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Strong beat led by convergence of all positives in 2Q

Healthy demand to sustain during festive season; supply chain normalizes

* Maruti Suzuki (MSIL) reported a strong EBIT margin beat in 2QFY24; its margin improved ~400bp QoQ to 10.8% (vs. est. 9.1%). This was driven by RM cost savings, favorable FX, healthy mix, and operating leverage. While 2Q margin reflects all the positives and no negative, we expect some of these positives to ebb from the third quarter.

* We raise our FY24E/25E EPS by 10%/6% to factor in better gross margin and higher other income (as we factor in the share swap for SMG instead of cash outflows). The stock trades at 23.4x/22.4x FY24E/FY25E consol. EPS. Maintain BUY with a TP of INR12,300 (premised on 25x Sep’25E consol. EPS).

RM cost savings, favorable mix/FX, & operating leverage aid margin

* MSIL’s revenue/EBITDA/PAT grew 24%/73%/80% YoY to ~INR370.6b/ INR47.8b/INR37.2b in 2QFY24. Its 1HFY24 revenue/EBITDA/adj. PAT jumped 23%/66%/102% YoY.

* Net realizations improved ~16% YoY/3% QoQ to INR671.2k/unit (est. INR681.5k/unit). Volumes were up ~7% YoY. Net sales came in at INR370.6b (+24% YoY/ est. INR376.35k) during the quarter.

* Gross margin expanded 250bp YoY/220bp QoQ to 29.4% (est. 27.4%) driven by a better mix and stable commodity costs, but diluted by higher discounts (+20bp YoY to 2.6% of ASP or INR17.7k/unit) in 2QFY24.

* This, coupled with operating leverage, led to a 360bp YoY EBITDA margin improvement (+370bp QoQ) to 12.9% (vs. est. 11.1%). EBITDA/unit improved ~INR33k YoY (+INR26.7k/unit QoQ) to INR86.6k/unit. EBITDA jumped 73% YoY to INR47.8b (vs. est. INR41.7b) in 2QFY24.

* Further, higher other income and lower tax boosted adj. PAT to INR37.2b (vs. est. INR31b), a growth of 80% YoY.

* FCFF in 1HFY24 stood at INR53.1b (vs. INR12.3b in 1HFY23) due to improved CFO, which stood at INR80.1b (vs. INR50.6b in 1HFY23). Capex was at INR27b (vs. INR38.3b in 1HFY23).

Highlights from the management commentary

* Management expects ~18% YoY industry growth during the festive season and 5-7% growth for FY24. MSIL should grow ahead of the industry. Overall demand has been stable. The central region (Delhi, NCR, Rajasthan, and MP) is doing well; the southern market is stable, while there is a weakness in the eastern markets. Weakness in the lower-end segment remains, while the SUV is doing better.

Order book at end-2QFY24 was ~288k units (~355k units in 1QFY24), which has further declined to ~250k units at present as supply side has now been largely normalized. Inventory is slightly higher than one month (normal).

* The 2QFY24 reflects all the tailwinds. The sequential decline in commodity prices (precious metals) contributed significantly to EBITDA margin expansion. This was further supported by favorable mix/FX, employee cost (1Q had a oneoff), and operating leverage. Some benefits of the decline in precious metals should accrue in 3QFY24, while increasing steel prices may limit the gains.

* Capex guidance for FY24 is INR80b (excl. SMG), while it is yet to be finalized for FY25.

Valuation and view

* Stable growth in domestic PVs and a favorable product lifecycle augur well for MSIL. We expect market share gains and margin recovery in FY24 vis-à-vis FY23. These would be fueled by an improvement in supplies, a favorable product lifecycle, healthy mix, and operating leverage.

* The stock trades at 23.4x/22.4x FY24E/FY25E consol. EPS. Reiterate BUY with a TP of INR12,300 (premised on 25x Sep’25E consol. EPS).

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