Q1FY24 Review: Maruti Suzuki: Concerns on demand & SMG deal termination

1 Aug 2023 , 12:19 PM

Analysts of IIFL Capital Services downgrade Maruti from BUY to ADD, as they see: i) weakness in the demand environment, ii) dilution risk to EPS, FCF & ROCE on account of Maruti’s plans to buy Suzuki Motor Gujarat (SMG). Maruti’s Q1 results (excl. one-offs) were in line with estimates. However, end-demand seems to be softer than reported wholesale volumes. Dealer inventory has increased in the past six months, implying that retails are trailing wholesales. Maruti’s order-book shrunk by 57k in Q1, implying that new order-flow is lower than deliveries. Discounts have started rising. Meanwhile, the Board has approved plans to acquire SMG from Suzuki. They expect this to be dilutive to EPS (4- 5%; not built in estimates yet) and ROCE. They expect Maruti’s PAT-to-FCF conversion to fall from 113% in FY14-21 to 61% in FY23- 26. Stock is fully priced at 25x FY25 EPS (diluted for SMG deal). Analysts of IIFL Capital Services cut the stock from BUY to ADD, with TP of Rs 10,250. 

Q1FY24 results largely in line: 

Q1 revenue grew 22% YoY, driven by 6% volume growth and 15% ASP jump (price hikes, mix). Gross margin (GM) improved 50bps QoQ to 27.2%. Ebitda margin contracted 120bps QoQ to 9.2% (Est. 10.2%). Reported Ebitda/PAT missed analysts of IIFL Capital Services estimate by 9%/7%. However, if excluded one-off in employee costs (80bps); Ebitda margin came in at 10.0% and absolute Ebitda was in-line. 

Net new order flow < Retails < Wholesales: 

As analysts of IIFL Capital Services had highlighted recently, retail volumes are trailing wholesales, especially in PVs. This is reflected in Maruti’s dealer stock increasing from 1 week at Q3FY23-end to almost 4 weeks at Q1FY24-end. Mgmt mentioned that the order book has come off from 412k at Q4FY23-end to 355k at Q1FY24-end, implying that new order flow is not keeping pace with deliveries. 

Termination of SMG manufacturing agreement dilutive to EPS, FCF and ROCE: 

In 2014, Suzuki set up SMG to manufacture/supply cars to Maruti at cost (zero Ebit) for a period of 15 years. Maruti’s Board has now decided to terminate the agreement and to acquire SMG from Suzuki. The 2014 deal was accretive to Maruti’s FCF, EPS and ROCE as Suzuki was funding Maruti’s expansion capex. The termination of the deal would be dilutive to EPS (they estimate 4-5%) and ROCE. Analysts of IIFL Capital Services expect Maruti’s PAT-toFCF conversion to fall from 113% in FY14-21 to 61% in FY23-26.