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Valuation correction factors in challenges
Maruti Suzuki’s 1QFY20 results were operationally in-line with margins came in at 10.4%. However, higher other income led to a beat in PAT at Rs14.4bn (PLe: Rs12bn). While we expect demand headwinds to continue to impact domestic volumes (we estimate flat overall volumes in FY20E), we believe MSIL is well placed amongst OEMs in light of, a) structural shift towards Petrol cars especially in lower CC segments, b) with ~78% of its portfolio is skewed to Petrol making it less prone to cost increase challenges in BS6 and c) management’s comments on evaluating options in 1.5ltr diesel engines. For FY20E, we estimate volumes to be flat and EBITDA margins to be at 11.6% (-100bp YoY). The benefit of sofetening RM price and forex benefit to be partially offset by higher spends in run up to BS6. We believe, well spread out monsoon would be a single major force in escalating buying sentiments. We value the stock at 23x Mar21E EPS (15% discount to 5 year LPA). We continue to maintain our BUY rating with a target price of Rs6,842.
* Revenue in-line: Overall revenue for the quarter dipped 12% YoY / 8% QoQ to Rs197.2bn (PLe: Rs191bn), where volumes plummeted 18% YoY / 12% QoQ over Q1FY20 but realisations improved 7% YoY / 4.6% QoQ and other operating income surged 52% YoY. Export revenues for Q1FY20 stood at Rs14bn.
* OPM in-line at 10.4%: Absolute EBITDA declined 39% YoY / 10.5% QoQ to Rs20.5bn with EBITDA margin at 10.4% (PLe: 10.5%), lower 450bps YoY / 10bps QoQ. Gross margin was lower 250bps YoY (inching up 40bps QoQ) while staff costs as well as other expenses as a % of sales were higher 100bps YoY and 120bps YoY respectively.
* Other income drive PAT beat by 20% v/s PLe: With higher than expected non-operating income (up 207% YoY) and lower tax rate at 24.9% (v/s 31.5% in Q1FY19 & PLe of 27.5%), net profit for MSIL stood at Rs14.4bn, lower 27% YoY / 20% QoQ (PLe: Rs12bn).
* Key takeaways from the con-call:
(1) Sequentially, margins were benefitted by RM cost relief & favorable forex movement to the tune of 40bps, offset by adverse impact of BS VI cost increase, higher discounts & unfavorable mix to the tune of ~50bps, 40bps & 20bps, respectively.
(2) Retails down ~17% YoY in Q1FY20 led by subdued demand environment in both Urban and rural areas (17% each). Dealer inventory level currently slightly over 1 month.
(3) MSIL is evaluating BS VI compliance for their 1.5L diesel engine. No timeline given though.
(4) Petrol share for MSIL at 78% in Q1FY20 v/s 72% in Q1FY19 (industry share rose to 66%). CNG models are being accepted well with cab aggregators, now forming ~6% of revenue.
(5) Average discounts over Q1FY20 at Rs16,941/unit (up ~12% YoY/QoQ).
(6) Royalty rate for the quarter stood at 5.2% of sales v/s 5% over Q4FY19.
(7) SMG volumes for the quarter stood at 96K units (flat QoQ; 80% utilization).
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