Results in line with estimates: Maruti Suzuki India Ltd (MSIL)s 2QFY2016 results
have come in in line with our estimates. Its revenues grew 13% yoy to `13,934cr,
in line with our expectations of `14,007cr. Volumes grew 10% yoy while the
realization/vehicle grew 3% yoy on account of a better product mix. MSIL
maintained its record high margins similar to 1QFY2016; margins rose sharply
by 390bp yoy to 16.3%, and are in line with our estimate. A favorable currency
movement (depreciation of Japanese Yen and Euro vis-a-vis the Indian Rupee) led
to lower imported raw material costs. This, coupled with decline in discounts,
boosted the operating margin. On the back of the robust operating performance,
the net profit came in at `1,226cr, in line with our estimate of `1,248cr.
Outlook and valuation: The passenger vehicle (PV) industry is well poised to post
double-digit growth over the next two years, given the improved consumer
sentiments, better economic outlook, and softer fuel prices. Further, new launches
by MSIL, with it having recently introduced the premium hatch – Baleno and a new
compact SUV, would enable it to gain market share, going ahead. Also, we
believe MSIL would be able to sustain higher margins (we have built in ~17%
margin levels in our estimates for FY2016/17) given the subdued commodity
prices and favorable currency rates. Reduction in discounts due to improved
industry outlook coupled with new product launches and benefits of operating
leverage would also enable MSIL to sustain margins at elevated levels. We view
MSIL as the best play on passenger vehicle demand recovery and expect 36%
earnings CAGR over FY2015-2017. We have retained our earnings estimates
given the inline results and maintain our Accumulate rating on the stock with a
price target of `4,960 (based on a PE multiple of 22x FY2017 EPS).

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