Q3FY24 Review: Maruti Suzuki: Expect strong Q4, but FY25 may be muted

2 Feb 2024 , 01:49 PM

Maruti’s Q3 Ebitda (although down 18% QoQ) beat analysts of IIFL Capital Services estimate by 5% on higher than expected margins. Maruti’s Q3 results were hurt by inventory destocking, negative operating leverage and higher discounts. As the impact of destocking is behind us (Dec dealer stock at 1 week), analysts of IIFL Capital Services expect Q4 to be relatively strong with higher volumes and multiple positive margins levers. Having said that, there isn’t much optimism on demand scenario heading into FY25, with mgmt. indicating 3-4% growth expectations. Analysts of IIFL Capital Services expect Maruti to mirror muted industry growth in FY25. They have upgraded EPS estimates by 2-4% (lower volumes, higher margins, higher other income). Retain ADD with TP of ₹11,900. 

Q3 Ebitda 5% above est. on margin beat: 

Rev grew 15% YoY (in-line) on 8% volume growth and rise in ASP (prices hikes, mix). ASP shrunk 1.2% QoQ, driven by higher discounts. Gross margin (GM) contracted 30bps QoQ to 29.1% (50bps beat) due to higher discounts. Ebitda margin contracted 120bps QoQ to 11.7% (60bps beat), on GM contraction and negative operating leverage. Absolute Ebitda came in 5% above estimate. PAT beat by 9% on lower depreciation, higher other income. 

Q4 volumes, margins should be strong as destocking impact behind us: 

Maruti’s Q3 saw sequential fall in volumes and margins due to destocking (to reduce dealer inventory), negative operating leverage and higher discounts. Maruti entered Q4FY24 with relatively low levels of dealer inventory (about 1 week), which implies there is scope to stock up in Q4 and bill higher wholesales. There are multiple tailwinds for margins: i) operating leverage, ii) lower discounts as wholesales > retails in Q4, iii) fall in precious metal prices, iv) weak JPY. As a result, analysts of IIFL Capital Services expect Ebitda margin to rebound from 11.7% in Q3 to 12-5-13.0% in Q4. 

FY25 growth may be muted: 

Mgmt. mentioned that SIAM expects PV industry to grow from ~4.2mn in FY24 to ~4.3mn in FY25 (implied growth 3%; analysts of IIFL Capital Services forecast 4-5%). This is consistent with softening new order-flow and shrinkage of order-book seen in recent quarters. Maruti’s busy new model launch pipeline is behind; so, analysts of IIFL Capital Services do not forecast market-share gains for Maruti in FY25. Entry-level segment (hatchbacks) is not seeing signs of revival. They believe that if industry growth is muted, Maruti would mirror the same. ASP increase due to richer mix is largely factored in FY24. Overall, analysts of IIFL Capital Services forecast only 5% EPS growth in FY25.