Operating results meet estimates, lower other income drags profitability: Maruti Suzuki India Ltd (MSIL) 3QFY2016 operating results adjusted for one off items were in line with our estimates. MSIL revenues, expectedly grew 20% yoy to Rs15,082 cr driven majorly by a robust 16% volume growth. New product launches coupled with robust festive demand enabled MSIL to clock strong volumes. Realisation/vehicle grew 4% led by a better product mix. MSIL incurred one off expenditures to the tune of Rs175 cr during the quarter (Rs150 cr on account of inventory decretion and Rs25 cr due to higher employee expenses due to higher bonus declared retrospectively for 21 months). Adjusted for the one off items, operating margins came in at 15.5% which is line with our estimates. However, MSIL reported lower other income of Rs32 cr (as against Rs102 cr reported in corresponding quarter last year) which led to the Adjusted Net Profit coming in at Rs1,142 cr as against our estimate of Rs1,270 cr.
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. Given the new launches, MSIL is likely to retain its market share despite increased competitive intensity. However, MSIL margins are likely to tread down in FY2017 from the record 1HFY2016 levels given the increased sales promotion expenses due to new launches and the recent appreciation of JPY vis a vis INR which would increase the raw material and the royalty expenses. At CMP, MSIL is trading at P/E of 25.6x and 19.4x its FY2016 and FY2017 earnings respectively, leaving no scope of meaningful upside from current levels. Hence, we maintain our Neutral rating on the stock.

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