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Maruti Suzuki (MRTI.BO, Neutral): Upgrade to Neutral on
underperformance, relative valuation
What happened
We are upgrading Maruti Suzuki from Sell to Neutral, on
underperformance and valuations close to historical averages. We also
raise our estimates for FY11-13 by 9-11% mainly on higher volume
assumptions. Since we added Maruti Suzuki to our Sell List on May 03,
2010, the stock is down 2.2% vs. the Sensex up 9.3%. In the past 12
months, the stock is down 13.4% vs. the Sensex +11.5%.
Current view
1) 2010 was an unprecedented year for India’s car industry in our view
with 5 new competitors entering the high volume compact car market (1
more expected in 2011).
2) We believe the Indian car market is catching up with the global
industry in level of competitive intensity, potentially affecting long-run
return and growth profile for MSIL.
3) We believe margins in the near term are likely to remain under
pressure due to limited pricing power on higher competition, with
management’s stated objective of prioritizing market share over
margins.
Valuation
Maruti Suzuki is trading close to historical averages on P/E, P/B, EV/GCI
and below historical average on EV/EBITDA. Our view on valuation
remains unchanged, and we continue to apply below normalized P/E
multiple of 12X (vs. historical average of 13X), adding back cash to
arrive at our 12-month FY12E P/E based TP of Rs1,140.
Catalysts
Investors should watch for monthly sales volume releases, quarterly
margins, launch of Toyota Etios hatchback by Apr’11 and Honda Brio in
2HCY2011. These data points are likely to act as catalysts to stock price
in our view.
Key risks
Upside – Higher than expected consumer confidence and consequent
growth in auto demand, lower than expected commodity costs.
Downside – Lower than expected demand, higher than expected rate of
inflation and interest rates, higher than expected success of competitors
such as Toyota and Honda leading to an adverse pricing environment.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki (MRTI.BO, Neutral): Upgrade to Neutral on
underperformance, relative valuation
What happened
We are upgrading Maruti Suzuki from Sell to Neutral, on
underperformance and valuations close to historical averages. We also
raise our estimates for FY11-13 by 9-11% mainly on higher volume
assumptions. Since we added Maruti Suzuki to our Sell List on May 03,
2010, the stock is down 2.2% vs. the Sensex up 9.3%. In the past 12
months, the stock is down 13.4% vs. the Sensex +11.5%.
Current view
1) 2010 was an unprecedented year for India’s car industry in our view
with 5 new competitors entering the high volume compact car market (1
more expected in 2011).
2) We believe the Indian car market is catching up with the global
industry in level of competitive intensity, potentially affecting long-run
return and growth profile for MSIL.
3) We believe margins in the near term are likely to remain under
pressure due to limited pricing power on higher competition, with
management’s stated objective of prioritizing market share over
margins.
Valuation
Maruti Suzuki is trading close to historical averages on P/E, P/B, EV/GCI
and below historical average on EV/EBITDA. Our view on valuation
remains unchanged, and we continue to apply below normalized P/E
multiple of 12X (vs. historical average of 13X), adding back cash to
arrive at our 12-month FY12E P/E based TP of Rs1,140.
Investors should watch for monthly sales volume releases, quarterly
margins, launch of Toyota Etios hatchback by Apr’11 and Honda Brio in
2HCY2011. These data points are likely to act as catalysts to stock price
in our view.
Key risks
Upside – Higher than expected consumer confidence and consequent
growth in auto demand, lower than expected commodity costs.
Downside – Lower than expected demand, higher than expected rate of
inflation and interest rates, higher than expected success of competitors
such as Toyota and Honda leading to an adverse pricing environment.
INVESTMENT LIST MEMBERSHIP
Neutral
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