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Maruti Suzuki (MSIL) has reported EBITDAM of 9.2%, down 130bps QoQ, despite 50bps QoQ improvement in GM, as 80bps non-recurring expenses under staff cost impacted margins in Q1FY24. ASP was up 4% QoQ to INR 650k/unit with blended discount being up ~INR 3k/unit QoQ. EBITDA came in at ~INR 30bn vs consensus estimate at INR 32.5bn. MSIL is planning to acquire SMG, with valuation being equal to the net residual book value. Gross block of MSIL would get enhanced by ~INR 130bn as against the enhancement in EBITDAM by ~150bps (4% depreciation/sales for SMG going away from P/L of MSIL wrt ~40% of production). We maintain ADD rating on MSIL, largely keeping our estimates unchanged and revising up our DCF-based target price to INR 10,923 (from INR 10,329), implying 24x FY25E core earnings.

Key takeaways from conference call and our views

* Gross margin improved slightly by 50bps QoQ on account of better mix and steady input commodity/forex environment, despite ~INR 3k/unit higher discounts QoQ (~INR 16k/unit). Led by a decline in volume QoQ, expenses on marketing campaigns wrt IPL and new launch expenses related to Jimny/Fronx, other expenses were up 70bps QoQ. Additionally, pay-out of annual retention bonuses resulted in annual expenditure getting clubbed in a quarter, impacting margin by ~80bps. Though palladium, rhodium prices have declined by ~20% in the past few months, steel cost has increased during the same period, and thus, MSIL is looking ahead for a stable input material cost environment in the near future, with forex movements, too, being easily managed without hurting margins. Royalty rate remained steady at 3.8% of revenue. With MSIL planning to buyout SMG (though we are not factoring it in our estimates currently), we believe positive impact on EBITDA margin for MSIL would be ~150- 180bps, though it would remain PAT neutral and add to the gross block of MSIL by ~INR 130bn.

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