Accumulate Maruti Suzuki; target of Rs 8945: KRChoksey

KRChoksey's research report on Maruti Suzuki

Company’s Net Sales stood at INR 217,682 Mn which was up by 7.2% y-o-y and by 10.1% q-o-q. Top-line sales was aided by 17.6% y-o-y volume growth resulting from Baleno and Brezza. Company’s new launch Dzire also contributed to growth.   EBIDTA stood at INR 36,775 Mn which was up by 21.1% y-o-y and showed a robust growth of 57.8% q-o-q. EBIDTA margin stood at 16.9% against our estimate of 12.8%. Increase in margins was on account of material cost reduction programme resulting into economies of scale. Lower discounts on models compared to previous quarter also resulted into healthy margins.  PAT was at INR 24,843 Mn which was up by 3.6% y-o-y and improved by 52.6% q-o-q. PAT Margin stood at 11.4% against our estimate of 9.5%. PAT margins improved by 354bps q-o-q but declined by 40 bps y-o-y. PAT margins declined on account of reduction in other non operating income. Company also witnessed higher Tax rate in Q2FY18 as compared to same quarter last year, relating investment allowances and tax shields

Outlook

We  strongly believe in company’s in MSIL’s growth story. However, near term hindrances like improvement in operational efficiency, slower than expected pick up in newly launched S-Cross and consistent discounts by other industry players to push sales is likely to have bearings on company’s near term earnings. However, in the longer run we strongly believe NEXA as a transformational brand for the company and believe recent launches is just a start to a new journey. While the growth story remains intact, increasing production and improvement in margins is likely to drive company’s earnings forward. Hence we expect company’s PAT to grow at 23% CAGR between FY17 to FY20E. At CMP of INR 8,112 MSIL is trading at 18.4x FY20E. We have valued company on DCF and PE methodology (50-50 weight). Our DCF target stands at INR 8,391/share and we assign PE of 21.5x FY20E EPS of INR 441.8. On weighted average basis we arrive at a target price of INR 8,945 indicating 10% upside from CMP. Hence we recommend an “Accumulate” rating on the stock.

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