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Maruti Suzuki (MSIL)
Automobiles
Taking the high road. We expect Maruti to outperform the auto sector with strong
sales growth as capacity constraints ease up and product momentum sustains over the
next 12 months. Maruti saw significant underperformance this year on the back of
(1) capacity constraints which led to market share losses and (2) increase in royalty
payments which impacted margins. We reinitiate on the stock with a BUY rating and a
target price of Rs1,701 based on a 20% premium to its historical average
Strong employment outlook points to robust growth in India’s passenger car market
We believe employment opportunities are likely to accelerate due to strong economic growth
expected over the next couple of years. For instance, our IT analyst expects hiring to increase by
24% yoy in FY2012E and our economists expects salary growth to increase by 12-15% over the
next couple of years. We expect India’s domestic passenger car market to grow at 24% and 18%
yoy in FY2011E and FY2012E, respectively, driven by new model launches, increase in personal
income levels and expanding distribution networks of passenger car players.
Market share losses are likely but unlikely to significantly impact earnings
We expect Maruti to lose only 1.5% market share in FY2012E to Toyota and Honda as they launch
their small cars. The only material threat to Maruti’s market share that we see going into FY2012E
is from Toyota Etios. We reckon Hyundai and Tata Motors are likely to lose 1-1.5% market share
to Toyota due to weaker product momentum as well. Maruti gained 3.8% qoq domestic market
share in 2HFY11 after it increased capacity by 10% through debottlenecking. Maruti’s capacity is
expected to increase to 1.8 mn by FY2013E and further ease in capacity constraints is expected.
Valuations close to historical average levels but strong earnings growth deserves a premium
Maruti trades at 14X PE multiple on our FY2012E consolidated EPS of Rs100 (Rs 95 for standalone,
Rs 5 for subsidiaries) which is in line with its long-term historical average. We expect the stock to
revert to premium valuations given strong earnings growth of 19% CAGR over FY2011-2013E.
We value the company at a 17X PE multiple on our FY2012E consolidated EPS estimate of Rs100,
which is based on a 20% premium to historical average.
Reinitiate with a BUY rating
We reinitiate coverage on Maruti Suzuki with a BUY rating as we believe Maruti is wellpositioned to benefit from multi-year growth in Indian passenger car market. The ease in
capacity constraints and strong product portfolio are likely to help Maruti post robust
growth despite intense competitive pressures, in our view. Our target price of Rs1,701 is
based on 17X PE on our FY2012E consolidated EPS of Rs100.
Passenger car industry is heading for another year of strong growth
We believe India’s passenger car industry is heading for strong growth in FY2012E driven by
an increase in personal income levels and employment opportunities. Our IT analyst expects
employment in IT services to grow at 24% yoy in FY2012E after a 21% yoy growth in
FY2011E. This should aid passenger car growth, in our view. Our economic research team
also expects salaries to grow between 12% to 15% yoy in FY2012E while cost of ownership
of a car has gone up by only 7% over the past year (even after factoring in Rs2/litre likely
increase in petrol prices from current levels). Hence, we expect the domestic passenger car
industry to grow at a robust 18% yoy in FY2012E.
Downside risks
We believe sharp appreciation of Yen against the INR and sharp rise in material costs pose key risks
to our target price.
Market share losses likely; but this is likely to impact the whole top tier
We believe Maruti Suzuki is better-positioned than its key competitors Tata Motors and
Hyundai to handle increasing competitive pressures due to strong product portfolio (6
models with CNG, diesel variants versus 2 for Hyundai and 1 for Tata Motors). New K-series
engines have also improved market positioning of Maruti Suzuki due to increase in power
and higher fuel efficiency. In the compact segment, Maruti has increased its market share by
3.1% QoQ in 2QFY11 driven by easing of capacity constraints through debottlenecking and
launch of new models (Alto K-10, new CNG variants).
We expect the compact segment (A2) to grow at 24% yoy and 18% yoy in FY2011E and
FY2012E, respectively. We estimate Maruti to lose 1.2% market share in FY2012E while
Hyundai and Tata Motors are likely to lose 1.0-1.5% market share to Toyota Etios and the
Honda small car. We forecast Toyota Etios to sell 50,000 units and Honda upcoming small
car to sell 24,000 units in FY2012E
Domestic A3 segment has grown at a faster pace than the compact segment in FY2011E
and is likely to outpace the A2 segment in FY2012E as well, in our view. We forecast the A3
segment to grow at 30% yoy and 20% yoy in FY2011E and FY2012E, respectively. We
expect Toyota Etios sedan (estimate 20,000 units in FY2012E) and Volkswagen Vento to
increase its market share from the top-4 players in the A3 segment. Toyota will also face a
challenge of limited capacity going into FY2012E and is unlikely to make a significant impact
on Maruti’s market share, in our view. We expect Maruti Suzuki to lose higher market share
in this segment than its competitors as Toyota Etios will directly compete with Maruti’s Dzire,
which has limited competition at this juncture but market share loss is likely to be restricted
to 1.5% only.
Most of the players have expanded capacities in FY2011E and we expect capacity expansion
to moderate over the next two years, thereby improving capacity utilization. Global
manufacturers like Nissan, Ford, Volkswagen, Toyota and General Motors are also looking at
exporting small cars from India to improve their capacity utilizations; hence, we do not
foresee pricing environment to deteriorate in the market as we are entering a strong growth
phase.
Focus on UV segment to help offset market share loss in passenger cars
We forecast Maruti’s domestic volumes to grow by 28% yoy in FY2011E which was aided
by strong growth of Eeco (new van launched in FY2011). Excluding MPVs (Van, Gypsy and
Eeco), we estimate Maruti’s domestic passenger car volumes to increase by 22% yoy in
FY2011E while the industry is expected to grow at 25% yoy—indicating Maruti will lose
1.2% market share and we forecast the company to lose another 1.5% market share in
FY2012E. We estimate the domestic passenger car industry will grow by 18% yoy in
FY2012E vs Maruti’s growth of 15% yoy. The company plans to aggressively target utility
vehicle segment and plans to launch a new utility vehicle next year. Given Maruti’s strong
distribution network, we believe Maruti could be a significant player in this space. We have
forecasted a 20% yoy growth in MPV/UV segment for Maruti Suzuki in FY2012E.
EBITDA margins likely to improve slightly till FY2013E
We believe EBITDA margins in 1HFY11E were impacted by higher royalty and currency
headwinds. We expect margins to improve marginally till FY2013E by 40 bps driven by (1)
favorable mix to domestic sales, (2) increase in prices and (3) operating leverage on strong
volume growth offsetting escalating commodity cost pressures and currency headwinds. We
also expect currency headwinds to reduce as Maruti localizes key import components over
the next couple of years. The company has indicated that import content (direct + indirect)
can be reduced by 2% of net sales over a couple of years (from ~22% currently).
We believe currency headwinds will be neutral for Maruti in 3QFY11E as the JPY, Euro and
USD have not moved significantly versus the INR from 2QFY11 levels and hence, we expect
Valuations in line with historical average but strong growth deserves a premium
We believe Maruti deserves to trade at a premium to historical average given strong sales
growth, slight loss of market share and marginal improvement in EBITDA margins which is
likely to drive 19% earnings growth over FY2011-FY2013E. We base our target price at a
20% premium to historical average to reflect the strong earnings momentum. Our target
price is based on consolidated FY2012E EPS of Rs 100 which includes Rs5/share of
subsidiaries. Profitability at engine joint venture (30% stake of Maruti Suzuki) has improved
quite significantly and subsidiaries made an EPS of Rs 4.4/share in FY2010. Given the limited
information on the engine joint venture we have not made detailed forecast for the
subsidiaries. However, Maruti is increasing the sourcing of engines from the engine joint
venture and we are conservatively assuming an 8% CAGR between FY2010 and FY2012E in
subsidiary profits.
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