PL Stock Report - Maruti Suzuki (MSIL IN) - Q2FY24 Result Update - Strength in margins to sustain - BUY

Maruti Suzuki (MSIL IN) – Himanshu Singh – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs10,561 | TP: Rs12,485

Q2FY24 Result Update – Strength in margins to sustain

Quick Pointers:

§ Festive season growth at 18% YoY to drive MSIL’s FY24 growth to 10%.

§ MSIL expects to sustain current margins, assuming "ceteris paribus”.

Maruti Suzuki (MSIL) has convincingly broken its double digit margin mark after a period of 20 quarters (large part of it being sustainable) and therby we increase our FY24-FY26E EPS estimates by 9-12% to factor in strong beat on margins & higher other income. MSIL’s 2QFY24 revenues were largely in-line vs PLe and consensus estimates, however, EBITDA margin was a solid beat (12.9% vs BBGe & PLe: 11.0%) helped by lower RM, controlled other expenses and benefits from inventorisation. The company guided for domestic PV volume growth of 10% compared to c5% for peers in FY24E, while festive season sales were strong for both MSIL and industry; expected to grow by c18% YoY. Management maintained that margins are sustainable in current scenario and inventory movement is a normal phenomenon. Also small cars will continue to lag, while exports will improve over the medium term.

We believe MSIL is well placed to benefit from (1) market share gains & ASP increase from higher mix of the new UV portfolio, (2) c350bps increase (over FY23-26E) in EBITDA margins on the back of lower input price, cost control, operating leverage and higher UV share and (3) export volume. We reiterate ‘BUY’ rating and TP of Rs 12,485 (previous Rs. 11,500) at 25x Sep-25E EPS.

§ Strong beat on margins: Revenue grew by ~24% YoY, largely in line with PLe and Bloomberg consensus estimates (BBGe). EBITDA margins at c12.9% were above our and BBGe both at 11.0%, helped by gross margin expansion by ~220bps QoQ, improved capacity utilisation, softening of commodity prices and favorable forex, but also had an element of inventorisation benefit which increased the outperformance. Good Opex control further helped margins despite higher discounting. Higher other income increased the PAT beat.

§ Key takeaway: (1) MSIL expects its domestic PV volume to grow by 10% and peers to grow by 5% in FY24E. Festive season retails are expected to grow by 18% YoY for MSIL and industry. Management noted that while its peers are expecting flattish volumes in FY25E, it expects to grow however, refrained from providing guidance. MSIL sees small cars have been impacted due to lower affordability, however, should recover but only in the medium term. (2) MSIL has started exporting 5-door Jimny to LATAM, Middle East and Africa. It aims to increase its export volume by upto 3x and reach 750k-800k units by FY31. (3) MSIL has an order book of 288k units (vs 355k unit in 1QFY24), out of which CNG (123k units) and new SUVs account for majority. Inventory has increased to over a month to cater to higher festive demand. (4) MSIL reached SUV market share of ~23% in Q2 helped by recently launched models. (5) Commodity basket was favorable in 2Q helped by declining trends in precious metals. This along with favorable FX could benefit margins in 3Q as well, however, increase in steel prices could play a spoilsport. (6) MSIL gave discounts of about Rs. 17.7k per vehicles. (7) MSIL saw no production losses due to semiconductor shortages after eight quarters. (8) MSIL has Rs.80bn capex plan for FY24 of which 50bn is for H2FY24.

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