Narnolia Securities Ltd

INDUSTRY -

AUTOMOBILE MSIL IN 532500 MARUTI 10463

BLOOMBERG BSE Code NSE Code NIFTY

20-Dec-17 Company Data

Key Highlights of the Report:

CMP

The company reported volume of 145300 units vs our estimate of 144850

9804 8800

units, a growth of 15%YoY. In YTD FY18, MSIL has registered a growth of 15%YoY against the industry growth of about 7-8%YoY.

9855/5043

MSIL holds a market share of 52% in the domestic PV segment. MSIL could be one of the biggest beneficiaries of rural demand recovery

Target Price

NA

Previous Target Price Upside 52wk Range H/L

2,96,174

Mkt Capital (Rs Cr)

193

Av. Volume (,000)

RoE to maintain over 20% RoE 25% 20%

13%

20%

18%

16%

-

21%

as approx. 35% of its sales come from rural areas. We expect RoE to be maintained over 20% in FY19. The stock has achieved our recommended target of Rs.8800. MSIL has recently seen a sharp run up in its price which restricts possibility of near term investment gain. We change our rating from ACCUMULATE to HOLD. Shortly we will be rolling our target to FY20 estimates.

20%

15% 10% 5%

Financials/Valu

0%

Net Sales

Shareholding patterns % 2QFY18 1QFY18 4QFY17

Promoters Public Total

FY16

FY17

FY18E

FY19E

50,801

57,589

68,085

79,421

87,715

EBITDA

6,844

8,889

10,358

12,454

13,977

EBIT

4,329

6,067

7,754

9,711

10,967

PAT

3,807

5,504

7,733

8,923

10,249

126

182

249

295

339

EPS (Rs)

56.2

56.2

56.2

EPS growth (%)

33%

44%

37%

19%

15%

43.8

43.8

43.8

ROE (%)

16%

18%

20%

21%

20%

100.0

100.0

100.0

ROCE (%)

18%

20%

21%

22%

22%

805

1,014

1,227

1,432

1,681

BV

Stock Performance %

1Mn

3Mn

Absolute

17.6

20.2

91.5

Rel.to Nifty

15.8

17.2

62.4

180

FY15

MARUTI

1Yr

P/B (X)

4.6

3.7

4.9

6.8

5.8

P/E (x)

29.3

20.4

24.2

33.2

28.9

RECENT DEVELOPMENT: Strengthening distribution network

The management expects that the company would require at least 3,500

NIFTY

sales outlets and over 5,000 workshops over the next few years to expand its distribution reach and better service quality to its customers.

170 160 150

Maruti is also taking various initiatives to bring the after sales service

140

close to the customers. During the year, the company added approx. over 200 new dealer workshops.

130 120

Maruti Suzuki had earmarked Rs 1,000 crore in the current financial year

110

to buy land parcels for new dealerships. Another 43 land deals were finalized in the first half of the year. The company plans to add 1500 new dealerships in the next three years.

100 90

NAVEEN KUMAR DUBEY

Dec-17

Nov-17

Oct-17

Sep-17

Jul-17

Aug-17

Jun-17

Apr-17

May-17

Mar-17

Jan-17

Feb-17

Dec-16

80

A separate chain which sells premium models under the Nexa brand has

a further 280 outlets. It also runs a network of around 3,293 service centres across the country.

[email protected]

Narnolia Securities Ltd

Please refer to the Disclaimers at the end of this Report

Quarterly Performance Financials

2QFY17

Total Volumes ('000) Realization(Rs./ car)

418

3QFY17 387

426381.8 435500.5

4QFY17

1QFY18

2QFY18

YoY %

QoQ%

18%

25%

442420

444678

442337

4%

-1%

414

395

492

FY16

FY17

1,429

YoY % 10%

1,568

8%

402932.2 434062.5

17,843

16,865

18,333

17,546

21,768

22%

24%

57,589

68,085

18%

813

592

445

683

523

-36%

-23%

1,481

2,290

55%

12,074

11,674

12,767

12,288

14,978

24%

22%

38,706

46,742

21%

519

617

616

652

667

28%

2%

2,000

2,360

18%

Other Expenses

2,212

2,085

2,402

2,296

2,490

13%

8%

8,054

8,728

8%

EBITDA

3,037

2,489

2,549

2,309

3,634

20%

57%

8,768

10,358

18%

630

635

701

683

683

8%

0%

2,822

2,604

-8%

20

29

23

31

15

-24%

-52%

8

9

9%

PBT

3,200

2,417

2,270

2,278

3,460

8%

52%

7,419

10,035

35%

Tax

802

673

573

742

1,019

27%

37%

2,087

2,616

25%

PAT

2,398

1,745

1,709

1,557

2,484

4%

60%

5,451

7,591

39%

Net Sales Other Income COGS Employee Cost

Depreciation Interest

Results in-line, posted strong 22%YoY revenue growth

Maruti reported results in line with our estimates. Net sales stood at Rs.21768 crore in 2QFY18 a

growth of 22% over same quarter previous year. This was driven by 18%YoY volume growth and 3.7%YoY realization growth.

Domestic volumes grew by 19%YoY to 457401 units during 2QFY18. Compact segment saw a growth of 44%YoY and utility vehicle segment grew by 28% YoY during the quarter. Fast growing UV and Compact segment demand is driven by Vitara Brezza, Dzire and Baleno. These models have a waiting period of 4, 4 and 7 months respectively.

Exports volumes have seen growth of 33%QoQ backed by exposure in the new geographies and increase in the Baleno volumes exported to Japan.

Realization improved by 3.7%YoY to Rs.442337 per car on account of better product mix and price increases taken during the quarter.

Royalty rate for the quarter stood at Rs.1144 crore.

Volume Growth YoY

300000

0


492118

394571

414389

387251

418470

348443

360402

374182

100000

353335

200000

1%

430,000

2%

1%

-1%

4%

420,000 410,000 400,000 390,000 380,000 370,000

6% 5%

0%

3%

2% 0%

2% 1%

360,000


442,337

2%

13%

2%

444,678

4%

3%

5%

440,000

442,420

400000

15%

18%

450,000

Realization Growth (QoQ)

426,382

10%

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

428,400

18% 16%

422,967

500000

401,227

600000

Realization (Rs./car)

392,013

Volume

Realization and realization growth trend

435,500

Volume and volume growth trend

0% -1%

Higher volumes led economies of scale in 2QFY18 Margin %

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

YoY(+/-)

QoQ(+/-)

FY16

FY17

YoY(+/-)

Gross Margin

32%

31%

30%

30%

31%

-0.01

0.01

33%

31%

-0.01

EBITDA Margin

17%

15%

14%

13%

17%

0.00

0.04

15%

15%

0.00

PAT Margin

13%

10%

9%

9%

11%

-0.02

0.03

9%

11%

0.02

Gross Margin increased by 110bps QoQ on the back of lower commodity prices and lower discounts during the quarter.

EBITDA Margin soared 350bps QoQ to 16.7% on account of better product mix, stable commodity prices in 2QFY18, lower discounts and operating leverage.

PAT Margin was up by 250bps QoQ to 11.4%. Higher volumes led economies of scale, increase in the share of higher segment models and material cost reduction initiatives together contributed to the profits.

3,000

PAT Margin

13% 11%

11%

2,000

10%

10%

10%

9%

9%

1,557

2,500

8%

1,500

-

2,484

1,745

500

2,398

1,000 1,486

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

1,538

3,634

13%

2,309

2,489

14%

1,183

17% 15%

2,549

15%

3,037

15%

2,216

2,145

14%

2,339

16%

2,245

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -

PAT (Rs. Crore)

EBITDA Margin

17%

1,497

EBITDA (Rs. Crore)

PAT and PAT Margin trend

1,709

EBITDA and EBITDA Margin trend

16% 14% 12% 10% 8% 6% 4% 2% 0%

Concall Highlights: The company is capable of doing 1.7 million units in FY18. Maruti Suzuki will grow in double digits in the next three years and meet its stated target of selling 2

million vehicles a year by 2020. The company will focus on automotive industry without getting deviated to other diversification plans. Waiting period for Baleno: 16 weeks, Dzire: 16 weeks and Brezza: 20 weeks Exports revenue for the quarter stood at Rs.1565 crores Tax rate would be around 29% in FY18 Discounts for the quarter stood at Rs.15200 Royalty for the quarter Rs.1144 crore Capex Rs.1458 crore for the quarter but for full year FY18 is Rs.4000 crore Inventories would be down by 20% after the festive season. Gujarat plant production 10500 units per month. Management expects that the plant will be producing 20000 units per month by 4QFY18.

First time buyers are 50% of total sales. Government employees forms 20% of total Maruti's sales and fleet sales is still in single digits of total sales.



Investment Arguments: Focus on cost control to drive margins- Maruti is constantly working on various cost cutting initiatives which includes; outbound logistics cost and increasing localization. Though Maruti primarily uses roads currently, It worked with the Indian Railways to bring down transportation time substantially. These initiatives may further improve margins by 200 bps by FY20.

Electric Vehicles a new opportunity- Being a market leader in the passenger vehicle segment, Maruti is stepping towards developing electric vehicles. Considering the increasing pollution government has already asked all car makers to update their portfolio by 2030. With regard to that Suzuki is developing its own Lithium-ion battery plant in JV with Toshiba and Denso. Currently China is the only producer of Lithium-ion batteries in the world.

Unleashing the potential in the international business- Maruti is onset to unleash the potential in the international business by targeting European and Latin American markets. Recently launched and upcoming new products are technologically sound and competent to the export markets. Europe contributes 36% of total export volumes.

Reducing dependency on Yen to improve profitability- Maruti is also aggressively working towards bringing down the import content in its cars from an average 14% at the end of FY17 to 10% as part of its vision 2.0 plan. Currently about 14 percent of imports are yen denominated. Management expects to bring it down to 5 percent and typically, 1% movement in yen leads to around 1% change in the operating profit of Maruti. The company also have rupee denominated Royalty contracts with the parent Suzuki Motors for new models.

Improvement in rural economy to push entry level car sales - Currently about 30-32% of Maruti's sales come from rural areas. FMCG major like Hind unilever also sees gradual recovery in rural demand going forward led by two consecutive better monsoon, increase in minimum support prices and government’s intervention to get the rural economy back on track. Government's focus towards improving rural infrastructure will provide huge opportunities for entry segment cars like; Alto. The entry segment cars have been witnessing slowdown due to increasing popularity of compact segment. In the month of November Alto volume have jumped 8%YoY.

Mix changes towards premium segment cars

Discounts (Rs.) 25000

120% 8%

8%

7%

7%

10% 6%

10% 7%

10% 8%

10% 11%

9% 13%

10% 13%

9% 14%

3%

10% 13%

9% 14%

3%

3%

2%

2%

2%

2%

38%

38%

37%

38%

35%

37%

39%

39%

42%

30%

30%

27%

27%

27%

25%

26%

24%

60% 40% 20%

2%

2%

20000

0%


5.0%

4.4% 3.9% 3.8%

3.4%

3.7%

3.4%

4.0%

15000 3.0% 10000 2.0% 5000

31%

4.2%

0


15200

7%

16600

7%

15200

8%

6.0%

5.5%

19000

80%

6%

9%

19600

100%

5.0%

As % of Realization

16100

Export

16800

Super Compact Mid size

Vans

17600

Compact

Utility Vehicles

22000

Mini

Discount/vehicle decreased qoq in 2QFY18

1.0% 0.0%

Total Capacity(in units)

RoCE

14% 13%

11%

10%

9%

5% 0%

90%

93%

76%

86%

90%

97%

95%

100% 80% 60% 40%

1900000

13%

21% 20%

1510000

16%

12%

15%

18%

1510000

18%

1510000

20% 20%

Utilization Trend 120%

1260000

25%

2000000 1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0

1260000

RoE

Capacity and Utilization Trend

1650000

Improvement in Return Ratios

20% 0%

View & Valuation Maruti Suzuki India Ltd (MSIL) has once again posted a stronger sales number in November 2017, inline with our estimates. The company reported the volume of 145300 units vs our estimate of 144850 units, a growth of 15%YoY. In YTD FY18, MSIL has registered a growth of 15%YoY against the industry growth of about 7-8%YoY. The company has been able to post growth on the back of growing product portfolio and expanding reach in the interiors of the country, which resulted in 52% market share in November 2017. We believe MSIL to continue this robust growth momentum going ahead. MSIL could be one of the biggest beneficiaries of rural demand recovery as approx. 35% of its sales come from rural areas. FMCG major like Hind Unilever also sees gradual recovery in rural demand going forward led by two consecutive better monsoon, increase in minimum support prices and government’s intervention to get the rural economy back on track. We expect that the growing demand for premium segment cars, improving rural infrastructure, lower passenger vehicle penetration will drive the volumes going ahead. We believe Maruti to continue its growth momentum by expanding its premium and high margin product portfolio. We expect RoE to be maintained over 20% in FY19. Currently the stock is trading at 29x FY19E EPS. The stock has achieved our recommended target of Rs.8800. MSIL has recently seen a sharp run-up in its price which restricts the possibility of near-term investment gain. We change our rating from ACCUMULATE to HOLD. Shortly we will be rolling our target to FY20 estimates.



Financials Snap Shot Income Statement Y/E March Revenue from Operation Change (%)

Rs in Crores

FY16

FY17

FY18E

FY19E

57,589

68,085

79,421

87,715

13%

18%

17%

10%

Other Operating Income EBITDA

8,889

10,358

12,454

13,977

Key Ratios FY16

Y/E March

FY17

FY18E

FY19E

ROE

18%

20%

21%

20%

ROCE

20%

21%

22%

22%

Asset Turnover

1.3

1.3

1.3

1.3

Debtor Days

8.39

6.45

7.00

7.00

Change (%)

30%

17%

20%

12%

Inventory Days

19.9

17.5

17.5

17.5

Margin (%)

15%

15%

16%

16%

Payable Days

47

45

45

45

Interest Coverage

0.0

0.0

0.0

0.0

P/E

20

24

33

29

Price / Book Value

3.7

4.9

6.8

5.8

EV/EBITDA

13

18

24

21

1,252

1,109

3,137

2,817

Dep & Amortization

2,822

2,604

2,742

3,011

EBIT

6,067

7,754

9,711

10,967

82

89

87

82

Other Income

1,481

2,290

2,362

2,919

EBT

7,466

9,954

11,987

13,803

-

-

-

-

2,087

2,616

3,236

3,727

119

173

173

173

Interest & other finance cost

Exceptional Item Tax Minority Int & P/L share of Ass.

FCF per Share Dividend Yield

0.7%

5,497

7,511

8,923

10,249

Y/E March

Adjusted PAT

5,497

7,511

8,923

10,249

Volume ('000)

Change (%)

44%

37%

19%

15%

Volume Growth

Margin(%)

10%

11%

11%

12%

Realization(Rs./vehicle)

FY16 1,429

11% 4,02,932

Realization Growth Capex(Rs crore)

Y/E March Share Capital

Rs in Crores

FY16

FY17

FY18E

FY19E

0.8%

FY17 1,569

10% 4,34,062

FY18E

1,938

14% 4,43,115

8% 4,52,607

3%

8%

2%

2%

3,210

3,344

4,000

3,000

Cash Flow Statement Y/E March

FY19E

1,792

Rs in Crores

FY16

FY17

FY18E

FY19E

PBT

7,585

10,127

11,987

13,803

50,642

(inc)/Dec in Working Capital

8,935

10,413

14,989

17,069

43,271

50,793

Non Cash Op Exp

2,822

2,604

2,742

3,011

208.7

208.7

82

89

87

82

151

151

151

151

Reserves

30,465

36,924

43,120

Networth

30,616

37,075

77.4

483.6

Debt

0.8%

Assumptions

Reported PAT

Balance Sheet

0.6%

Interest Paid (+)

Other Non Current Liab

1,051

1,633

1,633

1,633

(1,912)

(2,323)

Total Capital Employed

30,693

37,559

43,480

51,002

others

1,021

1,868

575

706

Net Fixed Assets (incl CWIP)

13,537

14,563

16,292

16,402

CF from Op. Activities

8,483

10,282

12,154

13,875

Non Current Investments

19,535

26,972

31,308

38,839

(inc)/Dec in FA & CWIP

(2,456)

(3,236)

(4,472)

(3,121)

6,026

7,046

7,682

10,754

(12,044)

(17,694)

Other Non Current Assets

Tax Paid

1,680

1,603

1,664

1,664

34,774

43,162

49,296

56,937

Inventory

3,133

3,264

3,807

4,205

others

Debtors

1,323

1,203

1,523

1,682

CF from Inv. Activities

Non Current Assets

Cash & Bank

Free Cashflow (Pur)/Sale of Investment

51

24

52

60

Other Current Assets

1,661

1,541

1,986

2,193

Current Assets

7,951

8,798

10,318

11,496

Interest Paid

Creditors

7,409

8,369

9,763

10,782

Dividend Paid (inc tax)

71 (7,230)

56 (9,173)

(3,236)

(3,727)

(209)

(406)

(4,336)

(7,531)

(9,017)

(11,058)

inc/(dec) in NW inc/(dec) in Debt

(235)

253

(275)

(92)

(110)

(87)

(82)

(909)

(1,273)

(2,727)

(2,727)

(1,237)

(1,129)

(3,089)

(2,809)

414

472

547

601

1,165

1,828

2,132

2,355

Curr Liabilities

10,967

12,753

14,485

15,782

Inc(Dec) in Cash

16

(21)

48

8

Net Current Assets

(3,016)

(3,955)

(4,167)

(4,286)

Add: Opening Balance

28

43

24

52

Total Assets

42,726

51,961

59,614

68,433

Closing Balance

43

23

72

60

Provisions Other Current Liabilities


others CF from Fin. Activities


Narnolia Securities Ltd 201 | 2nd Floor | Marble Arch Building | 236B-AJC Bose Road | Kolkata-700 020 , Ph : 033-40501500 email: [email protected], website : www.narnolia.com

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