Buy Maruti Suzuki Ltd For Target Rs. 13,985 by Motilal Oswal Financial Services Ltd
Lumpy costs hurt 4Q performance
Growth to be driven by exports and new launches
* Maruti Suzuki (MSIL)’s 4QFY25 margin came in 110bp below our estimate at 10.5%, largely due to the lumpy nature of multiple costs that affected its performance. However, given lower-than-expected depreciation and higher other income, PAT beat our estimate by 6%. We estimate the impact of such lumpy costs at 90bp for 4Q.
* While domestic demand remains weak, we expect MSIL to outperform its peers on the back of its new launches. We factor in MSIL to post 7.6% volume CAGR over FY25-27E, led by its new launches and healthy export outlook. Overall, we expect MSIL to deliver a 10% earnings CAGR over FY25-27. At 24.3x FY26E/21.8x FY27E EPS, valuations appear attractive. Reiterate BUY with a TP of INR13,985, valued at 26x FY27E EPS.
Margins hit by the lumpy nature of several costs
* MSIL’s 4Q revenue rose 6% YoY to INR407b, in-line with our estimates.
* The gross margin has been broadly in line with our estimate at 28%.
* The company’s 4Q EBITDA margin came in below our estimate at 10.5%, down 180bp YoY/110bp QoQ (est. of 11.6%).
* The key miss was due to a sharp rise in other expenses at 13.8% of revenue (vs. our est. of 12.4%), which included: 1) start-up costs related to a new plant SOP (30bp), 2) an increase in input costs (20bp), 3) an adverse mix (40bp), 4) higher promotional spending (30bp), 5) a few lumpy costs (CSR, repairs & maintenance, and digitization spending) that were incurred in 4QFY25 but will not recur from 1QFY26.
* While most of these are operational costs, given their lumpy nature, these should be considered one-offs for 4QFY25 (on a quarterly run-rate basis). We estimate the impact of such lumpy costs at 90bp for 4Q.
* Depreciation has been lower than estimated at INR8.7b (est. of INR9.8b).
* Even other income has been ahead of our estimate at INR14.5b (est. of INR9.6b) due to hedging gains (+20bp).
* As a result, despite weaker-than-expected operational performance, PAT came in at INR37.1b – ahead of our estimate of INR35b.
* For FY25, MSIL has posted 8% YoY revenue growth led by 5% volume growth and improved ASP. Despite the weak demand and multiple headwinds highlighted above, MSIL has been able to maintain margins at 11.7% for FY25. Overall, MSIL has posted 6% YoY growth in PAT.
* MSIL has declared a dividend of INR135 per share in FY25, up from INR125 in FY24.
* For FY26, MSIL’s capex guidance stands at INR80-90b vs. INR84b in FY25. FCF for FY25 stood at INR53b.
Highlights from the management commentary
* Q4 margins were below estimates primarily due to lumpy nature of certain cost heads that were incurred in the quarter.
* Domestic outlook: The industry is likely to grow at a modest 1-2% for FY26E, and MSIL expects to outperform the same, aided by its new launches. MSIL has lined up two new launches: the recently unveiled e-Vitara and one more SUV.
* Exports outlook: Management expects its export momentum to sustain even in the coming years. MSIL expects to post at least 20% YoY growth in exports for FY26. One of the key growth drivers for exports for FY26 is expected to be the launch of the e-Vitara in Suzuki and Toyota’s key markets. The company targets to sell 70k units of e-Vitara in FY26E, the bulk of them in exports. However, we note that the demand momentum for key export models like Jimny and Fronx is also likely to be strong in the current fiscal.
* Overall, next year's growth is likely to be driven by exports, SUVs, and a further increase in CNG penetration.
* While demand growth drivers are in place, one needs to be cognizant of rising cost pressures, such as an increase in steel costs that is anticipated in the coming quarters.
Valuation and view
* For FY26, while domestic demand is likely to remain weak, MSIL is expected to outperform peers supported by its new launches. Further, continued export momentum is likely to boost volumes. MSIL anticipates exports to rise at least by 20% in FY26. Hence, we factor in a 7.6% volume CAGR over FY25-27E.
* However, we also factor in a 50bp margin pressure for MSIL for FY26E given the anticipated rise in input costs. Overall, we expect MSIL to deliver a 10% earnings CAGR over FY25-27, driven by new launches and strong export growth. At 24.3x FY26E/21.8x FY27E EPS, its valuations appear attractive. Reiterate BUY with a TP of INR13,985, valued at 26x FY27E EPS.
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