Accumulate Maruti Suzuki; target of Rs 4585: Prabhudas Lilladher

Prabhudas Lilladher's research report on Maruti SuzukiMaruti Suzuki’s (MSIL’s) performance in Q1FY17 was decent; it met expectations at EBITDA level. Unfavourable forex movements, increase in commodity costs and near‐stagnant volumes YoY resulted in mere 2.2% YoY EBITDA growth for the company. However, due to significantly higher non‐operating income, coupled with lower‐than‐expected depreciation provision, there was an impressive 23% YoY profit growth to Rs14.9bn.

While MSIL’s sales volume growth was muted at 2.1% YoY to 348,443 units, sales were impacted to some extent by disruption of supplies from a key vendor. MSIL, however, made efforts to moderate the impact by preponing its annual maintenance shutdown and expects to make up for this over the course of FY17. With a realization increase of 9.6% YoY (up 1.5% QoQ), MSIL reported revenue growth of 11.6% YoY to Rs149.3bn. Gross margin reduction was 40bps YoY as adverse forex movement was partially set‐off by cost reduction efforts. Other expenditure was higher due to an increase in adspend and the impact of forex on royalty. Resultantly, EBITDA margin was 14.8% (lower 140bps YoY) and 60bps QoQ. EBITDA was Rs22.2bn, which met our expectations.

We have an “Accumulate” rating on MSIL on expectations of market share gains, a healthy product portfolio and the opportunity to reap benefits from recent launches which have been well received. A recovery in economic growth, sales prospects from new models overseas and incremental demand from hike in public sector wages provide a positive outlook ahead.