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Margins continue to flounder

Maruti Suzuki India’s (MSIL) Q4FY21 earnings were a miss on consensus estimates as EBITDA margin declined ~120bps QoQ to 8.3%. Gross margin compression of ~135bps QoQ (RM caused ~280bps drag while price(~80bps)/ lower discounts(~70bps) aided margins) was key to the EBITDA decline. We believe margin pressures are likely to continue in H1 as price hikes remain insufficient to cover the rising input costs, while the new Gujarat line is likely to cause additional fixed cost drag.

Operating leverage benefits have likely peaked out in Q4. MSIL’s key challenge remains the lack of attractive products (while competition keeps launching theirs) in SUVs which has led to market share loss (<48%) as premiumisation /customer up-trading to SUV continues unabated. Stock remains expensive (32x FY23E core EPS of Rs157). Maintain SELL.

* Key highlights of the quarter:

Revenues in Q4FY21 grew 32% YoY to ~Rs240bn, while ASP was up 325bps at ~Rs491k/vehicle (60bps each by lower discounts/exports while balance was due to price hikes/mix). PAT was down ~10% at Rs11.6bn on lower other income (down 446bps YoY) due to mark-to-market losses due to lower yields. The company declared a dividend of Rs45/share.

* Key takeaways from earnings call:

Management indicated: a) demand remains strong in rural markets (~41% share in FY21 sales); however, ~35% of demand catchment in partial lockdown which could impact consumer sentiment; b) share of first-time buyers went up by 3.5% to 46.9% while replacement demand has reduced to ~19.5% (down ~700 bps YoY) with customers delaying purchases due to lack of mobility amidst surging covid cases; c) increase in commodity prices impacted Q4 margins by 400bps YoY; hit from Q4 input costs rise impact would come in Q1; input costs are further surging in Q1FY22; d) MSIL took price hike of ~0.8% in Q4 and 1.25% in Q1FY22 to partially offset commodity inflation; management remains wary of price increase impact on demand, d) digital inquiries’ proportion has risen to ~35% in FY21 vis-à-vis 15-16% in FY20 and contributed 8% to retail sales; and e) network inventory levels have increased to ~90k units currently (Mar’21:32k units/ normal: 135-140k units) with an order backlog of ~200k units in Mar’21.

* Maintain SELL:

Globally, customers’ when given a choice are readily aligning towards BEVs over ICE (e.g. Europe), companies which are facilitating the change are being rewarded by investors (superior valuations). Indian automotive market may also follow suit; hence, MSIL’s potential leader inertia to not pivot early enough towards EVs could prove unwise in the long-run. We prune our EPS estimates downwards (-11%/-7% FY22E/23E, respectively) and maintain our target multiple at 24x FY23E core EPS of Rs157 and add cash per share of Rs1,582 to arrive at our target price of Rs5,339 (earlier: Rs5,226). Maintain SELL

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