Analysis

The management expects the company to outperform the industry in term of growth in FY20. It anticipates margin improvement on account of lower discounts, Gujarat plant ramp-up, royalty reduction due to scaling up, normalised inventory, softening of commodity prices and cost reduction measures. 

Maruti Suzuki India Ltd. (MSIL)

HITCH A RIDE WITH THE MARKET LEADER! 

Maruti Suzuki India Ltd. (MSIL) is a subsidiary of Suzuki Motor Corporation of Japan. It is engaged in the business of manufacturing and selling motor vehicles, components and spare parts. It is a leading passenger car manufacturer in India. It also facilitates pre-owned car sales, fleet management and car financing. MSIL boasts a vast product portfolio of 16 car models with more than 150 variants. Its product range extends from entry level small cars such as Alto 800 to the luxury sedan Ciaz.

Industry Overview

FY18-19 was an arduous year for the domestic passenger vehicle industry. Its growth came down to 2.7 per cent in FY19, which is the lowest growth in the last 5 years. This is because the passive demand environment which prevailed in Q3FY19 wound its way into the fourth quarter as well. The auto industry is set to experience several regulations as we move into FY2020. These include the introduction of the anti-locking braking system (ABS) as well as the implementation of the second phase of safety protocols. The BS-VI regulation, which will be effective from April 1, 2020, will be applicable on registration of vehicles and not on production. This implies that BS-IV specification vehicles cannot be sold from April 1, 2020 and any unsold inventory beyond the said date will be unserviceable. Therefore, this calls for meticulous volume planning. These regulations will result in price rise, which could affect the demand, particularly that of price sensitive entry level cars. Thus, it may so happen that potential customers may prepone the purchase of vehicles in anticipation of price hikes. On the other hand, some customers may have a preference for technologically advanced vehicles, which will leave the pace of buying unaltered. The Society of Indian Automobile Manufacturers (SIAM) expects the automobile industry to grow by 3 to 5 per cent in FY20E. The auto industry will be required to comply with improved safety regulations from October 2019.

Financial and Operating Performance

MSIL reported a subdued operating performance in the quarter ended March 2019 on account of low volumes, mounting pricing pressure and intensifying competition. On the standalone financial front, the total income from operations rose to Rs.21,459.40 crore in Q4FY19 from Rs.21,165.60 crore in Q4FY18, posting a meagre YoY growth of 1.39 per cent. However, on a QoQ basis, the total income showcased a growth of 9.11 per cent as it stood at Rs.19,668.30 crore in Q3FY19. EBITDA dropped to Rs.2,263.40 crore in Q4FY19 from Rs.3,015.00 crore in Q4FY18, thereby sinking 24.93 per cent. Consequently, EBITDA margin stood at 10.55 per cent in Q4FY19 as against 14.24 per cent in Q4FY18. The flat volume growth resulted in weak operating leverage, which ultimately impacted margins negatively. Furthermore, the commissioning of Phase II of the Gujarat plant, along with the disadvantageous impact of foreign exchange variation, also contributed to margin compression. Meanwhile, net profit for the quarter ended March 2019 came in at Rs.1,795.60 crore as against Rs.1,882.10 crore in Q4FY18, posting a fall of 4.60 per cent. However, on a QoQ basis, it demonstrated a growth of 20.57 per cent from Rs.1,489.30 crore in Q3FY19. The lower profitability was offset to an extent on account of higher other income and lower tax rates. Other income rose a whopping 45.83 per cent YoY to Rs.867.70 crore in Q4FY19 from Rs.595.00 crore in Q4FY18. This is attributable to higher fair value gain on invested surplus. Also, a one-time reversal of tax provision from earlier years, relating to the tax benefit on R&D expenditure, aided in margin movement. Nevertheless, EPS plummeted to Rs.59.44 in Q4FY19 from Rs.62.30 in Q4FY18, registering a fall of 4.59 per cent.

The total production from Gujarat came in at around 96,000 cars in Q4FY19. The from Rs.12,063.40 crore in FY18, posting a drop of 8.79 per cent. PAT sank to Rs.7,494.90 crore in FY19 from Rs. 7,717.40 crore in FY18, registering a decrease of 2.88 per cent. EPS plummeted to Rs.253.26 in FY19 from Rs.260.88 in FY18, thereby sinking 2.92 per cent. Management CommentaryThe growth in the rural market outpaced that of the urban regions as the former showcased a growth of nearly 10 per cent, while the latter spiralled downwards by 2 per cent YoY in FY19. As such, the rural sales constituted approximately 39 per cent of MSIL’s overall sales. MSIL’s management has expressed confidence in the company’s ability to outperform over and above industry growth in FY20. This is on account of rural expansion, new launches and enthusiastic response to the new products. The management also indicated that the average discount dropped sharply to Rs.15,125 from Rs.24,300 in Q3FY19, although it is still higher than H1FY19. Nonetheless, discounts are under control at present. 

The company has linked royalty rates with the volumes of its products. The royalty rates will reduce as sales ramp-up, that is, if a product attains certain satisfactory volumes. The company spent Rs.45 billion as capex in FY19 and intends to spend a similar amount in FY20 as well. This will be spent towards maintenance capex, R&D, product development and network expansion. The company’s depreciation as well as fixed costs are higher at present due to the Gujarat plant; however, once the plant ramps up and begins churning out volumes, the fixed costs will progressively come down over the next six months to a year. In other words, with improving volumes, the fixed cost base of the Gujarat sales volumes rose 7 per cent QoQ to 4,58,479 vehicles during the quarter. Operating EBIT climbed 24.9 per cent QoQ to Rs.1,453.20 crore in Q4FY19 from Rs.1,163.40 crore in Q3FY19. MSIL remained committed to containing costs in order to alleviate the pressure on margins. Production was streamlined to keep network stock in check. In an attempt to enhance sales despite the muted demand scenario, MSIL conducted premeditated events across urban and non-urban markets. Overall, during FY19, the company sold 17,53,700 units in the domestic market, marking a growth of 6.1 per cent. MSIL’s light commercial vehicle (LCV) offering, namely Super Carry, recorded sales of 23,874 units, posting a remarkable growth of 138 per cent YoY. 



Looking at the company’s consolidated performance in FY19 as a whole, we observe an increase of 7.84 per cent in revenues to Rs.86,068.50 crore in FY19 versus Rs.79,809.40 crore in FY18. EBITDA fell to Rs.11,003.20 crore in FY19  The from Rs.12,063.40 crore in FY18, posting a drop of 8.79 per cent. PAT sank to Rs.7,494.90 crore in FY19 from Rs. 7,717.40 crore in FY18, registering a decrease of 2.88 per cent. EPS plummeted to Rs.253.26 in FY19 from Rs.260.88 in FY18, thereby sinking 2.92 per cent.

Management Commentary

The growth in the rural market outpaced that of the urban regions as the former showcased a growth of nearly 10 per cent, while the latter spiralled downwards by 2 per cent YoY in FY19. As such, the rural sales constituted approximately 39 per cent of MSIL’s overall sales. MSIL’s management has expressed confidence in the company’s ability to outperform over and above industry growth in FY20. This is on account of rural expansion, new launches and enthusiastic response to the new products. The management also indicated that the average discount dropped sharply to Rs15,125 from Rs24,300 in Q3FY19, although it is still higher than H1FY19. Nonetheless, discounts are under control at present. The company has linked royalty rates with the volumes of its products. The royalty rates will reduce as sales ramp-up, that is, if a product attains certain satisfactory volumes. The company spent Rs45 billion as capex in FY19 and intends to spend a similar amount in FY20 as well. This will be spent towards maintenance capex, R&D, product development and network expansion. The company’s depreciation as well as fixed costs are higher at present due to the Gujarat plant; however, once the plant ramps up and begins churning out volumes, the fixed costs will progressively come down over the next six months to a year. In other words, with improving volumes, the fixed cost base of the Gujarat plant will be absorbed. The higher wholesale as well as increased focus on retail had an impact on operating leverage in H2FY19. Nevertheless, inventory levels started going down in Q4FY19. The depreciation too will be amortised as the volumes from the plant increase. However, the management does not anticipate significant improvement in volumes in Q1FY20, particularly due to dampening impact on demand during elections. 



Furthermore, the company undertook price hikes in January 2019. The full advantageous impact of the same will be felt next year, although some improvement was witnessed in this quarter as well. MSIL is also increasing localisation as it targets to reduce import content by 25 per cent. The management has guided for 4 to 8 per cent volume growth in FY20. While pre-buying ahead of BS-VI will aid in volume growth during the festive season, the adverse impact of elections on sales during Q1FY20 will impact production schedules. The March 2020 registration deadline ahead of the rollout to the stricter emission norms will also have a detrimental impact on production schedules. During FY19, the management of MSIL remained focused on streamlining the company’s production with the intention of countering the subdued demand for automobiles. In FY19, the company witnessed the fastest network expansion to 310 outlets spread across 230 cities. This is a testimony to the growing market acceptance of MSIL’s products. Furthermore, the company strengthened its dealership position across all three segments, namely – passenger cars, utility vehicles and vans. FY19 was a very volatile year and MSIL margins have been declining steadily for several quarters. In its attempt to keep costs in check, the management is implementing a large quantum of import reduction on the vendor side. Every element of cost and discretionary expense is being scrutinised carefully in order to come up with cost-effective practices. Nevertheless, the benefits of these measures will take time to register. Another focus area for the management is productivity improvement. MSIL’s management continues to have a very subdued outlook on exports as the company steps into FY20. The company has identified some lucrative opportunities in Africa, which it would like to tap in the near future. However, there is no concrete timeline for this. The management expects Q1FY20 to be tough on many counts, but it is hopeful that the volumes and margins will pick up.

Growth Drivers

MSIL has strengthened its leadership position across all three industry segments, namely – passenger cars, utility vehicles and vans. Its sales performance is picking up due to the success of previously launched models as well as new model launches such as the Ertiga and WagonR. FY19 marks the second year in a row, wherein all five best-selling passenger vehicle models in India were products of MSIL. In recent months, MSIL’s volumes were impacted by phasing out of the old Alto. Furthermore, the initial competitive impact of the XUV300 launch, high inventory levels and slowdown in the rural markets also exerted pressure on volumes. In response, the company launched its BS-VI products at affordable pricing, which includes the new Alto. Owing to the superior technology of its BS-VI products, they can be priced at competitive rates.Although the exports are likely to remain subdued in FY20, the Toyota tie-up could reverse this situation going forward.

Challenges

The detrimental impact of foreign exchange movement, rising commodity prices, intensifying competition and burgeoning expenses relating to depreciation and sales promotion are collectively exerting pressure on margins. Other challenges include currency devaluation and import restrictions in certain markets which are stifling export sales. As a result, the exports declined 13.1 per cent in FY19 to 1,08,749 units. Furthermore, any major economic slowdown in the light of the election results could pose a risk. The PV sales will be impacted in case of an abnormal monsoon.

Conclusion

Despite the disappointing operating performance in the quarter ended March 2019; the overall outlook on the stock is positive in the foreseeable future. Although the industry demand is likely to remain muted in H1FY20, we can expect recovery during the second half of the financial year. The BS-VI products will help MSIL capture more market share from H2FY20 onwards. The cost control measures implemented by the company in conjunction with the overall reduction in inventory at the industry level will ultimately result in lower discounts and bring back pricing power to the company. This will aid MSIL in reaching its average EBITDA margin of approximately 14 per cent going forward. The management expects the company to outperform the industry in term of growth in FY20. It anticipates margin improvement on account of lower discounts, Gujarat plant ramp-up, royalty reduction due to scaling up, normalised inventory, softening of commodity prices and cost reduction measures. Maruti has consistently maintained its market share above 50 per cent on the back of its robust product portfolio as well as diversified geographic presence. By virtue of these factors, we urge our reader-investors to HOLD this stock.

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR