Better product mix restricts the damage
Maruti Suzuki (MSIL) reported better than expected set of numbers considering muted volume growth and higher cost pressures during the quarter. The sales growth (3.1% yoy) was largely led by better product mix and higher other operating income during the quarter. However, EBITDA and PAT de-grew by 6.7% and 9.8% on account of dismal operational performance, higher interest cost and muted growth in other income. Nonetheless, we remain positive on MSIL’s growth prospects given its market leadership in the PV space and continued strength witnessed in rural markets. Maintain Buy.
Q2FY19 Result Update:
* Despite muted volume growth (down 1.5% yoy), net sales for the quarter grew by 3.1% yoy to Rs. 22,433 cr led by higher realization and other operating income. The domestic volume growth came in lower by 0.4% on account of delayed festive season and floods in Kerala. Further, increase in insurance cost per vehicle, rising fuel costs and hardening interest rates also impacted consumer sentiments. The exports volume growth (down 15.2% yoy) was also impacted due to adverse currency movements and import restrictions in target markets. Nonetheless, we remain optimistic of a double digit growth for FY19 driven by higher festive season demand and increase in realizations due to better product mix.
* Operating profit for the quarter de-grew by 6.7% to Rs. 3,431 cr as margins contracted by 160bps in Q2FY19. The contraction was mainly on account of higher discounts, adverse commodity cost and currency movement. However, this was partially mitigated by cost rationalization measures taken by the company. We expect margins to remain under pressure in H2FY19 given increase in discounts due to high competitive intensity amongst PV players and higher commodity cost.
* MSIL’s PAT de-grew by 9.8% to Rs. 2,240 cr in Q2FY19 due to dismal operational performance, muted growth in other income and higher interest cost during the quarter. The subdued growth in other income was on account of a MTM impact on the invested surplus. Other Key highlights: a) the management maintained its guidance of double digit growth in FY19, b) the average discounts during the quarter stood at Rs. 18,750, up by ~Rs. 3,500 compared to same period last year, c) the management also mentioned that the impact of floods in Kerala is also receding which should support sales growth for the company.
Outlook & Valuation:
The management mentioned that rural growth continues to outperform, registering a growth of 13% in Q2FY19. We believe MSIL remains one of the key beneficiaries of rising demand in rural areas on account of its strong brand presence and wide sales network. We remain optimistic of a double digit growth in FY19 led by continued strength in rural markets which is largely led by rising rural income and implementation of MSP by the government. Further, despite cost rationalization measures taken by the company, we expect cost pressures and competitive intensity to remain high in the near term and have factored in a ~40bps contraction in margins for FY19. Nonetheless, we believe that going forward revival in demand, rising market share, premiumization of portfolio and cost rationalization measures would drive earnings growth for the company. Hence, we maintain Buy on the stock with a target price of Rs. 8,677.
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