Maruti Suzuki - More competition = weaker pricing :: UBS

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UBS Investment Research
Maruti Suzuki India
More competition = weaker pricing
􀂄 Strong FY11 priced in; competitive pressure should intensify in FY12
While industry demand momentum surprised on the upside in FY11 and Maruti
Suzuki India (Maruti) has defended its overall market share admirably, we expect
more challenges for the company in FY12. We believe Maruti’s best-selling
models—the Alto (27% of FY10 domestic volume) and Swift/Dzire (24% of FY10
domestic volume)—will face strong competition from Hyundai’s small cars and
Toyota’s Etios, respectively, in FY12.
􀂄 Pricing power should remain weak in FY12
We expect Maruti to lose market share in its key product segments in FY12 due to
Hyundai’s and Toyota’s new launches. In addition, some of its competitors (Skoda
and Mahindra) have made large price cuts to gain sales volume. Therefore, we
expect Maruti’s pricing power to remain weak, and we think there is limited upside
to our FY12 domestic volume growth forecast of 15% YoY.
􀂄 Rising commodity prices and currency headwinds imply margin pressure
Given we expect weak pricing power, Maruti’s margins could come under pressure
if commodity prices rise further. While the euro’s appreciation offers some respite,
US dollar depreciation and the yen’s non-depreciation against the rupee will likely
keep margins in check. Maruti has limited currency hedges from H2 FY11.
􀂄 Valuation: maintain Neutral rating and Rs1,700.00 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11.3%.