Maruti Suzuki– 2QFY2011 Result Update: Angel Broking

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For 2QFY2011, Maruti recorded decent performance. The top line came in
marginally above our estimates, largely due to higher volume growth, while
bottom-line growth was lower due to contraction in EBITDA margin on a yoy
basis. Higher royalty charges and increased input costs hit Maruti’s operating
performance on a yoy basis. We maintain our Accumulate rating on the stock.



Decent performance; 2QFY2011 results above expectations: For 2QFY2011,
Maruti registered 27% yoy growth in net sales to `9,147cr (`7,203cr), 1.9% above
our estimates. Volumes for the quarter increased by 27% yoy, while average
realisation declined by 0.5% for the quarter. The company reported better-thanexpected
EBITDA margin, despite higher raw-material costs (up 149bp yoy) and a
substantial increase in royalty (up 160bp yoy) to 5.3% of net sales (3.7% in
2QFY2010). Savings at staff cost and power and fuel cost helped the company to
post an 87bp qoq expansion in EBITDA margin. Net profit at `598cr recorded a
5% yoy jump, 11.8% above our expectations. Higher other operating income
(up 39% yoy) and other income (up 22% yoy) helped the company to exhibit
better-than-expected bottom-line performance.

Outlook and valuation: At the CMP of `1,551, the stock is trading at 18.7x and
15x FY2011E and FY2012E earnings of `82.9 and `103.4, respectively.
We broadly maintain our volume and earnings growth estimates for Maruti.
We model a 16.6% volume CAGR and an 11% earnings CAGR for the company.
We maintain Accumulate on the stock with a Target Price of `1,670, at which
level it would trade at 16.2x FY2012E earnings (5% discount to our
Sensex target multiple).


Net sales marginally above expectation, up on higher volume growth: Maruti
reported 27% yoy top-line growth at `9,147cr, which was marginally above our
expectation of `8,981cr, largely aided by ~27.4% yoy jump in volumes. Top-line
performance was also aided by a substantial ~39.3% increase in other operating
income at `170cr (`122cr in 2QFY2010). Other operating income increased due
to forex gain of `10cr, higher spare part sale and cash discount during the
quarter. Average net realisation was marginally down by 0.5% yoy at `2.85lakh
(`2.86lakh), largely owing to currency (Euro) impact on export revenue, which
stood at `992cr (`1,130cr in 1QFY2011 and `1,266cr in 2QFY2010), while
average export realisation declined by almost 18.6% yoy to `2.77lakh (`3.41lakh
in 2QFY2010).


Better-than-expected performance at the operating front: For 2QFY2011, Maruti’s
EBITDA margin grew 87bp qoq to 10.5%, 53bp above our estimate. However, the
company reported a 222bp yoy dip in EBITDA margin, largely due to a 149bp yoy
increase in raw-material cost to 74.2% (72.7%) and a substantial increase in
royalty (up 160bp yoy) to 5.3% (3.7%) of net sales. Royalty charges spiked due the
increase in sales of K-series engine models and amendments in the various royalty
agreements the company has entered with Suzuki Motor Corporation, resulting in
additional royalty expense. However, lower power and fuel coat and fall in selling
and distribution expenses restricted the further decline in operating margin on a
yoy basis to a certain extent. Maruti expects annualised benefits of `30cr from the
Manesar facility on power and fuel cost; of this, `8cr was utilised during
2QFY2011.


Net profit up 5% yoy: Maruti reported net profit of `598cr, up 5% yoy, as against
our estimate of `535cr. Growth was largely aided by higher volume growth and
decent performance at the operating front. However, higher other operating
income and other income for the quarter positively supported net profit growth to a
certain extent.


Conference call – Key highlights
􀂄 Management expects the robust demand momentum to continue in
2HFY2011, driven by strong consumer demand. As a result of the buoyant
demand, festival discount during the current fiscal is 18% less as compared to
the last fiscal. The production capacity has been increased to 1.3mn units
(from 1.2mn) through de-bottlenecking exercise. The current production rate is
110,000 units/month. Total production capacity will increase to 1.75mn units
per annum by FY2012–13.
• Manesar plant B: Capacity of 2.5lakh units operational by 3QFY2012.
• Manesar Plant C: Capacity of 2.5lakh units operational by early FY2013.
􀂄 The company has hedged ~80% of exports and ~25% of imports exposure.
Ongoing appreciation in Yen is a concern, which may have an adverse impact
on the company’s margins.
􀂄 Management intends to de-risk exports and, as such, is concentrating on
non-European markets. Australia, New Zealand, Indonesia, Malaysia and
Brunei are the countries in which the company is testing its products. During
2QFY2011, 60% of exports were to non-European countries. Exports revenue
during 1HFY2011 was `2,122cr (`2,265cr in 1HFY2010).
􀂄 Maruti expects annualised benefits of `30cr from the Manesar facility on the
power and fuel front. Of this, `8cr was utilised during 2QFY2011.
􀂄 Capital expenditure of `500cr was incurred during 2QFY2011. Capex target
for FY2011 is `2,800cr.
􀂄 Sales of CNG models are in the range of 15–18% of overall sales in the
markets, where the CNG models have been launched.



Investment arguments
􀂄 Per capita near inflexion point for car demand: Car penetration in India is
estimated at around 12 vehicles/1,000 people in FY2009 compared to
around 21 vehicles/1,000 people in China. Moreover, India’s PPP-based per
capita is estimated to approach US $5,000 over the next 4–5 years, which is
expected to be the inflexion point for the country’s car demand. Increasing
penetration is estimated to drive ~13% CAGR in domestic volumes over
FY2010–12E. Further, Maruti has a sizeable competitive advantage over new
foreign entrants due to its widespread distribution network (nearly 2,767 and
681 service and sales outlets, respectively), which is not easy to replicate.
􀂄 Suzuki focusing to make Maruti a small car-manufacturing hub: Suzuki Japan
is making Maruti a manufacturing hub to cater to the increasing global
demand for small cars, due to rising fuel prices and stricter emission
standards. Thus, we believe there exists a huge potential for the company to
increase its market share in the export market. Moreover, R&D capabilities, so
far largely housed at Suzuki Japan, are progressively moving to Maruti.
The company is aiming to achieve full model change capabilities over the next
couple of years, which will enable it to launch new models and variants at a
much faster pace, which should ideally reduce its royalty payment in the long
run (2–3 years).

Outlook and valuation
We broadly maintain our volume and earnings growth estimates for the company.
We model a 16.6% volume CAGR and an 11% CAGR in earnings over
FY2010–12E for the company.


At the CMP of `1,551, the stock is trading at 18.7x and 15x FY2011E and
FY2012E earnings of `82.9 and `103.4, respectively. We maintain Accumulate on
the stock with a Target Price of `1,670, at which level it would trade at 16.2x
FY2012E earnings (5% discount to our Sensex target multiple).