Maruti Suzuki India Ltd.: Management call reinforces positive trends
Focus on market share and profitability
We hosted an investor call with Maruti management. A presentation and
subsequent Q&A was mostly related to the company's growth strategy in the
domestic passenger vehicle market and likely margin trends. Despite rising
competition, management remained confident of maintaining, if not improving,
both market share and profitability. We reiterate our Buy with a PO of Rs 1,720.
Geared for growth
Management highlighted the competitive positioning after the upgrade to K 10/12
engines. Despite the influx of competition, Maruti expects to hold on to passenger
vehicle market share at ~45% (5-year average ~46%). This will likely be driven by
the easing of capacity constraints (1.2mn to 1.8mn by mid-CY12) and new
launches, including upgrades. We forecast a 21% sales CAGR over FY10-13E,
similar to the industry, also aided by forays into the CNG space and premium
cars/Utility vehicles.
Margins to improve longer term
Maruti expects short-term margin pressures to continue, mainly due to crosscurrency
impact (strong JPY, weak USD). However, management expects longterm
EBITDA margins at 11%-12% (up from ~10.5% last quarter). We forecast
peak margins at 11% during our forecast period, driven by operating leverage and
cost-cutting initiatives, being partially offset by competitive pressures.
Stock has upside potential
The stock seems attractively valued on our above-consensus forecasts. We justify
the premium rating (16x FY12E EPS) being an early-cycle recovery multiple, and
the only listed pure-play in passenger vehicles, the fastest-growing segment in
autos.
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