Maruti Suzuki-2QFY11 PAT at Rs6B (+5% yoy) in line: JPMorgan

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Maruti Suzuki India Ltd
Neutral
MRTI.BO, MSIL IN
2QFY11 PAT at Rs6B (+5% yoy) in line with estimates ▲





• Results broadly inline with estimates, 2Q PAT at Rs6B (+5% yoy): Maruti
reported 2Q PAT at Rs6B (+5% yoy) which was driven by healthy volume
growth (+27% yoy), while EBITDA margins came in at 8.8% (flat qoq, -290bp
yoy). We re-iterate our Neutral stance on the stock given that while robust
industry growth will likely aide Maruti’s volumes, profitability is likely to be
impacted by adverse currency movement and increasing competitive intensity.

• Results highlights: While the company reported sales growth of 27% at
Rs89.8B, realizations were marginally lower yoy given that export realizations
have declined on account of the weakening euro. EBITDA margins at 8.8%
declined -290bps yoy and were flat qoq. While raw material expense ratio
declined -40bp qoq, the other expense ratio increased by +70bp – higher royalty
payouts (5.3% of sales vs. 5.1% in 1Q) partially led to the same.

• Management conference call takeaways: Volume Outlook: The management
was upbeat on industry growth and expect the strong momentum to sustain over
2H. Margin Outlook: While commodity costs are likely to be range bound, the
company will be impacted by the adverse currency movement – particularly the
JPY – which has appreciated by c.10% over the past few months. Over 2H, the
company has hedged about c.25% of its direct Yen contracts, while on exports
it has hedged 80% of sales. Exports: The management has diversified away
from Europe – with non-European exports now accounting for 50% of
shipments. Capacity Expansion – The company is on track with its expansion
program – it has de-bottlenecked capacity to 110,000 units currently; Manesar B
with a capacity of 250,000 units will be on-stream by Sep'11. VW alliance: The
management highlighted that an announcement on the same could be made by
year end.

• Price Target & estimates: We are raising our volume forecasts over FY11E to
1.25m units to factor in stronger than expected industry volume growth and are
consequently raising our EPS estimates by 4% over FY11-12E. We are also
introducing FY13E estimates and are rolling forward our price target to Sep’11.
We set a revised target price of Rs1,575 based on 15x forward earnings, inline
with mid-cycle multiples (and inline with our earlier methodology). Key risks:
Maruti is sensitive to currency movement – particularly the Yen. Any
fluctuations in currency could impact earnings. Key downside risks: slower than
anticipated industry growth rates, and key upside risks: Maruti’s ability to
sustain market share and any potential outsourcing order to VW.