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Maruti Suzuki India (MRTI.BO)
3QFY11 Results: Subdued
Maintain Hold. New TP Rs1,395 — The stock has corrected ~20% from 2Q peak,
& downside from hereon is somewhat limited, as valuations (P/E, P/CEPS,
EV/EBITDA) have corrected to long-term averages. Earnings outlook remains
occluded due to multiple headwinds (commodity costs, FX, competition, negative
mix), rendering it difficult to get more positive as we continue to pare earnings. Our
new TP of Rs1,395 values the base business/subsidiary at long-term averages of
10x CEPS/14x P/E on FY12 earnings. We cut earnings by 5-10% over FY12/13E
to reflect EBITDA margin pressures and a difficult pricing environment, even as we
hike volume forecasts by 7-8% over FY12/13E.
Recurring PAT at ~Rs 6bn was 4% below estimates — buoyed by higher other
income and a lower tax rate. EBITDA missed est. by 14% given a combination of
higher discounts (+26% Q/Q), negative mix and adverse impact of FX. EBITDA
margins at 8.5% declined 100bps Q/Q. Net revenues at Rs92.8bn were ~3% lower
than estimates, on account of negative mix-shift and lower forex realizations.
Conference call takeaways — 1) Realizations declined 150bps Q/Q – driven by
negative product mix. 2) Mgmt optimistic on short-term demand – and
accelerates capacity additions by ~6 months (1.4mn from Apr’11 onwards, ~1.65m
units by 2HFY12). Longer term, concerns are rising interest rates, cost of retail
credit and fuel prices. 3) Forex hedges – Euro exports fully hedged for 1HFY12.
However, mgmt believes that JPY will be stable, hence not hedged. 4) Margin
pressure to continue – Higher commodity costs as well as mix + forex to impact
margins; mgmt will try to mitigate through cost reduction rather than price hikes.
Product mix/market share trends — Product-mix in 3Q exhibited a negative
trend. Proportion of A3 in overall domestic sales dipped 60bps Q/Q and 90bps Y/Y,
reflected in ASPs decline of 1.5% Q/Q. Market share trends were encouraging with
MSIL gaining 320/60bps Q/Q in domestic A2 and A3 segments respectively.
Overall in the domestic market (cars+ C segment), Maruti gained 40bps Q/Q
MSIL results disappointed on fairly downbeat expectations. EBITDA was ~14%
lower than estimates – the miss at the PAT level was less (~4%), driven by a
lower tax rate (28.7% vs. 30.5% estimate) and mitigated by higher other
income.
Over the past 3Qs, MSIL’s margins have been hit by 4 factors: a) The hike in
royalty (~180 bps of revenues), b) adverse mix shift (100 bps), c) negative
currency movements (120 bps) and d) Commodity cost-related
pressures(50bps) and the inability to pass these through – an indication of the
competitive dynamics of the industry.
Adverse mix and commodity costs are our greatest concern at this juncture, as
directionally neither factor appears to have bottomed out – yet. Both factors
could continue to drag earnings downward despite robust growth in volumes
(the silver lining over the past 3Qs).
Our earnings have been revised downward by 5-10% over FY12-13E to
essentially reflect a) heightened cost pressures and b) MSIL’s inability to pass
these through. MSIL appears to be vigorously defending its market share,
which should prove beneficial over the long term. Our volume growth forecasts
have been revised upwards by 7-8% over FY12-13E to essentially reflect the
continued strong growth evidenced this fiscal. It is the volume growth that has
ensured that MSIL’s earnings have not collapsed YoY, despite the aggressive
decline in margins.
We maintain our Hold recommendation on MSIL. The stock has retraced over
20% from its interim peak at the end of 2Q. Admittedly, the stock could trade up
over the short term given valuations are at more appealing levels. But the
competitive dynamic continues to impact MSIL’s margins adversely, and with
attendant commodity/FX-related cost pressures, we do not think earnings have
bottomed out yet. Given this context, we cut our target multiple on MSIL’s core
business to 10x CEPS (from 11.5x) as we peg it to MSIL’s longer-term average.
We also cut the multiple on the subsidiary earnings to 14x (from 15.4x) pegging
it to MSIL’s historical average P/E. Our revised target price is Rs1,395, and we
maintain our Hold recommendation.
We would like to see a tangible improvement in MSIL’s A2 segment mix before
we get positive from a longer-term perspective. The vulnerability of earnings to
volatility in F/X, commodity costs is far lower in the upper A2 segment as the
gross contribution/car is meaningfully higher (we estimate the Swift has a gross
contribution that is at least 60% more than that of the Alto). This ‘cushion of
profit’ would in turn support a higher multiple for the entire business.
Conference call takeaways
1) Lower realizations reflect mix-shift and forex impact — Overall net
realizations dipped 1.3% Y/Y and 1.5% Q/Q. Mgmt attributed major part of
domestic ASP decline to lower proportion of A3 vehicles in the overall sales.
Discounts rose 26% Q/Q to Rs10,700/vehicle from Rs8,500/vehicle in 2Q.
Impact on export realizations was exacerbated by Euro decline in 3Q. However,
mix-shift helped in lowering royalty payment as a) the proportion of exports
(which involve higher royalty) in overall sales declined 200bps Q/Q and 880bps
Y/Y; and b) Higher proportion of low-royalty models in overall sales.
2) MSIL management thinks short-term demand will sustain – and is thus
ramping up capacity to 1.4m units from April 2011 (vs. Oct 2011 earlier) and
further ramping up capacity by 250k units from 2HFY12 (vs. FY13 earlier).
Management has not provided a formal guidance or outlook on volumes for
FY12, but we think this is far more tangible than any verbal guidance.
3) Exports outlook is challenging – MSIL noted it will not attain export
guidance of 150k units. Euro-denominated exports are now only 30% of export
revenues, which augurs well – margin downside is relatively limited hereon.
4) FX hedging policy is a bit risky – MSIL management has taken the view
that there is relatively limited probability of the JPY appreciating over the next
fiscal. Its JPY exposure will be unhedged from FY12 onward. Our estimates
reflect CIRA economist’s forecasts on cross currency rates (USD/INR and
USD/JPY). We think this significant exposure (costs equivalent to 25-30% of
revenues are JPY denominated) will pose a business risk to MSIL as it could
reduce MSIL’s competitiveness vis-à-vis other players like Tata Motors,
Hyundai, Ford/GM and VW, whose supply chains are not Japan-linked.
Maruti Suzuki India
Valuation
Our target price for Maruti of Rs1,395 is based on Sum-of-Parts methodology.
We value the parent business at Rs1,318 based on 10x March FY12E cash
earnings (CEPS = PAT + depreciation). At 10x (earlier 11.5x) we value the
parent business at par with its historical average. We have cut it from 11.5x to
10x to reflect escalating competitive pressures, commodity cost pressure,
foreign currency exposure and our concerns on the changing contours of the
relationship between Suzuki Motors and Maruti Suzuki. We value MSIL's
subsidiaries at Rs77/share, based on 14x March FY12E EPS. We estimate
cash earnings CAGR of ~10% over FY10-FY13E, which reflects a 6%YoY dip
in FY11 before 21% and 15% upticks in FY12 and FY13 respectively. On our
target multiple, Maruti would trade at FY12 E P/E (including subsidiary
earnings) of around 14.6 x (slightly lower than the broad market at ~16x). We
prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and
is thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price
volatility, and we believe warranted by improving macro trends for the auto
sector, in our view. Upside risks that could prevent the stock from reaching our
target price include: 1) greater than forecast increase in volumes and
realizations; and 2) decline in competitive intensity. Downside risks include: 1)
sales of passenger vehicles are sensitive to economic variables with an
appreciable rise in interest rates potentially hitting volume growth across the
auto sector; 2) higher than forecast increase in commodity costs; 3) competitive
pressures in the Indian market continue to increase, which could impact
margins over the longer term; 4) unfavorable foreign currency rates
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India (MRTI.BO)
3QFY11 Results: Subdued
Maintain Hold. New TP Rs1,395 — The stock has corrected ~20% from 2Q peak,
& downside from hereon is somewhat limited, as valuations (P/E, P/CEPS,
EV/EBITDA) have corrected to long-term averages. Earnings outlook remains
occluded due to multiple headwinds (commodity costs, FX, competition, negative
mix), rendering it difficult to get more positive as we continue to pare earnings. Our
new TP of Rs1,395 values the base business/subsidiary at long-term averages of
10x CEPS/14x P/E on FY12 earnings. We cut earnings by 5-10% over FY12/13E
to reflect EBITDA margin pressures and a difficult pricing environment, even as we
hike volume forecasts by 7-8% over FY12/13E.
Recurring PAT at ~Rs 6bn was 4% below estimates — buoyed by higher other
income and a lower tax rate. EBITDA missed est. by 14% given a combination of
higher discounts (+26% Q/Q), negative mix and adverse impact of FX. EBITDA
margins at 8.5% declined 100bps Q/Q. Net revenues at Rs92.8bn were ~3% lower
than estimates, on account of negative mix-shift and lower forex realizations.
Conference call takeaways — 1) Realizations declined 150bps Q/Q – driven by
negative product mix. 2) Mgmt optimistic on short-term demand – and
accelerates capacity additions by ~6 months (1.4mn from Apr’11 onwards, ~1.65m
units by 2HFY12). Longer term, concerns are rising interest rates, cost of retail
credit and fuel prices. 3) Forex hedges – Euro exports fully hedged for 1HFY12.
However, mgmt believes that JPY will be stable, hence not hedged. 4) Margin
pressure to continue – Higher commodity costs as well as mix + forex to impact
margins; mgmt will try to mitigate through cost reduction rather than price hikes.
Product mix/market share trends — Product-mix in 3Q exhibited a negative
trend. Proportion of A3 in overall domestic sales dipped 60bps Q/Q and 90bps Y/Y,
reflected in ASPs decline of 1.5% Q/Q. Market share trends were encouraging with
MSIL gaining 320/60bps Q/Q in domestic A2 and A3 segments respectively.
Overall in the domestic market (cars+ C segment), Maruti gained 40bps Q/Q
MSIL results disappointed on fairly downbeat expectations. EBITDA was ~14%
lower than estimates – the miss at the PAT level was less (~4%), driven by a
lower tax rate (28.7% vs. 30.5% estimate) and mitigated by higher other
income.
Over the past 3Qs, MSIL’s margins have been hit by 4 factors: a) The hike in
royalty (~180 bps of revenues), b) adverse mix shift (100 bps), c) negative
currency movements (120 bps) and d) Commodity cost-related
pressures(50bps) and the inability to pass these through – an indication of the
competitive dynamics of the industry.
Adverse mix and commodity costs are our greatest concern at this juncture, as
directionally neither factor appears to have bottomed out – yet. Both factors
could continue to drag earnings downward despite robust growth in volumes
(the silver lining over the past 3Qs).
Our earnings have been revised downward by 5-10% over FY12-13E to
essentially reflect a) heightened cost pressures and b) MSIL’s inability to pass
these through. MSIL appears to be vigorously defending its market share,
which should prove beneficial over the long term. Our volume growth forecasts
have been revised upwards by 7-8% over FY12-13E to essentially reflect the
continued strong growth evidenced this fiscal. It is the volume growth that has
ensured that MSIL’s earnings have not collapsed YoY, despite the aggressive
decline in margins.
We maintain our Hold recommendation on MSIL. The stock has retraced over
20% from its interim peak at the end of 2Q. Admittedly, the stock could trade up
over the short term given valuations are at more appealing levels. But the
competitive dynamic continues to impact MSIL’s margins adversely, and with
attendant commodity/FX-related cost pressures, we do not think earnings have
bottomed out yet. Given this context, we cut our target multiple on MSIL’s core
business to 10x CEPS (from 11.5x) as we peg it to MSIL’s longer-term average.
We also cut the multiple on the subsidiary earnings to 14x (from 15.4x) pegging
it to MSIL’s historical average P/E. Our revised target price is Rs1,395, and we
maintain our Hold recommendation.
We would like to see a tangible improvement in MSIL’s A2 segment mix before
we get positive from a longer-term perspective. The vulnerability of earnings to
volatility in F/X, commodity costs is far lower in the upper A2 segment as the
gross contribution/car is meaningfully higher (we estimate the Swift has a gross
contribution that is at least 60% more than that of the Alto). This ‘cushion of
profit’ would in turn support a higher multiple for the entire business.
Conference call takeaways
1) Lower realizations reflect mix-shift and forex impact — Overall net
realizations dipped 1.3% Y/Y and 1.5% Q/Q. Mgmt attributed major part of
domestic ASP decline to lower proportion of A3 vehicles in the overall sales.
Discounts rose 26% Q/Q to Rs10,700/vehicle from Rs8,500/vehicle in 2Q.
Impact on export realizations was exacerbated by Euro decline in 3Q. However,
mix-shift helped in lowering royalty payment as a) the proportion of exports
(which involve higher royalty) in overall sales declined 200bps Q/Q and 880bps
Y/Y; and b) Higher proportion of low-royalty models in overall sales.
2) MSIL management thinks short-term demand will sustain – and is thus
ramping up capacity to 1.4m units from April 2011 (vs. Oct 2011 earlier) and
further ramping up capacity by 250k units from 2HFY12 (vs. FY13 earlier).
Management has not provided a formal guidance or outlook on volumes for
FY12, but we think this is far more tangible than any verbal guidance.
3) Exports outlook is challenging – MSIL noted it will not attain export
guidance of 150k units. Euro-denominated exports are now only 30% of export
revenues, which augurs well – margin downside is relatively limited hereon.
4) FX hedging policy is a bit risky – MSIL management has taken the view
that there is relatively limited probability of the JPY appreciating over the next
fiscal. Its JPY exposure will be unhedged from FY12 onward. Our estimates
reflect CIRA economist’s forecasts on cross currency rates (USD/INR and
USD/JPY). We think this significant exposure (costs equivalent to 25-30% of
revenues are JPY denominated) will pose a business risk to MSIL as it could
reduce MSIL’s competitiveness vis-à-vis other players like Tata Motors,
Hyundai, Ford/GM and VW, whose supply chains are not Japan-linked.
Maruti Suzuki India
Valuation
Our target price for Maruti of Rs1,395 is based on Sum-of-Parts methodology.
We value the parent business at Rs1,318 based on 10x March FY12E cash
earnings (CEPS = PAT + depreciation). At 10x (earlier 11.5x) we value the
parent business at par with its historical average. We have cut it from 11.5x to
10x to reflect escalating competitive pressures, commodity cost pressure,
foreign currency exposure and our concerns on the changing contours of the
relationship between Suzuki Motors and Maruti Suzuki. We value MSIL's
subsidiaries at Rs77/share, based on 14x March FY12E EPS. We estimate
cash earnings CAGR of ~10% over FY10-FY13E, which reflects a 6%YoY dip
in FY11 before 21% and 15% upticks in FY12 and FY13 respectively. On our
target multiple, Maruti would trade at FY12 E P/E (including subsidiary
earnings) of around 14.6 x (slightly lower than the broad market at ~16x). We
prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and
is thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price
volatility, and we believe warranted by improving macro trends for the auto
sector, in our view. Upside risks that could prevent the stock from reaching our
target price include: 1) greater than forecast increase in volumes and
realizations; and 2) decline in competitive intensity. Downside risks include: 1)
sales of passenger vehicles are sensitive to economic variables with an
appreciable rise in interest rates potentially hitting volume growth across the
auto sector; 2) higher than forecast increase in commodity costs; 3) competitive
pressures in the Indian market continue to increase, which could impact
margins over the longer term; 4) unfavorable foreign currency rates
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