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MARUTI SUZUKI INDIA (MSIL)
PRICE: RS.1392
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1497
FY12E P/E: 14X
q Strong yen continues to pose the single biggest threat to the company's
margins in 2HFY11.
q Raw material prices have started to rise once again in the past couple of
months.
q Capacity constraints to keep volume growth limited for the company in
the short term.
q MSIL has corrected by 10% since our previous update. We thereby
change our rating on the stock from REDUCE to ACCUMULATE. However
we believe the stock to remain weak in the short term given the pressure
on its margins in the next couple of quarters. Declines from the current
level should be used as an opportunity to enter into the stock for a target price of Rs.1,497.
Yen remains on a strong foothold; posing margin worries
n MSIL has significant yen exposure pertaining to imports (direct and indirect) and
royalty outgo.
n MSIL's exposure to foreign currency through imports in FY11E is expected to be
around 28% of their net sales of which around 80% is yen dominated.
n MSIL is hedged for only 25% of their total exposure on the import side.
n Since April 2010, yen has appreciated by ~12% against the Indian rupee. However YoY increase has been lower at ~4%.
n Still, given the company's significant unhedged yen exposure, it is expected to
keep the company's margins under pressure over the next couple of quarters.
Commodity prices have started to firm-up once again
n Commodities like steel, aluminum and copper have started firming up since the
past two months.
n Rubber price, both in the domestic and the international markets, has shot up
above Rs200/kg.
n Given increased competition and seasonally weak post festive period provides
with limited opportunities for price hikes.
n Furthermore price hikes taken in the past has covered up only a part of the increase in raw material cost leaving the rest for the company to absorb.
Capacity constraints to limit volume growth in the short term
n MSIL has been grappling with capacity constraints for the past few months leading to long waiting period for some of the models.
n MSIL has substantially enhanced its capacity through debottlenecking process but
it continues to remain short of demand.
n We expect limited increase in production from the current capacity as the company is already operating at more than 100% capacity utilization rate.
n Company's new capacities are expected to be operational only by 3QFY12.
n With new model launches by competitors, customers are now provided with lot
more options. We thereby believe that capacity constraints will lead to loss of
sales for the company in the short term.
n We have factored in a volume growth rate of 14.5% for FY12E with majority of
the incremental volumes coming only during 2HFY12.
Toyota could prove a serious competitor in the long term
n Toyota recently launched an entry level sedan - ETIOS, pitching it against MSIL's
D'Zire.
n Initial response to the new Toyota car has been positive and given the attractive
pricing, we believe Etios to offer serious competition to Maruti D'zire. Like MSIL,
Toyota too enjoys strong brand equity in the Indian car market.
n Furthermore Toyota is expected to launch a hatchback called "Liva" in the next
few months which again could generate interest given Toyota's past record of
their successful launches in India.
Valuation
n At the CMP of Rs1392 the stock trades at 17x and 14x its FY11E and FY12E
earnings respectively.
n After peaking at 13.6% in 3QFY10, the company's EBITDA margin has come
down to 8.8% in 2QFY11 (150bps fall due to increase in royalty). We expect the
company's margin during 2HFY11 to continue to remain under pressure on back
of unfavorable currency and increase in commodity prices.
n MSIL has corrected by 10% since our previous update. We thereby change our
rating on the stock from REDUCE to ACCUMULATE. However we believe the
stock to remain weak in the short term given the pressure on its margins in the
next couple of quarters. Declines from the current level should be used as an
opportunity to enter into the stock for a target price of Rs1,497.
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