Q2FY24 Review: Maruti Suzuki: Margins surprise, but demand losing steam

30 Oct 2023 , 02:24 PM

Maruti’s Q2 Ebitda beat analysts of IIFL Capital Services estimate by 12%, on higher margins. Analysts of IIFL Capital Services expect some of the factors that led to the margin uptick to sustain (input costs, JPY depreciation). Other factors namely operating leverage, low discounts and inventory valuation benefit may reverse in Q3. The festive season is seeing strong growth (+18%), yet mgmt guided to 5% industry growth in FY24. Current retails and growth seem to be supported by the pre-existing order-book, which is depleting rapidly. This also implies that the new order flow is not keeping pace with production. This casts doubts on the industry growth outlook for FY25. Following the beat in Q2, analysts of IIFL Capital Services increase FY24/FY25/FY26 EPS estimates by 12%/8%/4% (fall in precious metals, higher Other income). Retain ADD; TP of Rs 11,200 is based on 24x 2YF EPS. 

Q2 Ebitda 12% above estimate: 

Revenue grew 24% YoY, led by 7% volume growth and sharp rise in ASP (SUV mix, price). Gross margin (GM) expanded 220bps QoQ to 29.4% (160bps beat). Ebitda margin improved 370bps QoQ to 12.9% (150bps beat), driven by GM expansion and operating leverage. Absolute Ebitda came in 12% above analysts of IIFL Capital Services estimate. PAT beat was 14% with higher-than-expected Other income. 

Concerns on volume growth, as order book depleting rapidly: 

Despite strong festive season (+18% YoY), mgmt guided to 5% industry growth in FY24. Current volume growth seems to be supported by preexisting order-book, which is depleting fast. Maruti’s order-book has come off from 412k at the end of Q4FY23 to 250k. Of the 250k, ~200k are for CNG models and Ertiga. The new launches (Brezza, Grand Vitara, Fronx, Jimny, Invicto) together have an order book of ~50k, which is only slightly above one month’s sales of these models. Overall dealer inventory is high at “> 1 month”. If the PV industry ends FY24 with a depleted order book, it would cast doubts on the growth potential in FY25. 

Margin surprise to partly reverse in Q3: 

Analysts of IIFL Capital Services expect the benefit of lower input costs (mainly precious metals) and JPY depreciation vs INR to sustain in the coming quarters. However, the following factors may reverse in Q3: i) Operating leverage, (volumes moderate post the festive peak). ii) Low discounts (expect uptick in Q3, waiting period coming off). iii) Inventory valuation benefit as Q2 production > Q2 wholesales.