MARUTI SUZUKI: Operating results in line

Demand uncertainty remains
 

(MSIL IN, Mkt Cap USD25.4b, CMP INR6186, TP INR6850, 11% Upside, Buy)

Demand back to 85-90% of retails, but situation dynamic due to COVID

-       While MSIL’s 1QFY21 performance was insignificant as normal operations were there only for two weeks in 1Q, commentary on demand recovery is positive. However, commentary on demand recovery is positive. Management has not given any demand outlook as the situation in dynamic and operating environment is changing frequently.

-       We upgrad our FY21/FY22E EPS by ~13%/5% to factor in for cost cutting initiatives, higher other income and lower depreciation. Maintain Buy.

In-line operating performance, Higher other income restricts losses

-       MSIL’s 1QFY21 revenues declined 79% to ~INR41b; EBITDA/PAT loss was reported at ~INR8.6b/INR2.5b.

-       MSIL’s domestic PV market share declined sharply by 430bp YoY (700bp QoQ) to 47.3% in 1QFY21 due to supply side challenges.

-       Net realization saw steep increase of 9.3% QoQ (+13.2% YoY) to ~INR536k (v/s est. ~INR471k) as non-vehicular revenue contribution was very high, though vehicle ASP were stable.

-       Gross margin contracted ~120bp QoQ (140bp YoY) due to sharp decline in inventory levels (impact of INR1.1b or 3.5pp). Also, the Gujarat plant’s operating deleverage impacted MSIL’s gross margins. This coupled with operating deleverage resulted in EBITDA losses.

-       Higher other income of ~INR13.2b (v/s est. INR8b) due to MTM gains on treasury restricted PAT loss to ~INR2.5b (v/s est. INR7.5b).

Highlights from management commentary

-       Retail demand stood at 85-90% of pre-COVID levels with rural markets bouncing back stronger than urban.

-       Entry-level cars demand increased to 65% v/s 55-56% earlier. Salaried customer share has gone up to 49% (from 45%), self-employed is stable and contribution of customers having business has come down.

-       First-time buyers contribution has increased by 5.5pp (to 50-51%), whereas replacement is down to 16-17% (v/s 25-26%). Second car demand is also up.

-       Status of operations: Current production ramp-up is at run-rate of over 4,000/day. With Gujarat plant starting second shift from mid-Aug’20, it will add 900/day to current run-rate of 900/day.

-       Due to new lockdowns, number of operational dealerships have come down from >90% in beginning of Jun’20 to 80-92%.

-       Discounts were at INR25,000/unit (~INR14,000/unit on retail sales) as Wholesales (67k units) were substantially lower than Retails (119k units).

-       Diesel models share for the industry declined to 20.6% (v/s 29.5% YoY).

-       Inventory for MSIL stood at 80k units or 25 days.

Valuation and view

-       MSIL would be the fastest to recover on account of its strong brand equity and strength in entry-and mid-segment PVs. Key monitorables are (a) normalization of operations, and (b) sustenance of demand recovery.

-       The stock trades at 40.7x/25.6x FY21/FY22E consol. EPS. Maintain Buy, with TP of ~INR6,850 (~25x Sep’22E consol. EPS).

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