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High commodity cost impacts performance

Maruti Suzuki reported weak set of numbers in Q1FY22 impacted due to lockdown and high commodity cost pressure. Its revenue was down 26% QoQ (+332.7% YoY) as volumes decline by 28.2% QoQ (+361.6% YoY). The operating margins was impacted (down 367bps) due to lower operating leverage. MSIL reported a net profit of Rs. 441 cr, down 62.2% QoQ.

Going forward, the demand recovery continues to remain healthy and we expect growth momentum to strengthen as state government eases restrictions. Moreover, normal monsoon and festive season would aid demand growth. However, commodity cost and price action from MSIL would be key monitorables. Nonetheless, we maintain a Buy on the stock.

Result Update Q1FY22

* MSIL revenue decline by 26% QoQ to Rs. 17,771 cr as volumes were down 28.2%. The decline in volumes QoQ was due to lockdown restrictions in many states. Average realizations were up 3% QoQ due to lower discounts and price hikes during the quarter. The lower operating leverage and high commodity cost pressure impacted margins as it contracted 367bps QoQ at 4.6%. Despite higher other income, its net profit declined by 62.2% QoQ to Rs. 441 cr due to poor operating show and higher tax rate.

* Other key highlights: i) Post easing of restrictions, enquiries have reached Q4FY21 levels while booking are in the range of 80-85%, ii) MSIL has taken price hikes of 1.3%/1.6% during Jan/Apr and has taken one minor price hike in July, iii) the semiconductor shortage is expected to continue for a year and MSIL adjusting its production accordingly, iv) the rise in commodity cost is likely to impact gross margins in Q2 but the company would look to offset it by volume recovery, better operating leverage, lower discounts and price hikes.

Outlook & Valuation

We continue to remain constructive on long-term growth prospects of the industry given the low penetration of cars in India as compared to other major economies, economic recovery, increase in per capita income, low-interest rate and higher rural income. MSIL is better placed than peers in the PV space given its leadership position, strong product portfolio and wide distribution network.

On the operational front, we expect margins could remain under pressure in the near term due to rising commodity prices. However, price hikes, better product mix and cost rationalization measures would aid margin improvement in FY23. We have tweaked our estimates for FY22 and FY23 and have maintained a Buy on the stock with a target price of Rs. 8,289.

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