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Operating performance in line with estimates
Maruti Suzuki India’s (MSIL) adjusted net profit, at INR 6.03 bn (down 10% Y-o-
Y and up 1% Q-o-Q), was broadly in line with our estimate (INR 6.05 bn).
Higher-than-expected input costs were partially offset by lower selling expenses.
EBIDTA margin at 10.0%; cost pressures to continue
EBITDA margins, at 10.0% (down 490bps Y-o-Y and 50bps Q-o-Q), were in line
with our expectations. Raw material costs (up 100bps Q-o-Q) were impacted by
a stronger commodity cycle, seasonally higher discounts and adverse forex
movements. Other expenses, however, declined sequentially on account of
lesser exports (implying lower freight costs) and lower royalty rate (down 30bps
Q-o-Q due to a change in product mix).
Management outlook: Margin pressure to sustain
Notwithstanding the current headwinds (rising fuel costs, higher interest rates),
the management remained cautiously optimistic on demand. MSIL has ramped
up its production capacity to 1.4 mn units w.e.f April 01, 2011, and will add
another 250,000 units in H2FY12 with commissioning of its new plant at
Manesar.
The company, however, emphasised that EBITDA margin pressures are likely to
continue, going forward. Recent price hikes (average of ~1%) may not
adequately offset the existing pressure. Since competition (particularly in A2
segment) is unlikely to subside in the near-to-medium-term, the company’s
ability to hikes prices will be constrained.
Outlook and valuations: Negative; maintain ‘HOLD’
Amongst the automobile space, we expect the passenger car segment to register
the highest growth. However, this segment will continue to witness severe
profitability pressures, particularly in a rising commodity scenario. We expect
MSIL to accord priority to preserving its market share over EBITDA margins.
Hence, we maintain our negative stance and ‘HOLD/Sector Underperformer’
recommendation/rating on the stock, with a target price of INR 1,280 that
implies 14x FY12E (in line with MSIL’s historical trading band).
Other concall takeaways
• Forex hedges: For Euro exposure that constitutes 30% of exports, the company is
hedged for H1FY12. However, with respect to Yen, which comprises 23% of total
costs (including vendors import), MSIL has opted to not take any hedges based on
opinion of its internal economist’s team.
• Higher average discounts: Average discounts for the quarter increased by INR
1,000 to INR 10,700 Q-o-Q per vehicle. Management expects discounts to decline
going forward.
• New launches: Management confirmed the launch of the premium sedan, Kizhashi,
in February. However, it denied plans of launching new diesel variant of its existing
models.
• CNG versions performing strongly: In August 2010, the company had launched
CNG variants of Alto, Eeco, SX4, WagonR, and Estilo in selected regions of India
(viz., Mumbai, NCR and Gujarat), which have penetrated 20% till date.
• Non-European export rising: While exports to Europe were on the decline (due to
absence of scrappage incentives), non-European exports have picked up
substantially and now contribute ~70% of total exports (versus ~10% in FY10).
Company Description
MSIL is India’s largest passenger vehicle manufacturer with a market share of more than
50%. It is a key player in the compact car segment with a dominant market share.
Suzuki Motor Corporation (Suzuki) of Japan holds 54% stake in the company. MSIL
offers the widest product range in passenger cars (10 models), with special focus on the
compact car segment (five models). The company has an installed production capacity of
1m units per annum.
Investment Theme
MSIL is expected to leverage its leadership in the growing domestic market with the
launch of several new models in recent times. On the negative side, the company is
likely to face intense competition from several global players, most of who plan to enter
the MSIL-dominated compact segment for the first time.
Key Risks
Ability to overcome the competition
If the company is able to withstand the fierce competition in A2 segment with successful
new launches and maintain market share, it could exercise its pricing power besides
witnessing volume growth.
Favourable currency movement to boost margins
Depreciating Yen could benefit the company and, thereby, improve its margin as it
imports nearly 22% of its total raw material in Yen.
The above factors would help the company realize the benefit of operating leverage and,
thereby, improve its operating margins.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Operating performance in line with estimates
Maruti Suzuki India’s (MSIL) adjusted net profit, at INR 6.03 bn (down 10% Y-o-
Y and up 1% Q-o-Q), was broadly in line with our estimate (INR 6.05 bn).
Higher-than-expected input costs were partially offset by lower selling expenses.
EBIDTA margin at 10.0%; cost pressures to continue
EBITDA margins, at 10.0% (down 490bps Y-o-Y and 50bps Q-o-Q), were in line
with our expectations. Raw material costs (up 100bps Q-o-Q) were impacted by
a stronger commodity cycle, seasonally higher discounts and adverse forex
movements. Other expenses, however, declined sequentially on account of
lesser exports (implying lower freight costs) and lower royalty rate (down 30bps
Q-o-Q due to a change in product mix).
Management outlook: Margin pressure to sustain
Notwithstanding the current headwinds (rising fuel costs, higher interest rates),
the management remained cautiously optimistic on demand. MSIL has ramped
up its production capacity to 1.4 mn units w.e.f April 01, 2011, and will add
another 250,000 units in H2FY12 with commissioning of its new plant at
Manesar.
The company, however, emphasised that EBITDA margin pressures are likely to
continue, going forward. Recent price hikes (average of ~1%) may not
adequately offset the existing pressure. Since competition (particularly in A2
segment) is unlikely to subside in the near-to-medium-term, the company’s
ability to hikes prices will be constrained.
Outlook and valuations: Negative; maintain ‘HOLD’
Amongst the automobile space, we expect the passenger car segment to register
the highest growth. However, this segment will continue to witness severe
profitability pressures, particularly in a rising commodity scenario. We expect
MSIL to accord priority to preserving its market share over EBITDA margins.
Hence, we maintain our negative stance and ‘HOLD/Sector Underperformer’
recommendation/rating on the stock, with a target price of INR 1,280 that
implies 14x FY12E (in line with MSIL’s historical trading band).
Other concall takeaways
• Forex hedges: For Euro exposure that constitutes 30% of exports, the company is
hedged for H1FY12. However, with respect to Yen, which comprises 23% of total
costs (including vendors import), MSIL has opted to not take any hedges based on
opinion of its internal economist’s team.
• Higher average discounts: Average discounts for the quarter increased by INR
1,000 to INR 10,700 Q-o-Q per vehicle. Management expects discounts to decline
going forward.
• New launches: Management confirmed the launch of the premium sedan, Kizhashi,
in February. However, it denied plans of launching new diesel variant of its existing
models.
• CNG versions performing strongly: In August 2010, the company had launched
CNG variants of Alto, Eeco, SX4, WagonR, and Estilo in selected regions of India
(viz., Mumbai, NCR and Gujarat), which have penetrated 20% till date.
• Non-European export rising: While exports to Europe were on the decline (due to
absence of scrappage incentives), non-European exports have picked up
substantially and now contribute ~70% of total exports (versus ~10% in FY10).
Company Description
MSIL is India’s largest passenger vehicle manufacturer with a market share of more than
50%. It is a key player in the compact car segment with a dominant market share.
Suzuki Motor Corporation (Suzuki) of Japan holds 54% stake in the company. MSIL
offers the widest product range in passenger cars (10 models), with special focus on the
compact car segment (five models). The company has an installed production capacity of
1m units per annum.
Investment Theme
MSIL is expected to leverage its leadership in the growing domestic market with the
launch of several new models in recent times. On the negative side, the company is
likely to face intense competition from several global players, most of who plan to enter
the MSIL-dominated compact segment for the first time.
Key Risks
Ability to overcome the competition
If the company is able to withstand the fierce competition in A2 segment with successful
new launches and maintain market share, it could exercise its pricing power besides
witnessing volume growth.
Favourable currency movement to boost margins
Depreciating Yen could benefit the company and, thereby, improve its margin as it
imports nearly 22% of its total raw material in Yen.
The above factors would help the company realize the benefit of operating leverage and,
thereby, improve its operating margins.
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