Maruti Suzuki- No surprises.:: Kotak Sec

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Maruti Suzuki (MSIL)
Automobiles
No surprises. Maruti reported PAT that was in line with estimates while EBITDA came
in slightly lower than anticipated on higher other expense. Other expenses increased at
a faster (19%) pace than volume growth. We are maintaining our earnings estimates.
Our FY2011E EPS assumes a 100 bps increase in margins in 2HFY11E from 1HFY11,
which could be aggressive given the renewed uptrend in commodity prices. We are
maintaining our Rs1,330 target and REDUCE rating.

Maruti reported in-line PAT for 2QFY11; EBITDA came in slightly lower than anticipated
Maruti Suzuki reported Rs6 bn in PAT for 2QFY11 and was in line with our estimates. EBITDA for
the quarter came in at Rs9.6 bn, slightly lower than our estimate of Rs10 bn. Automotive revenue
for the quarter totaled Rs89.4 bn, up 26% yoy and 10.5% qoq. Realizations were flat qoq and
down 1% yoy. The yoy decline was largely driven by an almost 20% decline in export realizations.
EBITDA margin for the quarter was 10.5%, up 90 bps from 1QFY11 and down 220 bps yoy. We
had anticipated EBITDA margins closer to 11%. The lower-than-expected margins were driven by
higher other expenses and raw material costs. Raw material costs declined 50 bps from 1QFY11.
Other expenses increased to Rs9.5 bn from Rs8.6 bn (excluding royalty arrears) or 19% from
1QFY11 compared to an 11% increase in volumes.

Maintaining EPS estimates at Rs80.6 and Rs93.4 for FY2011E and FY2012E
Our FY2011E EPS estimate of Rs80.6 implies 11% operating margin for 2HFY11E compared to
10% for 1HFY11. Our volume growth estimate for 2HFY11E is 17% yoy and 7% from 1HFY11.
While our volume estimates seem reasonable in light of current capacity, we believe our margin
expansion assumption for 2HFY11E could be aggressive. Management indicated that they are only
25% hedged against the JPY. The JPY has been appreciating to new highs recently and could hurt
margins for 2HFY11E if they stay at current levels.
For FY2012E, we have modeled 15% domestic volume growth and 10% export growth. We have
assumed margins to be flat from 2HFY11E levels.

Maintaining Rs1,330 target and REDUCE rating
We continue to believe that Maruti’s business model does not carry the operating leverage
benefits to be able to offset the higher royalty payout. 2QFY11 results confirm our observation.
EBITDA margins were flat going from 1QFY11 to 2QFY11 despite an 11% increase in volumes.
The qoq contribution margin in 2QFY11 was a mere 12%. Our Rs1,330 target is based on 13.5X
FY2012E consolidated EPS of Rs98.4.