Maruti Suzuki 3QFY2014 performance highlights and results update
January 31, 2014, Friday, 09:43 GMT | 04:43 EST | 15:13 IST | 17:43 SGT
Strong 3QFY2014 results: Maruti Suzuki (MSIL) reported strong results for 3QFY2014, ahead of our estimates, driven largely by cost control measures, localization benefits and favorable currency movement (on a yoy basis). While the top-line was broadly in line with our estimates, the bottom-line at Rs.681cr was higher than our estimates of Rs.620cr, due to better-than-expected EBITDA margins at 12.4%. The EBITDA margins surprise was primarily on account of the cost reduction initiatives and localization benefits which negated the impact of unfavorable forex movement (lagged impact on vendors’ imports). Additionally, lower ocean freight charges due to lower exports (other expenditure down 4.8% sequentially) also aided the operating performance.
Future expansion through SMC takes bourses by surprise: While MSIL declared strong 3QFY2014 results, the announcement of a new 100% subsidiary by Suzuki Motor Corporation (SMC) to implement the expansion project in Gujarat has taken the bourses by surprise. In what is described by the Management as a unique arrangement, SMC will invest Rs.3,000cr over a period of 3-4 years to create an initial capacity of 250,000 units (eventually 1.5mn units) which will undertake exclusive contract manufacturing for MSIL. The vehicles would be sold to MSIL at the cost of production plus adequate cash (net of tax) to cover incremental capex, without any RoCE for SMC. The Management indicated that cheap money available in Japan and no major investment avenues for SMC prompted this kind of an arrangement. The Management clarified that the new production structure will have no impact on MSIL’s profit margins. In addition, the RoCE for MSIL is likely to increase due to treasury income, resulting from not investing its own funds in the expansion projects.
Outlook and valuation: We believe that the new arrangement would not have any adverse financial impact on MSIL in the near term as it would take 3-4 years for the Gujarat plant to go operational. On the contrary, MSIL’s FCF will improve given that it will not have to invest any money for the initial phase of Gujarat facility’s expansion. Nevertheless, the rationale behind such a move is not clear, particularly when MSIL has significant cash on its books (~Rs.7,500cr) and could have easily funded the initial as well as future capex requirements for the Gujarat plant from its internal accruals. Moreover it raises longer term concerns with regards to transparency, complexity in structure and more importantly structural shift in MSIL’s revenue mix towards trading business, which may warrant a de-rating of the valuation multiple. We maintain our Neutral rating on the stock.