In an interview with CNBC-TV18's Sonia Shenoy, analysts Bharat Gianani of Angel Broking, Basudeb Banerjee of Antique and Nishant Vass of ICICI Direct discussed Maruti Suzuki's third quarter earnings that were declared today.
Maruti's net profit rose 18 percent year-on-year to Rs 802 crore,. According to a CNBC-TV18 poll, profit was expected at Rs 875 crore. While revenue increased 15.4 percent to Rs 12,576 crore, slightly ahead of estimates of Rs 12,352 crore due to higher sales volume.
Below is the edited transcript of the interview on CNBC-TV18.
Q: What would your initial view be on the earnings?
Gianani: They have reported operating margin of 13 percent, which is in line with our estimates. However, there has been a miss as far as the bottomline is concerned. That is primarily because the company has reported lower other income.
So we believe that the results are slightly below our estimates primarily because of the lower other income but as far as the operating profitability is concerned, the numbers are pretty well in line with our estimates.
Q: The tax expense is quite high this time around: Rs 261.5 crore versus Rs 204 crore same time last year while other income is higher at Rs 129 crore versus Rs 116 crore. What will you do with the stock now because it has been priced to perfection -- at 20 times it is quite steep as far as valuations are concerned, what would your recommendations be after looking at these earnings?
Gianani: As far as the operating performance is concerned, the numbers are pretty much in line. So we continue to remain positive on the stock. we believe that the company has seen a market share gain of about 300 bps over the last nine months mainly on back of our new product launches, the Ciaz and the Celerio.
Particularly, the auto manual transmission (AMT) variant of the Celerio has seen a good response. So we continue to believe that the company is poised to maintain its market share because the product pipeline is very strong for the company, it is planning to launch in the compact utility vehicle (UV) segment space in which it has never been in before and it will also launch a crossover. So we believe that the company has a strong product pipeline and given its leadership position, the valuations are justified at this point of time. So we continue to remain positive.
Q: Would you continue to remain bullish on Maruti or would you recommend taking some money off the table?
Banerjee: As the previous interviewee said, the main reason broadly for the disappointment was lower other expenses and the tax. Other expenses should not compared on a YoY basis because your cash on book has also increased proportionately with earnings in the last four quarters. So your other income should be compared with past couple of quarters.
If you see in sync with Bajaj Auto's other income, there was a negative surprise because of the change in the FMP taxation norms. So that is why Maruti also should have followed a similar aspect that Bajaj Auto followed and there will be prolonging FMP bookings. So that is why there was a negative surprise in terms of other income.
Yes, it is a tad lower than expected in margin terms, revenue is broadly in line so operationally I will say that EBITDA we were expecting close to Rs 1,620 crore so it came at around Rs 1,590 crore, so maybe the full effect of yen might get reflected in the coming quarters with pretty steady dollar/rupee.
But discount anyhow, because the diesel portfolio has been on a rising trend but that is getting counter-compensated by favourable things such as falling commodity prices and favourable dollar/yen. Overall, we are confident that Maruti should be able to maintain or improve margins over and above 13 percent levels towards 14 percent in next two quarters time.
As you rightly said, the product pipeline is very strong especially in the UV segment where Ertiga is the only model under their belt. Overall product pipeline is also pretty strong. So definitely with passenger vehicle (PV) market being weak for last three years, your leader is coming up with such a strong pipeline and margin also is at a multi-year high, definitely one should remain positive on this entity.
Q: When you say remain positive, what kind of valuations would justify the earnings now and what would your upside target be on this stock?
Banerjee: We have a price target of Rs 4,330 based on FY17 numbers, which signifies an upside of close to 120 percent from these levels. So our numbers are based on the core earnings of FY17 and cash per share, so we have taken a 20 times core earnings multiple.
Q: Would you concur with the previous two speakers that despite a little bit of a miss this time around, there is still a long-term positive for Maruti and what would your view be both on the earnings as well as what to do with the stock?
Vass: It is fairly understandable that Maruti is one of the best bets in terms of the auto recovery cycle. I think another interesting point is that there is an exceptional item on excise duty demand on sales tax subsidy that is hitting in the other expenses which has pushed down the EBITDA a bit.
So on an overall basis, it remains a stock that one needs to be very interestingly looking at. From an earnings perspective and target price, we have around Rs 3,700 target price for the stock and on an earnings estimate probably it will see an uptick from 205 number that we have for FY17.
Q: Can you give us an indication of what your expectations are as far as margins are concerned, from this 12.7 percent level how much could it rise to going ahead?
Vass: We anticipate margins will grow easily in a period of 9-12 months to move to around 13.5-14 percent on Maruti considering the fact that there might be incrementally lowering of discounts and product mix could improve with the launch of Ciaz significantly from where it is right now.
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