Maruti Suzuki rating – Buy: Margins likely to suffer in first quarter of FY22

Product launches (including upgrades) and continued demand strength is set to help MSIL’s volumes and earnings. Also, with the price hikes likely done, any moderation in commodity prices should flow down to margins.

Significant negative operating leverage from COVID-19 led to lower volumes and continued hits from commodity prices in Q1FY22. Overall, we expect there was a c200bp contraction in margins q-o-q to the Ebitda margin of 6.5% in Q1FY22 (1.6% Ebit). This leads to further cuts in our near-term FY22e earnings estimates. As discussed earlier, downward revision in earnings will likely test the patience of investors, but we believe FY22e has the potential to be significantly positive for MSIL.

Product launches (including upgrades) and continued demand strength is set to help MSIL’s volumes and earnings. Also, with the price hikes likely done, any moderation in commodity prices should flow down to margins.

Q1FY22 push-pulls – price hikes vs commodity hit vs negative operating leverage: MSIL has taken c2% in price hikes so far in FY22 and announced a plan to increase prices further in July. On the other hand, the total commodity hit has been about 900bps with a hit of c300-350bps likely in Q1FY22. The mix for Q1FY22 has been favourable, led by lower contributions from entry-level car and van segments.

Domestic retail sales were at c200K units compared with wholesale (domestic) of c297K. Thus, we factor in a c100bps tailwind from lower discounts. We also factor in c40bps benefit from the JPY’s depreciation. The ramping up of operations in Phase 3 of Gujarat’s plant is an incremental margin headwind. Overall, the wholesale volume in Q1FY22 was 354K units, down 28% q-o-q.

We now forecast volume of 1.83m units for FY22 and Ebitda margin of 10%, leading to a cut of 7% in earnings in FY22e. MSIL has been able to maintain its market share despite its ageing portfolio.

Launches appear key: We have discussed in the past that launches remain the key trigger for MSIL for the medium term. While our outlook for the next six months on launch activity appears muted, we expect strong product action in FY22. Launches are also the most critical driver of margins for any OEM. The last upcycle in margins (FY15/16) for MSIL coincided with a strong launch pipeline as well.

Retain Buy with TP of Rs 8,400: The demand sustenance post the festive season will likely be key for the stock. In that regard, higher-than-expected impact due to COVID-19, fuel price increases or commodity prices remain the key risks.