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Showing promising recovery Driven by increasing preference for personal mobility, better financing

availability and strong rural pick up, MSIL printed strong numbers in Q2FY21. EBITDA grew 20% YoY to Rs. 19.3bn with expanded margin at 10.3% (+86bps YoY) led by lower discounts ( Rs 17.3k/vehicle vs Rs.25k in 2Q last year) and cost control measures, partially offset by commodity inflation and adverse FX movement.

PV demand has recovered in the past 2-3 months and dealer confidence has improved materially after strong Navratri sales, this augurs well for channel restocking ahead of the Diwali and Dhanteras. MSIL is outperforming its peers and Inventory is also at lower level (120k units or ~ 22-25 days).

First time buyer demand is picking up well (share improved to 48% vs 43% last years) while replacement demand is still weak.

We expect increasing realization of used cars and recovery in urban demand to aid in faster recovery of replacement demand. We expect a broad-based long term demand recovery to be visible from FY22 as GDP growth/job creation rates pick-up.

Operating margin will expand materially (+300bps) over FY21-23E led by benefit of operating leverage and lower discounts.

We estimate 45% CAGR in MSIL’s earnings over FY21-23E, as we expect the company to outperform industry growth on the back of its strong product portfolio entry level cars, new launches and strong rural presence (accounts for +40% sales).

Given the improving visibility for PV demand and margin outlook, we increase EPS estimates by 11/15% for FY22/23E and value the stock at Rs 7,815 (25x for FY23E EPS). Recommend Accumulate.

Strong retail and lower inventory are key tailwinds Domestic PV demand has seen a swift recovery after the lockdown was lifted, aided by higher preference for personal safety, better financing availability and strong rural demand. System Inventory has come down to 20-25 days post Navratri period and we visualize stronger momentum in dispatches for Oct & Nov’20. During Navaratri MSIL has delivered 96.7k units (vs 76k units in last Navaratri period) and registered a booking of 85k units during the same period. (cont..) Q2FY21 Result (Rs Mn)

Particulars Q2FY21 Q2FY20 YoY (%) Q1FY21 QoQ (%)

Revenue 1,87,445 1,69,853 10.4 41,065 356.5

Total Expense 1,68,109 1,53,790 9.3 49,699 238.3

EBITDA 19,336 16,063 20.4 (8,634) (324.0)

Depreciation 7,659 9,261 (17.3) 7,833 (2.2)

EBIT 11,677 6,802 71.7 (16,467) (170.9)

Other Income 6,025 9,200 (34.5) 13,183 (54.3)

Interest 224 282 (20.6) 173 29.5

EBT 17,478 15,720 11.2 (3,457) (605.6)

Tax 3,762 2,134 76.3 (963) (490.7)

RPAT 13,716 13,586 1.0 (2,494) (650.0)

APAT 13,716 13,586 1.0 (2,494) (650.0)

(bps) (bps) Gross Margin (%) 30.0 28.8 127 28.5 154

EBITDA Margin (%) 10.3 9.5 86 (21.0) 3134

NPM (%) 7.3 8.0 (68) (6.1) 1339

Tax Rate (%) 21.5 13.6 795 27.9 (633)

EBIT Margin (%) 6.2 4.0 223 (40.1) 4633

CMP Rs 7,118

Target / Upside Rs 7,815 / 10%

NIFTY 11,671

Scrip Details

Equity / FV Rs 1,510mn / Rs 5

Market Cap Rs 2,150bn

USD 29bn

52-week High/Low Rs 7,754/ 4,001

Avg. Volume (no) 11,87,720

Bloom Code MSIL IN

Price Performance 1M 3M 12M

Absolute (%) 6 15 (8)

Rel to NIFTY (%) 1 11 (8)

Shareholding Pattern

Mar'20 Jun'20 Sep'20

Promoters 56.3 56.3 56.4

MF/Banks/FIs 17.5 17.7 17.3

FIIs 21.8 21.7 22.0

Public / Others 4.4 4.4 4.3

Valuation (x)

FY21E FY22E FY23E

P/E 46.9 27.5 22.8

EV/EBITDA 36.5 20.8 17.0

ROE (%) 9.2 14.4 15.7

RoACE (%) 9.1 14.2 15.5

Estimates (Rs mn)

FY21E FY22E FY23E

Revenue 6,44,464 8,11,662 9,18,057

EBITDA 58,186 1,01,439 1,23,429

PAT 45,812 78,260 94,425

EPS (Rs.) 151.7 259.1 312.6

Analyst: Abhishek Jain Tel: +9122 40969739

E-mail: abhishekj@dolatcapital.com

Associate: Kripashankar Maurya Tel: +91 22 40969741

E-mail: kripashankarm@dolatcapital.com

Maruti Suzuki

Accumulate

October 29, 2020

October 29, 2020 2 Maruti Suzuki

Rural demand is better compared to urban led by strong Kharif sowing and Rabi output. Rural sales grew 10% YoY in 2Q and revenue share improved to 41% (vs 38.5% last years). Urban and Semi urban market is also showing an initial sign of recovery as lockdown restriction eases out. We expect Maruti will continue to benefit from a shift in demand towards small cars due to faster recovery in demand in rural areas and increasing preference for personal mobility. MSIL is in better positioned to tackle current economic downturn vs its competitors because of its cash reserve and deep network strength.

Margin levers in place

We expect MSIL’s EBITDA margins to remain under pressure in FY21E due to commodity inflation, adverse product mix, adverse currency movement (JPY/INR). Management is aggressively working towards bringing down the fixed cost, model development cost and increasing localization levels. We expect sharper recovery in margin from FY22, driven by operating leverage, easing off commodity prices and cost cutting measures. Dealership strength provides an edge over peers

With the robust network of dealers, Maruti is expected to do better than competitors on all fronts (resumption of supply and gaining market share). Dealer survival is the key during this crisis and service revenue will help dealers to sail through this tough time. We believe MSIL's dealers are in a better position with more than 50% market share in the PV market. Over the years MSIL has developed such a business model for dealers which helps them to make some money even if they sell vehicles in loss by cross selling other products such as insurance, spare parts, accessories etc.

Conference Call Highlights In Q2FY21, overall performance has improved on the back of demand

recovery, gradual improvement in supply chain and production across factories.

Festive season demand appears good so far. However, the outlook is still elusive for post festive demand.

Improvement in operating margin was led by higher sales volume, lower sales promotion expenses, lower operating expenses and cost reduction efforts which was partially offset by increase in commodity prices and adverse FX movement.

Management expect margin to be under pressure due to increasing commodity prices in near term. Increase in precious commodity prices such as Platinum has impacted the margin during the quarter by 1.2% (YoY). Other commodity like steel also impacting the margin.

Increase in preference of personal mobility led to recovery in volume, share of first time buyer improved from 43% to 48% and demand of lower variant car also increases. Industry is witnessing more of functionality demand rather than aspiration demand. Pre-owned car enquiry was up by 40% YoY however sales is not happening as per enquiry level.

Rural demand is better compared to urban led by better monsoon and Kharif & Rabi corp. Rural sales grew 10% YoY in 2Q and revenue share improved to 41% (vs 38.5% last years). Share of first time buyer in SUV improved to 14% in last 4-5 years from 6%. MSIL retail volume up by 4% YoY to 320k units during the quarter.

During Navaratri company has delivered 96.7k units (vs 76k units in last Navaratri period) and done a booking of 85k units during the same period. Current channel inventory for MSIL is close to 120k units at the beginning of

October 29, 2020 3 Maruti Suzuki

October month. Average discount is Rs.17.3k/vehicle vs Rs.25k/ vehicle last year.

SMG production for the quarter is 96k units, Overall production for the quarter has improved from 3100 units in beginning of quarter to the rated capacity by end of Q2, current capacity utilization is near to 90-95% level. Currently only Baleno and swift is getting manufactured from Gujarat plant.

The proportion of Diesel variant share went down to 17.8% in 2QFY21 for Industry as a whole, demand for diesel vehicle is more for higher model of UV rather than lower variant of UVs.

Replacement demand for Q2Y21 was 18.8% vs 24% last year. Financing penetration in PV remain at similar level of 80% vs last year.

Volume contribution from top 10 cities is 36% in FY20 however it has come down to 31% by September end.

Export revenue stood at Rs.10bn vs Rs.12bn last year. Royalty for the quarter is 5% vs 5.3% last year. CNG share has improved to 11.2% vs 7.9% last year

Company has started subscription base model on pilot basis and expected to launch the same in 20+ cities going forward, company is receiving encouraging demand so far.

Actual vs DART Estimates

Particulars (Rs mn) Actual Dart Estimates Variance (%) Comments

Revenue 1,87,445 1,97,202 (5)

EBIDTA 19,336 20,706 7 Higher RM and adverse forex movement EBIDTA Margin (%) 10.3 10.5 (18.4)bps

PAT 13,716 15,713 13

Source: Company, DART

Change in estimates

Rs Mn FY22E FY23E

New Previous Chg (%) New Previous Chg (%)

Volumes (in mn) 1.64 1.56 5.1 1.83 1.74 5.2

Net sales 8,11,662 7,82,799 3.7 9,18,057 8,76,768 4.7

EBITDA 1,01,439 92,195 10.0 1,23,429 1,11,879 10.3

EBITDA margin 12.5 11.8 72.0bps 13.4 12.8 68.4bps

APAT 78,260 70,341 11.3 94,425 82,048 15.1

EPS (Rs) 259 233 11.3 313 272 15.1

Source: Company, DART

Volume grew YoY/QoQ on better demand recovery

PV market share improved QoQ

Source: Company, DART Source: SIAM, DART

October 29, 2020 4 Maruti Suzuki

Net revenue increase YoY/QoQ Net ASP weaken YoY/QoQ on adverse

product mix

Source: Company, DART Source: Company, DART

Disc. reduces YoY/ QoQ EBITDA margin rebounded on better

operating leverage

Source: Company, DART Source: Company, DART

EBIT improved YoY/QoQ Forex movement remain unfavorable

Source: Company, DART Source: Company, DART

October 29, 2020 5 Maruti Suzuki

Annual Charts

Sharp recovery expected from FY22 MSIL Volume (18% CAGR over FY21-23E)

Source: Company, DART Source: Company, DART

MSIL Dealership Network Swift and Baleno doing well

Source: Company, DART Source: Company, DART

Margin to improve on uptick in utilization 1 year forward P/E

Source: Company, DART Source: Company, DART

October 29, 2020 6 Maruti Suzuki

Profit and Loss Account

(Rs Mn) FY20A FY21E FY22E FY23E

Revenue 7,56,106 6,44,464 8,11,662 9,18,057

Total Expense 6,83,080 5,86,278 7,10,223 7,94,629

COGS 5,31,566 4,53,704 5,64,919 6,36,217

Employees Cost 33,839 32,147 34,719 38,885

Other expenses 1,17,675 1,00,427 1,10,586 1,19,527

EBIDTA 73,026 58,186 1,01,439 1,23,429

Depreciation 35,257 31,491 33,993 35,121

EBIT 37,769 26,695 67,445 88,308

Interest 1,329 450 300 250

Other Income 34,208 35,249 37,903 39,546

Exc. / E.O. items 0 0 0 0

EBT 70,648 61,493 1,05,048 1,27,604

Tax 14,142 15,681 26,788 33,179

RPAT 56,506 45,812 78,260 94,425

Minority Interest 0 0 0 0

Profit/Loss share of associates 0 0 0 0

APAT 56,506 45,812 78,260 94,425

Balance Sheet

(Rs Mn) FY20A FY21E FY22E FY23E

Sources of Funds

Equity Capital 1,510 1,510 1,510 1,510

Minority Interest 0 0 0 0

Reserves & Surplus 4,82,860 5,14,930 5,68,932 6,33,145

Net Worth 4,84,370 5,16,440 5,70,442 6,34,655

Total Debt 1,063 1,063 1,063 1,063

Net Deferred Tax Liability 7,444 7,944 8,444 8,944

Total Capital Employed 4,92,877 5,25,447 5,79,949 6,44,662

Applications of Funds

Net Block 1,52,129 1,54,012 1,65,018 1,74,898

CWIP 13,374 14,374 15,374 16,374

Investments 3,52,488 3,92,488 4,37,488 4,79,488

Current Assets, Loans & Advances 1,01,236 1,11,102 1,35,218 1,68,634

Inventories 32,149 26,485 33,356 40,244

Receivables 21,270 21,188 22,237 27,667

Cash and Bank Balances 4,869 10,588 21,439 38,409

Loans and Advances 5,246 12,889 16,233 18,361

Other Current Assets 37,702 39,952 41,952 43,952

Less: Current Liabilities & Provisions 1,26,350 1,46,529 1,73,149 1,94,731

Payables 74,914 89,949 1,10,912 1,26,270

Other Current Liabilities 51,436 56,580 62,238 68,461

sub total

Net Current Assets (25,114) (35,427) (37,931) (26,098)

Total Assets 4,92,877 5,25,447 5,79,949 6,44,662

E – Estimates

October 29, 2020 7 Maruti Suzuki

Important Ratios

Particulars FY20A FY21E FY22E FY23E

(A) Margins (%)

Gross Profit Margin 29.7 29.6 30.4 30.7

EBIDTA Margin 9.7 9.0 12.5 13.4

EBIT Margin 5.0 4.1 8.3 9.6

Tax rate 20.0 25.5 25.5 26.0

Net Profit Margin 7.5 7.1 9.6 10.3

(B) As Percentage of Net Sales (%)

COGS 70.3 70.4 69.6 69.3

Employee 4.5 5.0 4.3 4.2

Other 15.6 15.6 13.6 13.0

(C) Measure of Financial Status

Gross Debt / Equity 0.0 0.0 0.0 0.0

Interest Coverage 28.4 59.3 224.8 353.2

Inventory days 16 15 15 16

Debtors days 10 12 10 11

Average Cost of Debt 103.9 42.3 28.2 23.5

Payable days 36 51 50 50

Working Capital days (12) (20) (17) (10)

FA T/O 5.0 4.2 4.9 5.2

(D) Measures of Investment

AEPS (Rs) 187.1 151.7 259.1 312.6

CEPS (Rs) 303.8 255.9 371.6 428.8

DPS (Rs) 60.0 45.5 80.3 100.0

Dividend Payout (%) 32.1 30.0 31.0 32.0

BVPS (Rs) 1603.4 1709.6 1888.4 2101.0

RoANW (%) 11.9 9.2 14.4 15.7

RoACE (%) 12.0 9.1 14.2 15.5

RoAIC (%) 7.9 5.3 12.6 15.2

(E) Valuation Ratios

CMP (Rs) 7118 7118 7118 7118

P/E 38.1 46.9 27.5 22.8

Mcap (Rs Mn) 21,50,115 21,50,115 21,50,115 21,50,115

MCap/ Sales 2.8 3.3 2.6 2.3

EV 21,34,121 21,26,402 21,13,551 20,94,581

EV/Sales 2.8 3.3 2.6 2.3

EV/EBITDA 29.2 36.5 20.8 17.0

P/BV 4.4 4.2 3.8 3.4

Dividend Yield (%) 0.8 0.6 1.1 1.4

(F) Growth Rate (%)

Revenue (12.1) (14.8) 25.9 13.1

EBITDA (33.6) (20.3) 74.3 21.7

EBIT (52.7) (29.3) 152.7 30.9

PBT (32.5) (13.0) 70.8 21.5

APAT (24.7) (18.9) 70.8 20.7

EPS (24.7) (18.9) 70.8 20.7

Cash Flow

(Rs Mn) FY20A FY21E FY22E FY23E

CFO 34,051 95,837 1,28,113 1,37,188

CFI (4,639) (76,374) (93,000) (90,000)

CFF (31,000) (15,971) (28,192) (35,113)

FCFF 3,450 61,463 82,113 91,188

Opening Cash 1,789 4,869 10,588 21,439

Closing Cash 4,869 10,588 21,439 38,409

E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

Rating and Target Price History

Month Rating TP (Rs.) Price (Rs.)

Jan-20 BUY 7,942 6,997

Mar-20 Accumulate 5,694 5,079

Mar-20 Accumulate 5,694 4,328 Apr-20 Accumulate 5,282 4,698

May-20 BUY 5,570 5,114

Jul-20 Reduce 6,519 6,185

Sep-20 Reduce 6,791 7,209

*Price as on recommendation date

DART Team

Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747

Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 4096 9709

Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 4096 9735

Yomika Agarwal VP - Equity Sales yomika@dolatcapital.com +9122 4096 9772

Jubbin Shah VP - Derivatives Sales jubbins@dolatcapital.com +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales ashwanik@dolatcapital.com +9122 4096 9725

Lekha Nahar AVP - Equity Sales lekhan@dolatcapital.com +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading sridhar@dolatcapital.com +9122 4096 9728

Chandrakant Ware VP - Sales Trading chandrakant@dolatcapital.com +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading shirisht@dolatcapital.com +9122 4096 9702

Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives dinesh.mehta@dolatcapital.com +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 4096 9705

3,810

4,640

5,470

6,300

7,130

7,960

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(Rs) MSIL Target Price

Dolat Capital Market Private Limited. Sunshine Tower, 28th Floor, Senapati Bapat Marg, Dadar (West), Mumbai 400013

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