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Margin tailwinds in place to drive up earnings

Maruti Suzuki’s (MSIL) Q1FY23 operational performance missed consensus estimates as EBITDA margin came in at 7.2% (consensus: 8.6%), down 186bps QoQ. The miss was due to negative operating leverage, annual pay hikes/bonus, higher marketing expenses and peak of RM costs getting accounted. Led by ~2% price hikes, ASP was up 3% QoQ through improvement in model variant mix. However, overall model mix got impacted with the UV segment witnessing Brezza run-out period. Successful launches of Brezza / Grand Vitara should partly aid MSIL bridge gaps in the UV segment where its market share got eroded by ~900bps to ~19% in the past couple of years. Company lost production of 51k units in Q1FY23 due to chip shortage. But with improving chip supply, below-par inventory, new launches and steady retail demand, we are building-in MSIL’s PV market share at ~46.5% for FY23E-FY24E. Blended discounts were largely similar QoQ at Rs12.7k/unit, with a slight increase of Rs1.6k/unit being led more by model mix shifting towards higher-discount models in Q2FY23. Maintain BUY with a DCF-based revised target price of Rs9,970, implying 24x FY24E core EPS.

Key takeaways from earnings call:

* Total orderbook is at 350k units and, within it, Brezza is at 70k along with Grand Vitara at 20k units. ~50% of Brezza bookings are for top-end variant and ~45% of Vitara bookings so far (without knowing the on-road price) are for the strong hybrid version. Overall production in Q1 was impacted by chip shortage to the tune of ~51k units and, with gradual improvement in the situation, MSIL is looking forward to ramp-up supplies. Company is confident of the strong traction in exports continuing and is not much perturbed by macro-risks in select African markets. The newly launched Grand Vitara will also be exported, including the strong hybrid version.

* Against 2% raw material cost escalation QoQ led by lag effect of input commodity inflation topping out in Q4FY22, gross margin declined by ~120bps QoQ with adverse model mix, and UV volumes got impacted by run-out phase of Brezza. Discounts were also higher by ~Rs1.6k QoQ as a result of mix shifting towards higher-discount models. In Q2FY23, the lag effect of decline in input commodity costs would get reflected along with benefit of favourable USD/JPY movement. With ~7-8% of revenues remaining exposed to USD/JPY rates (~3% direct raw material exposure), bulk of the net ~20% favourable currency movement would start impacting profitability from Q2.

* Retails for Q1 were largely in line with domestic wholesales and, with systemic inventory being low, MSIL is trying to spruce up production prior to the onset of festive season. CNG models currently account for 20% of retails and this is set to grow despite the recent increase in CNG prices – if the rising orderbook for CNG vehicles is any indication. Thus, strong hybrids and CNG models would help MSIL take care of the emission aspect at portfolio leve

* SMG production was at 31% of overall volumes during the quarter. Land for new facility in Haryana has been finalised and the company will invest Rs110bn on the proposed plant in FY23E-FY25E to get the 250k units p.a. capacity ready by then. Other income got impacted in Q1FY23 due to a sharp ~150bps increase in repo rates, resulting in higher MTM losses on its invested fixed-income instruments.

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