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Higher discounts impact operating performance

Sustained demand revival remains the key

* Maruti Suzuki India (MSIL)’s 2QFY25 margin was below our estimates, largely due to higher discounts. MSIL is expected to experience a 14% YoY growth starting from Shraddh till the end of the festive period. This is the first sign of demand revival in MSIL during this fiscal. Despite this, Apr-Oct retail growth remains at 3.9% YoY.

* We have lowered our FY25E/FY26E EPS estimates by 6%/9% to account for lower volumes and higher discounts. For FY26, we see multiple launch tailwinds for MSIL, which are likely to include: 1) EV launch, for India and exports; 2) hybrid variants expected; 3) one more SUV expected following the recent correction. The stock is attractively valued at 25x/22x FY25E/FY26E consolidated EPS. Reiterate BUY with a revised TP of INR13,875 (premised on 26x Sep’26E EPS).

Operating margin below estimates on higher discounts

* Revenue remained flat YoY to ~INR372b (in-line) while EBITDA declined 8% YoY to INR44.2b (est. INR45.9b). Adj. PAT grew 5% YoY to INR39.1b (est. INR37b) in 2QFY25. 1HFY25 revenue/ EBITDA/ adj. PAT grew 5%/15%/22% YoY. 2HFY25 revenues/EBITDA/adj. PAT are expected to decline 2%/9%/10.5% YoY.

* Net realizations grew 2% YoY to INR687k/unit (est INR688k/unit) due to higher UVs in the overall mix and favorable FX. Volumes declined 2% YoY.

* Gross margins contracted 130bp YoY (-170bp QoQ) to 28.1% (est 29.1%).

* EBITDA margins came at 11.9% (-100bps YoY; est.12.3%). Margins were impacted by higher sales promotion (avg discount increased to INR 29,300/unit from INR 21,700/unit QoQ, +80bp impact) and higher input costs (+50bp impact). This was partially offset by the operating leverage benefit QoQ (~40bp).

* EBIT margins declined 90bp YoY to 9.9% (est 10.3%).

* Other income was higher than expected at INR14.7b (est of INR 9.8b).

* There was an extraordinary deferred tax expense of INR8.4b due to a change in the indexation benefit on LTCG of debt mutual funds.

* Adj. PAT came at INR39.1b (est INR37b), up 5% YoY.

* 1HFY25 cash inflow was INR17.45b (INR53.1b in 1HFY24)

Highlights from the management commentary

* Festival retail sales: Management has indicated that during the period of Shraddha to the festive end, MSIL is likely to experience 14% YoY growth in retail.

* Demand outlook: Management has also indicated that it has grown 3.9% YoY in Apr-Oct’24 (vs. flat growth in H1). Considering this, the management is hopeful to witness 3-4% growth in retail for FY25E.

*  The management has also indicated that by the end of this festive season, its network inventory is expected to reduce to around one month.

* The management expects commodity costs to remain stable in Q3.

Valuation and view

* We have reduced our FY25E/FY26E EPS estimates. For FY26, we see multiple launch tailwinds for MSIL, which are likely to include: 1) EV launch, for India and exports; 2) hybrid variants expected; 3) one more SUV expected. While the bulk of input cost benefits are likely to be over, we expect MSIL to post a 90bp margin improvement to ~12.5% in FY27E, largely led by an improved mix. This would, in turn, drive a steady 10% earnings CAGR over FY24-27.

* Further, any favorable policy for hybrids by the government may drive a rerating, as MSIL would be the key beneficiary of the same. Following the recent correction, the stock is attractively valued at 25x/22x FY25E/FY26E consolidated EPS. Reiterate BUY with a revised TP of INR13,875 (premised on 26x Sep’26E EPS).

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