MSIL reported a Q2 PAT of Rs8.6bn, which was ahead of street expectation but marginally below our expectation. Although margins were a tad below our expectations, we remain confident of margin improvement in coming quarters based on mix improvement (higher share of non-discounted models and new launches within discounted models) and favourable currency. Being on the favorable side of the model cycle, we maintain our view that MSIL to grow ahead of market in FY16/17. We maintain our BUY rating with a TP of Rs3,430.
Revenues broadly in inline: Revenues at Rs123bn were broadly in-line to our estimates (~1% ahead of consensus) on account of realization growth (+1% Q-o-Q). We expect realization growth to inch-up further on account of higher volume from Ciaz and Celerio along with no or very limited discounts for new Swift and Alto K10 in initial months.
Margins and PAT marginally below our estimates. The EBITDA margins at 12.4% (+ 70bps Q-o-Q, -20bp YoY) were a bit below estimates, primarily on account of slightly higher discounts (~21k v/s estimate of ~20k), Ciaz related launch costs and 25bp deferment of currency impact on margins to next quarter. PAT at Rs8.6bn (+29% YoY, +13% QoQ) was 3% ahead of consensus.
Management outlook and concall takeaways
- Demand: Although management maintained 10% volume growth guidance in FY15 due to market uncertainty, volumes driven by sales push and higher base of last year; we remain confident of 13% volume assumption based on Ciaz ramp-up (16k pre-booking) and our channel checks which suggest low inventory (~70k units) related to phasing out of Alto K10/Swift. Key encouraging signs were return of growth in urban cities (+10% YoY in 1H’15) after decline in FY14 and improvement in first time-buyers share to 42% (1H’15) from 37% in FY14.
- Product pipeline: Company will belaunching two new models in the next one year starting with S-Cross (Feb-March 2015) and premium hatchback (competitor to i20, next year festive season) in FY16E. We also learnt that compact SUV launch has been pushed back by few months to Feb-March 2016 primarily to get product pricing right as company is re-working on cost structure with vendors.
- Margins: The management indicated that discounts are unlikely to show a reduction in near-term unless demand picks up from customer pull. However, we still believe that blended discounts will show downward trends in coming quarters due to two factors like a) higher share of non-discounted models (Ciaz, Celerio and Ertiga), and b) new launches within discounted models (New Alto K10 and Swift). Further, benefits of JPY depreciation (~25bp on current rate) and benign raw material costs to help margins.
Maintain BUY on positive outlook:We clearly see positive triggers (volume/mix/margin/discount/currency) for MSIL playing out over the next 1-2 years. We remain confident on our margins and volume thesis. We maintain our estimates and target price of Rs3,430.
BUY
MSIL IN| CMP RS 3140
TARGET RS 3430 (+9%)
Company Data
O/S SHARES (MN) : / 302MARKET CAP (RSBN) : / 932
MARKET CAP (USDBN) : / 15.3
52 - WK HI/LO (RS) : / 2980 / 1334
LIQUIDITY 3M (USDMN) : / 16.5
FACE VALUE (RS) : / 5
Share Holding Pattern, %
PROMOTERS : / 56.2FII / NRI : / 22.5
FI / MF : / 13.6
NON PROMOTER CORP. HOLDINGS : / 5.5
PUBLIC & OTHERS : / 2.2
Price Performance, %
1mth / 3mth / 1yrABS / 10.6 / 23.9 / 117.0
REL TO BSE / 9.2 / 18.7 / 82.8
Price Vs. Sensex (Rebased values)
Source: Bloomberg, PhillipCapital India Research
Other Key Ratios
Rs, mn / FY14 / FY15E / FY16ENet Sales / 426,448 / 502,634 / 620,626
EBITDA / 50,959 / 62,821 / 83,223
Net Profit / 27,830 / 35,840 / 51,573
EPS, Rs / 92.1 / 118.6 / 170.7
PER, X / 33.5 / 26.0 / 18.1
EV/EBIDTA, x / 18.5 / 14.7 / 10.5
EV/Net Sales, x / 4.4 / 3.9 / 3.3
ROE, % / 13.3 / 15.0 / 18.5
Debt/Equity (%) / 8.7 / 7.6 / 6.5
Source: PhillipCapital India Research Est.
Dhawal Doshi (+ 9122 6667 9769)
Priya Ranjan (+ 9122 6667 9965)
Please refer to Disclosures and Disclaimers at the end of the Research Report.
Q2FY15: Volume Analysis
Volumes Analysis / Q2FY15 / Q2FY14 / % change / Q1FY15 / % change / PC CommentsVolumes
Units sold (nos) / 321,898 / 275,586 / 16.8 / 299,894 / 7.3 / Volume improvement led by higher discounts and festive season
Domestic / 287,687 / 241,562 / 19.1 / 270,643 / 6.3
Exports / 34,211 / 34,024 / 0.5 / 29,251 / 17.0
Realisation (INR) / 372,675 / 365,617 / 1.9 / 369,247 / 0.9 / Sequential improvement due to better mix
Q2FY15: Financial analysis
Year To March / Q2FY15 / Q2FY14 / % change / Q1FY15 / % change / PC CommentsTotal revenues / 123,038 / 104,681 / 17.5 / 113,696 / 8.2 / In-line with expectation
Raw material / 87,749 / 72,644 / 20.8 / 81,843 / 7.2 / Marginally better than expected
Staff costs / 3,698 / 3,723 / (0.7) / 3,535 / 4.6
Other expenses / 16,383 / 15,099 / 8.5 / 15,036 / 9.0 / Higher than expected due to higher blended discounts and Ciaz launch costs
Total expenditure / 107,829 / 91,466 / 17.9 / 100,414 / 7.4
EBIDTA / 15,208 / 13,214 / 15.1 / 13,282 / 14.5 / 3.5% below estimates
Other income / 1,933 / 1,010 / 91.3 / 2,965 / (34.8)
Interest / 348 / 434 / (19.8) / 386 / (9.8)
Depreciation / 5,989 / 4,992 / 20.0 / 5,836 / 2.6
PBT / 10,805 / 8,799 / 22.8 / 10,025 / 7.8
Tax / 2,180 / 2,097 / 4.0 / 2,403 / (9.3) / Lower than expected due to deferred tax assets
Adjusted net profit / 8,625 / 6,702 / 28.7 / 7,623 / 13.1 / ~2% below estimates
Extraordinary exp / - / -
Net profit / 8,625 / 6,702 / 28.7 / 7,623 / 13.1
Q2FY15: Margin analysis (As % of net Revenues)
As % Of Net Revenues / Q2FY15 / Q2FY14 / % change / Q1FY15 / % change / CommentsRaw material / 71.3 / 69.4 / 192.3 / 72.0 / (66.5) / Sequentially decline due to mix and benign raw material costs
Staff costs / 3.0 / 3.6 / (55.1) / 3.1 / (10.4)
Other expenses / 13.3 / 14.4 / (110.9) / 13.2 / 9.0
EBIDTA / 12.4 / 12.6 / (26.3) / 11.7 / 67.9 / 35bp below estimates adjusted to 25bp deferment of currency gains to next quarter
Adjusted net profit / 7.0 / 6.4 / 60.7 / 6.7 / 30.6
Tax rate / 20.2 / 23.8 / (365.6) / 24.0 / (379.3)
Source: Company, PhillipCapital India Research
Financials
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Income Statement
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16ENet sales / 426,126 / 426,448 / 502,634 / 620,626
Growth, % / 23 / 0 / 18 / 23
Other income / 9,753 / 10,558 / 11,692 / 13,675
Total income / 435,879 / 437,006 / 514,326 / 634,301
Raw material expenses / -325,590 / -313,488 / -366,420 / -448,713
Employee expenses / -10,696 / -13,681 / -15,833 / -19,239
Other Operating expenses / -57,297 / -58,878 / -69,251 / -83,126
EBITDA (Core) / 42,296 / 50,959 / 62,821 / 83,223
Growth, % / 68.3 / 20.5 / 23.3 / 32.5
Margin, % / 9.9 / 11.9 / 12.5 / 13.4
Depreciation / -18,612 / -20,844 / -22,898 / -23,661
EBIT / 23,684 / 30,115 / 39,923 / 59,561
Growth, % / 72.3 / 27.2 / 32.6 / 49.2
Margin, % / 5.6 / 7.1 / 7.9 / 9.6
Interest paid / -1,898 / -1,759 / -1,559 / -1,359
Other Non-Operating Income / 8,124 / 8,229 / 8,795 / 11,491
Pre-tax profit / 29,910 / 36,585 / 47,158 / 69,694
Tax provided / -5,989 / -8,755 / -11,318 / -18,120
Profit after tax / 23,921 / 27,830 / 35,840 / 51,573
Net Profit / 23,921 / 27,830 / 35,840 / 51,573
Growth, % / 46.3 / 16.3 / 28.8 / 43.9
Net Profit (adjusted) / 23,921 / 27,830 / 35,840 / 51,573
Unadj. shares (m) / 302 / 302 / 302 / 302
Wtdavg shares (m) / 302 / 302 / 302 / 302
Balance Sheet
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16ECash & bank / 16,250 / 6,297 / 28,051 / 80,268
Debtors / 14,699 / 14,137 / 15,889 / 18,685
Inventory / 18,407 / 17,059 / 17,765 / 21,586
Loans & advances / 29,802 / 32,567 / 32,567 / 32,567
Total current assets / 79,158 / 70,060 / 94,273 / 153,106
Investments / 70,783 / 101,179 / 111,179 / 126,179
Gross fixed assets / 198,007 / 227,018 / 247,018 / 252,018
Less: Depreciation / -100,015 / -119,114 / -142,012 / -165,674
Add: Capital WIP / 19,409 / 26,214 / 26,214 / 26,214
Net fixed assets / 117,401 / 134,118 / 131,220 / 112,558
Total assets / 267,342 / 305,357 / 336,671 / 391,843
Current liabilities / 54,833 / 62,715 / 60,185 / 69,152
Provisions / 8,741 / 8,757 / 13,829 / 19,064
Total current liabilities / 63,574 / 71,472 / 74,014 / 88,216
Non-current liabilities / 17,979 / 24,105 / 24,105 / 24,105
Total liabilities / 81,553 / 95,577 / 98,119 / 112,321
Paid-up capital / 1,510 / 1,510 / 1,510 / 1,510
Reserves & surplus / 184,279 / 208,270 / 237,042 / 278,012
Shareholders’ equity / 185,789 / 209,780 / 238,552 / 279,522
Total equity & liabilities / 267,342 / 305,357 / 336,671 / 391,843
Source: Company, PhillipCapital India Research Estimates
Cash Flow
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16EPre-tax profit / 29,910 / 36,585 / 47,158 / 69,694
Depreciation / 18,612 / 20,844 / 22,898 / 23,661
Chg in working capital / -133 / 6,974 / -4,989 / 2,350
Total tax paid / -4,326 / -8,320 / -9,074 / -16,420
Cash flow from operating activities / 44,063 / 56,083 / 55,995 / 79,286
Capital expenditure / -54,692 / -37,561 / -20,000 / -5,000
Chg in investments / -9,309 / -30,396 / -10,000 / -15,000
Cash flow from investing activities / -64,001 / -67,957 / -30,000 / -20,000
Free cash flow / -19,938 / -11,874 / 25,995 / 59,286
Equity raised/(repaid) / 12,822 / 402 / 0 / 0
Debt raised/(repaid) / 1,523 / 4,347 / 0 / 0
Dividend (incl. tax) / -2,517 / -2,828 / -4,241 / -7,069
Cash flow from financing activities / 11,827 / 1,921 / -4,241 / -7,069
Net chg in cash / -8,111 / -9,953 / 21,754 / 52,217
Valuation Ratios
FY13 / FY14E / FY15E / FY16EPer Share data
EPS (INR) / 79.2 / 92.1 / 118.6 / 170.7
Growth, % / 39.9 / 16.3 / 28.8 / 43.9
Book NAV/share (INR) / 615.0 / 694.5 / 789.7 / 925.3
FDEPS (INR) / 79.2 / 92.1 / 118.6 / 170.7
CEPS (INR) / 140.8 / 161.1 / 194.4 / 249.1
CFPS (INR) / 119.0 / 158.4 / 156.3 / 224.4
DPS (INR) / 8.0 / 12.0 / 20.0 / 30.0
Return ratios
Return on assets (%) / 10.3 / 10.1 / 11.5 / 14.4
Return on equity (%) / 12.9 / 13.3 / 15.0 / 18.5
Return on capital employed (%) / 13.3 / 13.0 / 14.6 / 18.3
Turnover ratios
Asset turnover (x) / 4.0 / 3.3 / 3.7 / 4.9
Sales/Total assets (x) / 1.7 / 1.5 / 1.6 / 1.7
Sales/Net FA (x) / 4.3 / 3.4 / 3.8 / 5.1
Working capital/Sales (x) / 0.0 / (0.0) / (0.0) / (0.0)
Working capital days / 2.8 / (3.2) / (2.8) / (6.7)
Liquidity ratios
Current ratio (x) / 1.3 / 1.0 / 1.3 / 1.8
Quick ratio (x) / 1.0 / 0.8 / 1.1 / 1.6
Interest cover (x) / 12.5 / 17.1 / 25.6 / 43.8
Dividend cover (x) / 9.9 / 7.7 / 5.9 / 5.7
Total debt/Equity (%) / 7.5 / 8.7 / 7.6 / 6.5
Net debt/Equity (%) / (1.3) / 5.7 / (4.1) / (22.2)
Valuation
PER (x) / 39.0 / 33.5 / 26.0 / 18.1
Price/Book (x) / 5.0 / 4.4 / 3.9 / 3.3
Yield (%) / 0.3 / 0.4 / 0.6 / 1.0
EV/Net sales (x) / 2.2 / 2.2 / 1.8 / 1.4
EV/EBITDA (x) / 22.0 / 18.5 / 14.7 / 10.5
EV/EBIT (x) / 39.2 / 31.3 / 23.1 / 14.6
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Recommendation Chart
Source: PhillipCapital India Research
Contact Information (Regional Member Companies)
SINGAPOREPhillip Securities Pte Ltd
250 North Bridge Road, #06-00 Raffles City Tower,
Singapore 179101
Tel : (65) 6533 6001 Fax: (65) 6535 3834
/ MALAYSIA
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/ HONG KONG
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Tel (852) 2277 6600 Fax: (852) 2868 5307
JAPAN
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Tokyo 103-0026
Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141
/ INDONESIA
PT Phillip Securities Indonesia
ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,
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/ CHINA
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THAILAND
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