Margins to remain in mid 15% range for FY 16E, increase in FY 17E on operating leverage

January 29, 2016 Buy Maruti Suzuki (MSIL) Industry: Auto and Auto Components Industry View: Positive Result Update Prune estimates on margin dip, maintain BUY on good volume growth Q3 numbers hurt by slurry of unexpected costs Maruti Suzuki India Ltd (MSIL) s Q3FY16 numbers came in well below street expectations. The top-line grew by 20% yoy at Rs148 bn. Volumes in the quarter grew by 15.6% yoy and 6% qoq to 3.74 lakh units. Net realizations improved by 5.9% yoy and 2.7% qoq as the quarter saw high priced new launches. EBITDA grew by 31% yoy while EBITDA margins decreased from 16.7% to 14.7% qoq. RM to sales went up to 69.9% up from 68.6% qoq due to decretion of inventory levels at 4,000 units from an average of 25,000 units. Employee costs increased to 3.42% from 3.08% qoq on higher bonus expenses which led to an impact of 15 bps on margins. Other expenses were at 14.1% due to Rs 700 mn additional costs linked with maintenance of the ageing Gurgaon plant which the company carries out biannually (June and December). Also the launch costs associated with Baleno and S-Cross led to higher advertising expenses. Furthermore, discounts associated with S-Cross (~Rs 2 lakh per vehicle) also led to margin dip. Other income remained low due to low scrap sale rate, while depreciation and amortization sequentially grew by 8% and 15% yoy to Rs 7.2 bn on the back of new launches. Tax rate in the quarter went up to 29.9%. In line with weak operational outperformance adjusted PAT dropped by 17% qoq at Rs10.19 bn, but grew by 17% yoy. MSIL volumes to spur on new launches though small cars are facing competition Currently the demand for passenger vehicles has been picking up. MSIL has posted a 13.9% domestic growth in Q3FY16. With MSIL s wide distribution network, robust aftersales support, wide portfolio of affordable products and recent good launches, MSIL has reported strong domestic numbers. Demand has shifted more towards petrol vehicles with the gap between diesel and petrol getting narrower day by day (68% petrol v/s 32% diesel). With new products such as Ciaz, S-Cross and Baleno, MSIL has been able to grow its overall PV market share though competition has stiffened. In the hatchback small car segment, the launch of Renault Kwid is gving very tough competition to the likes of Alto (growth of just 0.5% YTD). With Ciaz continuing a strong show in the third quarter of its launch, we expect this car to be the front runner in sedan segment for MSIL alongside Dzire. We are optimistic about the volume growth here on considering the warm response for Ciaz, new launch of Swift variant, Celerio strength, and the recent launch of Baleno which is attracting demand of 9000-1000 units per month. Since the launch of Baleno happened in Q3, the complete full year volumes numbers of it will be seen only in FY17, which we believe to take MSIL s volumes to an altogether new level. We estimate 8% of sales to come from Baleno in FY17 (1,20,000 units). The forthcoming Auto Expo will witness MSIL showcasing two new models. The first one to be launched is Vitarra Brezza SUV to compete with Hyundai Creta, Mahindra TUV 3oo, Renault Duster and Ford Ecosport while the second launch is of Ignis, which will be pitted in against the likes of Mahindra KUV 100. The launches will follow in Q4 or Q1FY17. Stock Data Current Market Price (Rs) 4,040 Target Price (Rs) 4,486 Potential upside (%) 11 Reuters Bloomberg What s Changed MRTI.BO MSIL IN 12 month PriceTarget (Rs) From 4,891 to 4,486 FY2016E EPS (Rs) From 180 to 160 FY2017E EPS (Rs) From 222 to 214 Key Data Market Cap (Rs bn) 1,216 52-Week Range (Rs) 4,789 / 3,362 Avg Daily Trading Value last 6 mts(rs.mn) 3,393 Promotors (%) 56.21 FII Holding (%) 25.22 DII Holding (%) 11.98 Public & Others Holding (%) 6.29 Fiscal YE YE Mar FY14 FY15 FY16E FY17E Total sales (Rs bn) 436.2 499.7 598.0 691.7 EBITDA margins(%) 11.8 13.8 15.5 16.4 PAT margins(%) 6.4 7.6 8.3 9.5 EPS 89.5 122.9 159.9 213.6 P/E 44.9 32.7 25.1 18.8 P/BV 5.8 5.1 4.5 3.8 EV/EBITDA 24.2 18.1 13.3 11.0 ROE% 13.0 15.7 17.7 20.2 ROCE% 9.4 13.8 20.7 22.9 Dividend yield % 0.4 0.8 0.8 1.0 Relative Price Performance 140 130 120 110 100 90 80 70 60 50 Jan-15 May-15 Sep-15 Jan-16 Maruti Suzuki One Year Indexed S&P Bse Sensex (%) 1 Month 3 Months 12 Months Absolute (12) (9) 10 BSE Relative (6) 1 27 Ashwin Patil ashwin_patil@lkpsec.com +91 22 6635 1271 Disclaimer: The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Financial Highlights Maruti Suzuki India Ltd. If the monsoon this year is in line with expectations then the rural markets (>30% of total volumes) also may yield a good traction for MSIL. Considering the growth that the company has posted in 9M FY16 at 13.9%, we believe that with the recent launches, the company can easily post a growth of 13.1% in FY16E and 14.9% in FY17E on an additional boost from the newer launches. On the exports front, we expect growth to continue from geographies like Angola, Peru, Chile, Indonesia, Algeria etc. MSIL has also started exporting Baleno to markets like Japan which will provide a fillip to exports. We expect exports to grow at 6%/8% in FY16E/17E. Margins to remain in mid 15% range for FY 16E, increase in FY 17E on operating leverage Q3 EBITDA margins were badly hit by some unforeseen costs related with inventory decretion, employee bonus costs and maintenance costs at Gurgaon plant. However, higher discounting and new launch expenses were factored in the street estimates. Commodity costs benefits were seen in the quarter to the extent of 50 bps only but going forward these benefits will be limited. The increase in the opening of Nexa outlets (200 by end of FY17 from 100 currently) along with higher foreign import content in Baleno as well as the upcoming launches of Brezza and Ignis may continue to impact margins in Q4 and in FY17E. Almost 21% of the RM costs are Yen denominated (6% royalty and 16% indirect imports at vendor end). However, the concerns over appreciating Yen v/s Rupee are mitigated in Q4 as the company has taken hedges against it. Also, with increase in Baleno exports to Japan the company will be awarded with a natural hedge. However, the indirect imports will be impacted to the extent of GBP denominated imports as the company has unhedged exposure against GBP on the vendor side. New launches may provide us with a tradeoff between volume growth and marketing expenses escalation which may impact margins either ways. We also believe that prudent costs saving through internal processes and operating leverage coming in through new launches and volume growth also coming from Seventh Pay Commission implementation will provide margin boost. Considering the pros and cons, we have reduced FY16E margins to 15.5% from 16% and FY17E margins to 16.4% from 16.8% earlier. Rs mn Q3 FY16 Q2 FY16 % qoq Q3 FY15 % yoy Total income 150,819 139,337 8.2 125,758 19.9 Raw material costs 103,277 93,124 10.9 88,261 17.0 Employee costs 5,045 4,180 20.7 3,750 34.5 Other expenses 20,796 19,339 7.5 17,121 21.5 EBITDA 21,701 22,694 (4.4) 16,626 30.5 EBITDA margins % 14.7% 16.7% (200 bps) 13.6% 110 bps Depreciation & Amortization 7,221 6,694 7.9 6,278 15.0 Interest expenses 244 178 37.2 300 (18.7) Other income 315 1,371 (77.0) 1,290 (75.6) PBT 14,551 17,193 (15.4) 11,337 28.3 Tax 4,358 4,937 (11.7) 2,615 66.6 Adjusted PAT 10,193 12,256 (16.8) 8,722 16.9 Exceptional items - - N/A 700 N/A Reported PAT (Rs) 10,193 12,256 (16.8) 8,022 27.1 LKP Research 2

Outlook and Valuation Maruti Suzuki India MSIL s volume performance has been very strong in 9M FY16 and the company has witnessed a quick gain in its market share too. With expectations of economic revival coming in FY17 along with interest rates and fuel costs going down along with recent launches of Baleno, S-Cross and Ciaz and upcoming launches of Brezza and Ignis from MSIL s stable will continue with a strong volume growth. Implementation of Seventh Pay Commission, improvement in GDP in line with falling oil prices and possible implementation of GST in FY17 will help the cause. MSIL being a proxy to the recovery in economy, we believe policy reforms and a populous upcoming budget may spur demand for cars. However, margin headwinds may lead to eating up of some gains coming from volume surge. Competition coming from Renault Kwid may impact Alto volumes, while Baleno and the upcoming launches which are expected to have high import content will be vulnerable to currency movement in Yen beyond Q4FY16 (where the Yen exposure is hedged). However, Baleno exports to Japan may provide a natural hedge in FY17 which is positive and would take care of much of the Yen exposure, though movement in GBP and $ exposures in indirect imports may impact margins. New launches of Brezza and Ignis may lead to increase advertising expenses. Lower commodity benefits may not restrict RM costs from moving higher but according to us the decretion of inventory levels seen in Q3 is a temporary phenomenon and will get adjusted in the ensuing quarters thus helping margins to improve from the lows seen in Q3. Higher capex and maintenance costs at the ageing Gurgaon plant may lead to higher depreciation costs, but expectations of higher other income and lower tax rate (24%) due to changes in accounting standards from FY17 may lift the bottomline. Expectations of higher exports with Baleno and newer launches to country like Japan may too help the profitability. In line with strong volume performance we have increased the volume outlook slightly but have cut the margin outlook to a higher extent than the volume upgradation. As a net-net effect, we have cut the target price by 8%, but from current levels, we still have an upside of 10% for a lower target price of 4,486. Maintain BUY. Per unit parameters (Rs.) Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Net Realisation/unit 363,779 369,244 372,675 378,596 382,812 383,159 384,191 394,666 Material Cost/unit 273,286 272,908 272,598 272,484 266,006 264,988 263,558 276,007 Employee cost per unit 12,344 11,788 11,489 11,578 14,658 13,567 11,830 13,483 EBITDA/unit 38,400 44,285 47,246 51,329 62,423 66,479 64,227 57,996 PAT/unit 24,626 25,414 26,795 26,927 37,041 37,293 34,685 27,241 LKP Research 3

Maruti Suzuki India Ltd. Financial Income statement YE Mar (Rs.mn) FY14 FY15 FY16E FY17E Total Revenues 436,198 499,706 598,024 691,668 Raw Material Cost 313,488 350,080 405,285 462,155 Employee Cost 13,681 16,066 20,061 22,095 Other Exp 59,221 66,431 81,903 96,764 EBITDA 50,151 67,130 90,775 110,655 EBITDA Margin(%) 11.8 13.8 15.5 16.4 Other Income 8,229 8,316 5,000 6,000 Depreciation 20,844 24,703 27,713 29,834 EBIT 37,536 50,742 68,062 86,821 EBIT Margin(%) 8.8 10.4 11.6 12.8 Interest 1759 2060 1000 800 PBT 35,777 48,682 67,062 86,021 PBT Margin(%) 8.4 10.0 11.5 12.7 Tax 8,755 11,570 18,777 21,505 PAT 27,022 37,112 48,284 64,516 PAT Margins (%) 6.3 7.6 8.3 9.5 Minority interest 0 0 0 0 Exceptional items 0 0 0 0 Adj PAT 27,022 37,112 48,284 64,516 Adj PAT Margins (%) 6.3 7.6 8.3 9.5 Key Ratios YE Mar (Rs mn) FY14 FY15 FY16E FY17E Per Share Data (Rs) Adj. EPS 89.5 122.9 159.9 213.6 CEPS 158.5 204.7 251.6 312.4 BVPS 694.6 784.9 900.8 1059.5 DPS 14.7 31.5 32.1 40.1 Growth Ratios(%) Total revenues 0.1 14.2 20.4 15.7 EBITDA 20.8 33.9 35.2 21.9 PAT 16.7 36.3 30.1 33.6 EPS Growth 16.7 36.3 30.1 33.6 Valuation Ratios (X) PE 44.9 32.7 25.1 18.8 P/CEPS 25.3 19.6 16.0 12.9 P/BV 5.8 5.1 4.5 3.8 EV/Sales 2.8 2.4 2.0 1.8 EV/EBITDA 24.2 18.1 13.3 11.0 Operating Ratios (Days) Inventory days 15.2 15.5 16.0 17.2 Recievable Days 12.1 8.0 7.0 6.0 Payables day 10.5 0.3 0.3 0.3 Net Debt/Equity (x) 0.08 0.01 0.01 0.00 Profitability Ratios (%) ROCE 9.4 13.8 20.7 22.9 ROE 13.0 15.7 17.7 20.2 Dividend payout 16.4 25.6 20.1 18.8 Dividend yield 0.4 0.8 0.8 1.0 Source: Company, LKP Research Balance sheet YE Mar (Rs. mn) FY14 FY15 FY16E FY17E Equity and Liabilities Equity Share Capital 1,510 1,510 1,510 1,510 Reserves & Surplus 208,270 235,532 270,536 318,452 Total Networth 209,780 237,042 272,046 319,962 Total debt 4,604 1,448 948 448 Net Deferred Tax 5,866 4,810 3,810 2,810 Other long term liabilities 2,386 1,054 554 254 Long term provisions 1,980 2,926 3,426 3,926 Current Liab & Prov Short term borrowings 12,247 354 500 500 Other current liabilities 13,382 18,658 20,658 22,658 Trade payables 48,975 55,614 68,921 79,717 Total provisions 6,777 13,604 15,604 17,604 Total Equity & Liabilities 305,997 335,510 386,467 447,879 Assets Net block 106,077 119,670 141,957 177,123 Capital WIP 26,214 18,828 20,000 22,000 Intangible Assets 1,827 2,923 4,000 5,000 Non current Investments 13,048 98,176 103,176 108,176 Other non current assets 533 441 500 500 Total fixed assets Current investments 88,131 29,964 41,964 53,964 Cash and Bank 6,297 183 3,012 110 Inventories 17,059 26,150 28,500 35,000 Trade receivables 14,137 10,698 11,220 11,123 Loan, Advances & others 12,511 11,728 18,136 22,330 Other current assets 3,779 3,256 3,510 4,060 Total current Assets 141,914 81,979 106,342 126,588 Total Assets 305,997 335,510 386,467 447,879 Cash Flow YE Mar (Rs mn) FY14 FY15 FY16E FY17E PBT 36,585 48,682 67,062 86,021 Depreciation 20,844 24,703 27,713 29,834 Interest (510) 974 1,000 800 Chng in working capital 7,561 8,356 (4,081) (8,351) Tax paid (8,320) (10,407) (18,777) (21,505) Other operating activities (7,125) (8,202) (4,989) (6,000) Cash flow from operations (a) 49,035 64,106 67,928 80,798 Capital expenditure (34,984) (32,468) (51,172) (67,000) Chng in investments (25,893) (20,271) (5,000) (5,000) Other investing activities 11,948 7,740 1,864 1,000 (Inc)/dec inintangible assets 0 0 (1,077) (1,000) (Inc)/dec in other non curr. assets 9,457 5,682 2,941 2,000 Cash flow from investing (b) (48,929) (44,999) (54,308) (71,000) Free cash flow (a+b) 106 19,107 13,620 9,798 Equity raised/(repaid) 0 0 0 0 Inc/dec in borrowings 12,247 354 (500) (300) Dividend paid (incl. tax) (2,828) (4,241) (9,280) (11,600) Other financing activities (10,078) (15,734) (1,000) (800) Cash flow from financing (c) (659) (19,621) (10,780) (12,700) Net chng in cash (a+b+c) (553) (514) 2,840 (2,902) Closing cash & cash equiv 697 172 3,012 110 LKP Research 4

Maruti Suzuki India Ltd. DISCLAIMERS AND DISCLOSURES LKP Sec. ltd. (CIN-U67120MH1994PLC080039, www. Lkpsec.com) and its affiliates are a full-fledged, brokerage and financing group. LKP was established in 1992 and is one of India's leading brokerage and distribution house. LKP is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited(NSE), MCX Stock Exchange Limited (MCX-SX).LKP along with its subsidiaries offers the most comprehensive avenues for investments and is engaged in the businesses including stock broking (Institutional and retail), merchant banking, commodity broking, depository participant, insurance broking and services rendered in connection with distribution of primary market issues and financial products like mutual funds etc. LKP hereby declares that it has not defaulted with any stock exchange nor its activities were suspended by any stock exchange with whom it is registered in last five years. However, SEBI and Stock Exchanges have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty on LKP for certain operational deviations in ordinary/routine course of business. LKP has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has its certificate of registration been cancelled by SEBI at any point of time. LKP offers research services to clients. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Other disclosures by LKP and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject company(s) covered in this report-: Research Analyst or his/her relative s financial interest in the subject company. (NO) LKP or its associates may have financial interest in the subject company. LKP or its associates and Research Analyst or his/her relative s does not have any material conflict of interest in the subject company. The research Analyst or research entity (LKP) has not been engaged in market making activity for the subject company. LKP or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: (NO) LKP or its associates may have received any compensation including for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. LKP or its associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. LKP or its associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report. Subject Company may have been client of LKP or its associates during twelve months preceding the date of distribution of the research report and LKP may have co-managed public offering of securities for the subject company in the past twelve months. Research Analyst has served as officer, director or employee of the subject company: (NO) LKP and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that may be inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest including but not limited to those stated herein. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LKP or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person. Unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of LKP or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. All material presented in this report, unless specifically indicated otherwise, is under copyright to LKP. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of LKP LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234 Fax- 91-22-66351249. www.lkpsec.com