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Weak performance in a tough quarter

Good demand recovery | RM cost inflation to persist in 2QFY22

* Maruti Suzuki (MSIL) reported a weak performance in 1QFY22, weighed by the impact of the lockdowns on volumes as well as commodity cost inflation. While commodity inflation would persist in 2Q, there are drivers in place for sustained volume and margin recovery from 2HFY22E.

* We lower our FY22E/FY23E EPS by 13%/3%, factoring in further cost inflation in 2Q, higher staff costs, and lower other income. Maintain Buy, with TP of INR8,200/share (27x Mar’23E consol. EPS).

Margins impacted by higher costs; lower other income hurts PAT

* Revenue grew to ~INR177.7b (+333% YoY / -26% QoQ) in 1QFY22, while EBITDA/PAT came in at INR8.2b/INR4.4b (-59% QoQ / -62% QoQ).

* Net realizations grew 3% QoQ (-6% YoY) to INR502.5k (v/s est. INR492.4k) on price hikes and lower discounts (at INR14k/unit v/s INR16.6k in 4QFY21).

* The gross margin declined 90bp QoQ (-3.3pp YoY) to 25.2% (v/s est. 25.5%), impacted by RM cost (350bp QoQ), but diluted by price hikes (~1.6% in Apr’21) and lower discounts (~60bp).

* The EBITDA margin declined 370bp QoQ to 4.7% (v/s est. 5.2%), impacted by higher staff costs (+18% QoQ / +46% YoY) and operating deleverage. The EBIT margin declined 480bp QoQ to 0.4% (v/s est. 0.9%). Lower other income resulted in PAT decline of 62% QoQ to INR4.4b (v/s est. INR6.2b).

Highlights from management commentary

* Update on demand: Recovery is seen in both urban and rural. Inquiries are similar to 4QFY21 levels and bookings are at 80–85% of 4QFY21. Inquiries in July’21 are at 120% of Jun’21 levels, with retail similar to Jun’21. Wholesale in Jul’21 should be higher v/s Jun’21. It has 170k pending bookings currently, whereas network inventory stands at 135–138k units (27 days at 4Q retail).

* SUV segment: The segment share stood at 38% in 1QFY22 (v/s 32% in FY21), with a similar split between Entry and Mid-SUV. Based on its experience in other countries, MSIL expects SUV’s share to rise to 42–43% over the next five years and plateau at these levels. Mid-SUV is a weak area for MSIL, and going forward, it would take a closer look at this segment.

* Chip shortage: MSIL is faring relatively better as it is able to adjust its production by manufacturing cars with a lower intensity of semi-conductors.

* Commodity price impact: In 1QFY22, it saw an impact of 3.5pp QoQ. It expects a further impact in 2Q as well and should see some stability thereafter. It took price increases in January (1.3%) and April (1.6%) and has taken one in July as well (small increase). It is attempting to strike a balance between cost pass-through, demand, and market share.

Valuation and view

* While MSIL has seen strong demand recovery, the sharp commodity cost inflation is expected to keep near-term performance in check. We expect recovery in 2HFY22 in both market share and margins, led by a favorable product lifecycle and mix as well as price action / cost-cutting.

* The stock trades at 38.1x/23.5x FY22E/FY23E consolidated EPS. Maintain Buy, with TP of INR8,200/share (27x Mar’23E consolidated EPS).

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