• Net sales decline 2.7% yoy owing to 4.4% yoy decline in volumes. However, yoy comparison is redundant as Q4 FY14 numbers are inclusive of Suzuki Powertrain numbers which were not a part of Q4 FY13 results

• OPM at 10.3% was much lower than our expectations owing to one time hit of Rs1.4bn owing to dealer compensation for excise duty cut and Rs900mn one time staff costs

• PAT falls by 35.5% yoy to Rs8bn lower than our estimates owing to lower than expected operating profit offset by higher than estimated other income

• Issues with regards to the Gujarat plant have been settled, volumes are expected to recover from H2 FY15 and pick further strength in FY16, margins are expected to strengthen with higher volumes and localization  

• We maintain our BUY rating with a revised 9-month target of Rs2,192

Net sales lower than expectations

During Q4 FY14, net sales rose 9% qoq which was lower than our expected increase of 15.8%. While volumes were higher by 12.7% qoq, realizations declined by 1.3% qoq. While domestic volumes remained flat export volumes surged 31.6% qoq. On a yoy basis, while domestic volumes were lower only by 3.3% yoy, export volumes fell sharply by 24.6%. Rural markets continued to fare much better with 16% growth in FY14 driven by strong disposable income owing to higher MSPs and employee guarantee scheme of the government. Contribution of rural market to total volumes in FY14 increased to 32%. Realizations have been weak owing to an unfavorable product mix, rising discount levels and one time impact of dealer compensation for excise duty cut to the tune of Rs1.4bn. The discounts during the quarter came in lower on sequential basis at Rs17,500 but were higher 67% yoy.

OPM lower than expectations, hit by one time dealer compensation and higher staff costs

During Q4 FY14, OPM for MSIL came in 10.3% a fall of 133bps qoq. The fall was lower than our expectations of a marginal fall. With dealer compensation of Rs1.4bn paid during the quarter for the impact of excise duty cut on the inventory, sales were starkly lower. Currency impact was marginally positive. On a sequential basis raw material costs were higher by 567bps (449bps adjusted for dealer compensation) as a percentage of net sales. This was owing to higher discounts and adverse product mix. Staff costs were higher by 40bps yoy as Q4 FY14 saw bonus payments to employees.

Standalone PAT falls by 35.5% qoq

The company reported a PAT of Rs8bn which was lower than our expectations. The underperformance was owing to lower than expected operating profit. Higher than estimated other income helped offset the impact to some extent. Depreciation expenses were higher as Manesar III unit and new diesel engine capacity commenced operations. Tax rate at 23.6% was in line with our expectations. The company has guided for tax rate to remain in the range of 23-25%.

Maintain BUY with a revised price target of Rs2,192

While macro headwinds will continue to keep the demand growth in H1 FY15 fairly muted, we expect a strong revival from H2 FY15 and even a stronger growth in FY16. MSIL is also set to benefit at operational level from the localization drive and the weak JPY. We raise our domestic volume estimates for FY16. Currency benefits and growth in volumes will enable the company to maintain the current levels of operating margins. Utilization of the cash will be keenly tracked and will have a key bearing on stock price performance in the medium term. Maintain BUY with a revised 9-month price target of Rs2,192.