 FY16E FY17E P/E (x) Target P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY15) ( Crore) Crore Cash and Investments (FY15) ( Crore) Crore EV ( Crore) Crore 52 week H/L ( ) 4763 / 3130 Equity capital ( crore) 151 Crore Face value ( ) 5 Price performance (%) 1M 3M 6M 12M Maruti Suzuki India Ltd M&M Ltd Tata Motors Ltd Research Analyst Nishit Zota [email protected] Vidrum Mehta [email protected] Unabated growth to continue... October 29, 2015 Maruti Suzuki India (MARUTI) 4495 Maruti Suzuki Ltd (MSIL) reported its Q2FY16 numbers marginally below our estimates (in-line with Street estimates). Revenues came in at 13,934 crore, up 13.2% YoY, driven mainly by 9.8% YoY volume growth & 0.3% QoQ growth in ASP. Revenues came below our estimates of crore mainly on account of lower ASPs Reported EBITDA margins came in at 16.3%, up 393 bps YoY, marginally below our estimates of 16.5%. Reported margins are strong despite the fact that this quarter included higher other expenses in the form of one-time ad spends for the launch of S- Cross, Ciaz hybrid & Nexa showroom The PAT increased 42.1% YoY, 2.7% QoQ to 1,226 crore (vs. expectation of 1,325 crore). PAT came below our estimates on account of lower than estimated other income MSIL to benefit most from growth of PV industry Domestic sales of passenger vehicle grew 3.7% in FY15 led by slight improvement in consumer sentiment with expectation of faster economic growth. The industry has shown recovery in FY16E, with industry volumes growing 6.2% in H1FY16 and MSIL outpacing that growth, growing 12.7%. We believe there are a lot of favourable demand & supply side variables that will lead to faster volume growth in the near to medium term. While demand side variables include revival in economic growth, low inflation, steady growth in disposable income, declining cost of ownership (driven by lower fuel cost/interest rates), supply side variables are new model launches and capacity expansions. We believe MSIL s largely petrol denominated small car portfolio is likely to benefit the most as most small car buyers are first time buyers & sensitive to change in cost of ownership. MSIL s small car segment sales will also gain from the Seventh Pay Commission that is expected in late FY16. Strong portfolio, new launches & reach ensures dominance MSIL s strength lies in withstanding slowdown & competition through its wide distribution network. Maruti gained ~300 bps market share in FY14 and another ~200 bps in FY15. The gain in market share in FY14 was partly driven by increasing rural penetration, gain in market share in FY15 is driven by successful new products like Celerio, Ertiga & Ciaz. Maruti has entered a strong product cycle and is looking to plug the gaps in its product portfolio. MSIL has already addressed the upper segment sedan with its product Ciaz. Its recent launch S-cross & upcoming compact SUV will help MSIL create presence in the SUV segment. Introduction of premium hatchback Baleno (pitted against the likes of Hyundai i20/honda Jazz/ VW Polo) is a step in the right direction as it provide support to the nascent Nexa dealership. Secondly, the presence of Baleno in the fastest growing premium hatchback segment, will meaningfully contribute towards volume growth & margin expansion. Lastly, Baleno will help in export growth as MSIL is sole manufacturer of Baleno for parent Suzuki. Margin expansion & growth story intact We prefer the four-wheeler auto segment to the two-wheeler segment as low penetration levels still provide headroom for sustained growth. A strong operational performance in two consecutive quarters and operating leverage benefit have led us to raise our EBITDA margin estimates to 16.1%, 16.4% for FY16E, FY17E, respectively. We ascribe a multiple of 22x its FY17E EPS of 231 and recommend BUY with a target price of 5,090. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q2FY16E Q2FY15 YoY (Chg %) Q1FY16 QoQ (Chg %) Comments Total Operating Income 13,934 14,007 12, , Below estimates on account of lower ASPs due to higher discounting Raw Material Expenses 9,312 9,269 8, , Employee Expenses QoQ reduction in employee cost on account of write back of provision made in Q1 Other expenses 1,934 1,925 1, , Other expenses to sales Increased 103 bps QoQ owing to higher ad spends on the launch of S-Cross, Ciaz hybrid & Nexa showroom EBITDA 2,269 2,308 1, , EBITDA Margin (%) bps bps QoQ reduction in margins (16.3% vs 16.9%) on account of higher other expenses to sales Other Income Other income came lower than estimates on account of FMP maturity mismatch Depreciation Interest Total Tax PAT 1,226 1, , PAT came below estimates on account of lower than estimated other income EPS Key Metrics ASP ( ) 384, , , , Lower ASPs due to higher discounting Provision for Royalty( cr) Higher royalty payout owing to product mix & yen movement in Q2 Discounts ( ) 19,500 16,000 21, , Higher discounts reflects the subdued demand sentiment Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 57,350 57, ,649 68, FY16E estimates remain unchanged. FY17E estimates have been increased marginally to reflect higher ASP EBITDA 9,148 9, ,833 11, EBITDA Margin (%) bps bps Margins estimates raised to reflect benefit of operating leverage benefit PAT 5,433 5, ,670 6, EPS ( ) Assumptions Current Earlier Comments FY14E FY15E FY16E FY17E FY16E FY17E Total Volumes (nos) FY17 estimates also remain almost unchanged Average ASPs ( ) 369, , , , , ,683 ASPs increase assumed on change in product mix RMC/Unit ( ) 271, , , , , ,757 Royalty rates (%) Discount ( ) 16,950 19,529 17,505 17,500 16,005 16,000 New launches & improvement in macro-environment will lead to reduction in discount Company, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways MSIL s domestic volumes grew 12.4% YoY against industry growth of 6.3% in Q2FY16. Although subnormal monsoon & uncertainty in rural demand was not conducive to growth, MSIL s double digit growth was led by multiple launches & facelifts. MSIL s rural growth was at 10% YoY vs. urban growth of 4% YoY For the overall industry, share of petrol segment stood at 54%. MSIL s petrol vehicles grew by 14.5% YoY (in-line with industry trend) while diesel vehicles grew 8% YoY (industry diesel vehicle volumes declined 2% YoY) Margin expansion was led by softening commodity prices & cost reduction initiatives taken by the company. Going ahead, the management does not expect significant benefits of commodity prices Export revenues for Q1FY16 were at 1128 crore. Export volumes declined 12% YoY to units. In the export market, MSIL is likely to benefit from a duty reduction in Sri Lanka For the quarter, average discounts were at ~ 19,500 vs. 16,000 in Q1FY16. The management has guided that these discount levels are likely to continue The dealer inventory is currently at about four weeks. The company has so far witnessed ~10% YoY growth in the festive season so far ( Dussehra/Navratri) There are currently 80 Nexa showrooms, which are expected to reach 100 by FY16 end. The management also alleviated concerns regarding this parallel dealership by stating that Nexa showrooms are exclusively offered to the existing Maruti dealers. Dealers who have taken up the Nexa dealership, currently have 785 non-nexa showrooms. Hence, the reach is not limited to the existing 80 Nexa showrooms. The company has a rewarding incentive system for non- Nexa dealer (50% revenue share with Nexa dealer, if the query is converted to vehicle sale). Product development expenses for the Baleno are at ~ 1100 crore The management has guided for a capex of 3500 crore for FY16E The management is optimistic about its recently launched premium hatchback Baleno. Before the launch date (declaration of price), dealers received ~12,500 customer enquiries and ~2,500 confirmed bookings. On the launch date, the company received 1000 enquiries & 600 confirmed bookings ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Unique position of dominance in spite of competition MSIL has maintained its market leadership despite the increase in competitive intensity. Despite ~18 players being in the fray fighting for the 2.5 million large market, MSIL has managed to hold ~45% market share. The financial performance has been strong over the past years with operating margins maintained at decent levels (over 10% in the last 11 quarters). On the business levers side, all factors range from cost of car ownership to demographics to new product launches led by S-Cross & Baleno. Allied to this, on the financial levers side, better operating leverage and FX benefits are also in place to benefit MSIL. We expect revenue growth at ~16.4% CAGR in FY15-17E reaching ~ crore in FY17E. Margins are likely to remain on an uptrend and clock 17% in both FY16E & FY17E, as industry demand improves, leading to better operating leverage and also reduction in discounting levels. Also, increased traction in newer products in premium categories would lead to better ASPs and, consequently, better margins and is likely to aid profitability. We expect the bottomline to grow at ~37% CAGR in FY15-17E and reach ~ 6993 crore in FY17E. Exhibit 1: Topline and bottomline trends ( crore) ( crore) 0 FY12 FY13 FY14 FY15 FY16E FY17E Topline Bottomline 0 Source: Company press release, ICICIdirect.com Research Exhibit 2: Margins to trend higher as volumes aid operating leverage 12, ( crore) 10,000 8,000 6,000 4,000 2, , , , , , (%) - FY13 FY14 FY15 FY16E FY17E - EBITDA Margins (%) Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4

5 Export performance steady; bigger growth post Suzuki s Gujarat plant! Suzuki is aiming to let MSIL grow as a low-cost brand to target markets such as Africa. MSIL already contributes ~45% to Suzuki s global profits. As such, Suzuki s strategy to make MSIL its global export hub for low priced products is logical. Currently, exports form ~9% of total sales for MSIL, with major export oriented product being the A-Star. Going ahead, we have taken ~11% CAGR in FY15-17E in export volumes. Exhibit 3: Export volumes ('000s) FY11 FY12 FY13 FY14E FY15E FY16E FY17E Domestic Exports Source: Company press release, ICICIdirect.com Research MSIL turns page as market share remains key focus With an increase in competitive intensity from FY10-11 onwards coupled with an increasing gap in petrol-diesel prices shifting customer preference for diesel cars in FY12-13, MSIL s market share had reduced from ~47% in FY09 to ~39% in FY13. The market share was further lost on account of persistent labour troubles at Manesar in both FY12 and FY13, which halted production. However, with the fuel price fall and domestic fuel price deregulation, there has been a recovery in petrol cars. MSIL has since then increased its presence in terms of products as well as capacity in both the petrol as well as diesel space. Launches of successful products like Ertiga and Celerio also aided growth of market share in a challenging environment. MSIL has regained a lot of lost ground in terms of market share (YTD ~47% domestic). We expect MSIL to maintain >40% market share despite the improvement in competition and growth in the utility vehicle space in the coming years. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 4: Domestic PV market share for MSIL (%) FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 YTD for Q3FY15 Domestic Market Share Exhibit 5: Passenger car market share (excluding UVs) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 (%) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Source: Company press release, ICICIdirect.com Research MSIL's domestic share Discounting levels declining with better macro environment, new launches In an intensely competitive industry struggling with demand slowdown, the increase in discounting levels to gain volumes is to be expected. As the market leader, MSIL had also been forced to give incentives to ward off competition and retain market share. However, we believe the new products launches (which do not offer any discounts) & facelifts will lead to improved product mix that will effectively reduce the discount levels. Discount on small cars (Alto, Wagon R) is broadly linked to the broad macro environment. These discounts will reduce with the improving macro economy conditions. From the higher discount levels of 21,000 in Q3FY15, the same has substantially reduced to ~ 15,000 in Q4FY15 & 16,000 in Q1FY16. We expect a reduction in average discounts from 19,625 in FY15 to 17,500 in both FY16E and FY17E. ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 6: Discounting levels reducing ,529 17,505 17,500 ( ) Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 FY15E FY16E FY17E Source: Company press release, ICICIdirect.com Research Going ahead, as the industry recovers on the back of an improvement in overall economic scenario and interest rate cuts, discounting levels are likely to taper off from FY16E onwards, albeit not too sharply, thereby aiding profitability slowly. Exhibit 7: Annual discount trends and expectations ,529 17,505 17,500 ( ) FY12 FY13 FY14 FY15E FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and Valuation We prefer the four-wheeler auto segment to the two-wheeler segment as low penetration levels still provide headroom for sustained growth. We continue to remain bullish on the longer-term growth prospects of the car segment, especially MSIL, considering its dominant market share at ~45%. A strong operational performance in two consecutive quarters and operating leverage benefit have led us to raise our EBITDA margin estimates to 16.1%, for FY16E, FY17E, respectively. We believe earnings growth trajectory would be strong (~37% CAGR in FY15-17E). We ascribe a multiple of 22x its FY17E EPS of 231 and recommend BUY with a target price of Exhibit 8: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 8

9 Company snapshot 6,000 5,000 Target Price: ,000 3,000 2,000 1,000 0 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 ( ) Mar-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Feb-10 Largest recall in Maruti's history for 1 lakh A-star's for faulty parts. Maruti plans to double petrol capacity and investments to ~ 2,500 crore Jul-10 Q1FY10 marks the change in royalty rates for Maruti from 3.3% to 5.9%, market disappointed Mar-11 Auto stocks rebound as Union Budget witnesses no change of excise duties. Manesar workers go on strike for first time in May for two weeks Aug-11 Labour trouble again brews up, production halted. Maruti Q2FY12 skids due to labour problems and high forex impacts as JPY unfavourable Jan-12 Maruti witnesses strong valuation based bargain hunting as management expects worst to be over Apr-12 Maruti launches the much awaited MPV product "Ertiga". Maruti announces merger with SPIL to consolidate business on the diesel side Jul-12 Maruti stock tumbles as workers in Manersar facility turn violent, causes tragic death of HR manager Awanish Kumar Dev Aug-12 Management lifts lockout post violence receding; production starts albeit slowly Apr-13 Yen moving beyond 100 vis-à-vis US$ aids Q4FY13 profits as EBIDTA margins rise to 10.4% Oct-13 Localisation and cost reduction initiatives Maruti surprise on Q2FY14 financials as margins surprise Jan-14 MSIL board approves Gujarat plant expansion by way of 100% subsidiary of Suzuki Motor Corporation; institutional investors perturbed; stock falls Mar-14 Management alleviates concerns of minority shareholders and removes uncertainty over the "mark-up" issue Oct-14 Maruti launches a new product in the sedan segment "Ciaz" Apr-15 MSIL reports bumper margins of 15.9% in Q4FY15. Announces dividend of 25 per share May-15 Maruti Suzuki 'Swift' completed 10 years of debut. The company has sold over 1.3 million car over the last 10 years Jun-15 Company launches Celerio's diesel variant at 4.65 lakh Jul-15 Maruti opens booking for premium crossover S-CROSS which is likely to to sold through its NEXA (premium) showrooms Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Suzuki Motor Corp 30-Jun Life Insurance Corporation of India 30-Jun Capital World Investors 30-Sep HDFC Asset Management Co., Ltd. 30-Sep ICICI Prudential Life Insurance Company Ltd. 30-Jun Schroder Investment Management Ltd. (SIM) 31-Jul UTI Asset Management Co. Ltd. 30-Sep Norges Bank Investment Management (NBIM) 31-Dec Fidelity Management & Research Company 31-Aug Birla Sun Life Asset Management Company Ltd. 30-Sep Source: Reuters, ICICIdirect.com Research Recent Activity (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares Capital World Investors m 2.22m Genesis Investment Management, LLP m -0.81m GMO LLC 50.45m 0.85m T. Rowe Price Hong Kong Limited m -0.74m TIAA-CREF 46.29m 0.65m Life Insurance Corporation of India m -0.72m DSP BlackRock Investment Managers Pvt. Ltd m 0.45m Reliance Capital Asset Management Ltd m -0.56m Birla Sun Life Asset Management Company Ltd m 0.44m Columbia Threadneedle Investments (US) m -0.40m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Total operating Income 43,701 49,874 57,378 68,412 Growth (%) Raw Material Expenses 31,310 35,008 38,538 45,735 Employee Expenses 1,368 1,607 1,847 2,267 Marketing Expenses Administrative Expenses Other expenses 5,933 6,654 7,773 9,212 Total Operating Expenditure 38,611 43,268 48,157 57,213 EBITDA 5,090 6,606 9,221 11,198 Growth (%) Depreciation 2,084 2,470 2,567 2,896 Interest Other Income ,303 PBT 3,659 4,868 7,454 9,579 Others Total Tax 876 1,157 2,069 2,586 PAT 2,783 3,711 5,385 6,993 Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax 2,783 3,711 5,385 6,993 Add: Depreciation 2,084 2,470 2,567 2,896 (Inc)/dec in Current Assets ,405 Inc/(dec) in CL and Provisions 868 1, ,157 Others CF from operating activities 5,926 7,668 7,981 9,641 (Inc)/dec in Investments -3,583 5,817-1,000-1,000 (Inc)/dec in Fixed Assets -3,756-3,201-4,000-3,000 Others 1,355-8,403-1,291-1,068 CF from investing activities -5,985-5,787-6,291-5,068 Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax ,233-1,479 Inc/(dec) in Sec. premium Others 336-1, CF from financing activities -88-2,385-1,133-1,379 Net Cash flow ,194 Opening Cash Closing Cash ,876 Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus 20,827 23,658 27,810 33,324 Total Shareholders funds 20,978 23,809 27,961 33,475 Total Debt 1, Deferred Tax Liability Others Liabilties Total Liabilities 23,686 24,868 29,170 34,834 Assets Gross Block 22,702 25,636 29,936 32,936 Less: Acc Depreciation 11,912 14,115 16,682 19,578 Net Block 10,790 11,521 13,253 13,357 Capital WIP 2,621 2,621 2,321 2,321 Total Fixed Assets 13,412 14,142 15,575 15,679 Investments 10,118 12,814 14,814 16,814 Inventory 1,706 2,615 1,674 3,441 Debtors 1,414 1,069 1,915 2,283 Loans and Advances 1,251 1,172 1,168 1,489 Other Current Assets Cash ,876 Total Current Assets 5,359 5,307 6,001 11,600 Creditors 4,898 5,561 5,744 6,759 Provisions 678 1,361 1,463 1,789 Other current Liabilities 1,274 1,867 1,746 2,563 Total Current Liabilities 6,849 8,789 8,954 11,111 Net Current Assets -1,491-3,481-2, Other Assets 1,647 1,393 1,734 1,852 Application of Funds 23,686 24,868 29,170 34,834 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV ,108.1 DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT / Net sales (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 10

11 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Hold Bajaj Auto (BAAUTO) Buy Balkrishna Ind. (BALIND) Hold Bharat Forge (BHAFOR) Buy Bosch (MICO) Hold Eicher Motors (EICMOT) Hold Escorts (ESCORT) Hold Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Hold JK Tyre & Ind (JKIND) Buy M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy NA Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai [email protected] ICICI Securities Ltd Retail Equity Research Page 12

13 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a SEBI registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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