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Operating performance in line
Maruti Suzuki India’s (MSIL) adjusted net profit, at INR 5.98 bn (down 1% Y-o-Y
and up 30% Q-o-Q), was 6% above our estimate, but in line with consensus.
While operating performance was in line with our expectations, treasury income
was higher than estimate.
EBITDA margin at 10.5%; cost pressure yet to fully come through
EBITDA margins at 10.5% (down 270bps Y-o-Y, up 100bps Q-o-Q) were in line
with our expectations. The improvement was largely on account of lower raw
material costs (down 50bps sequentially). Cost input pressures were partially
offset by price hikes taken in August. However, the complete impact of the yen
devaluation and commodity cost pressure is yet to be felt. Royalty as percentage
of sales increased Q-o-Q due to currency movements and change in the product
mix.
Management outlook: Strong volumes; weak margins
Management remains positive on the volume outlook. The company has ramped
up capacities to 110,000 units per month (up 10% Q-o-Q) through
debottlenecking at its existing plants. In H2FY12 the new plant at Manesar will
commence production.
However, competitive pressures prevent the company from effecting further
price hikes. EBITDA margin pressure is likely to continue as: (a) the impact of
forex movement, both Yen/ INR and EUR/INR; and (b) the full effect of
commodity price pressures (through vendors) flow through in the coming
quarters.
While we remain positive on demand growth, we believe MSIL’s profitability is
likely to remain under pressure. We expect competitive intensity to rise going
ahead with the launch of new products, notably, Toyota’s Etios and Hyundai’s
800cc hatchback in early CY11.
We raise our estimates for FY11 and FY12 by ~7% each to account for the
stronger-than-expected volume growth. However, with the competitive intensity
unlikely to subside, we maintain ‘HOLD/ SU’ recommendation/rating on the
stock with a target price of INR 1,475 (16x FY12E EPS).
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